APC 308 final

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Question 2 Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine: i. The Payback Period. ii. The Accounting Rate of Return.

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iii. The Net Present Value. Net Present Value for the project is 243,119.27 iv. The Internal Rate of Return (to two decimal places) b) Alternatively, the financial director of (STS) Limited is proposing to use 40% the total capital outlay for the above investment to repurchase some of the equity capital and the remaining funds to pay for cash dividends. The mechanics of repurchasing capital and paying cash dividends tends to be very distinct, as does the perception of the degree of flexibility between distributions and payments. An aggregate rise in repurchases does not seem to have any effect on dividends, according to the study. As a result, this illustrates that the two aren't really interchangeable, but a growth in returns has sparked other elements inside the business sector ( Ndanyenbah and Zakaria, 2019) . When it comes to dividend payments, they are always consistent, but capital repurchases are more cyclical. Every company's rewards are constantly subject to change, and this is what distinguishes this model. If a regress of the future payment on a given historical change payment on that particular business has altered, this is an effective strategy. Flexibility allows for a

buyback of equity, and pay-outs are extensively employed. It doesn't matter if dividends were used in the prior year or not, as long as they are being used in the following year ( Soka, 2020) . Such strategies are aimed to gather survey data and as certain for enterprises facing an equity offering, regulators and payment frictions. Share buybacks are used to being subject to linear charges that encompass all parts of expenses that come within the rules for purchasing inventory. Nevertheless, relative to dividends, these expenses make buybacks more flexible. There must be a transitionary and unique in real output if at all the company is to accept them. The buyback of capital also has the benefit of simplifying managers' conduct, particularly in reducing biases, since stakeholders may remove extra money from the company at a time when the business is suffering poor predicted production, money they believe will be squandered by the management. If dividends be a more costly method of distributing transitional cash flows, corporations will see no reason to raise their pay-outs until they are forced to do so later. (C)Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques . i. The Payback Period. An equity investment payback time may be determined using the payback technique. PBP is the amount of time it takes for a project's cash flow to cover its original investment ( Rahman and Shamsuddin, 2019) . Benefits of Payback Periods Easy to Use and Comprehend The payback time has this as one of its most major benefits. In comparison to other corporate finance approaches, this method requires just a few variables and is reasonably simple to compute. Liquidity preference The payback time is a critical piece of information that is not revealed by any other approach to capital planning. Most projects are less risky when the payback time is short. For small enterprises with scarce resources, this knowledge is critical. Small firms must swiftly recoup their investment in order to reinvest in new prospects.

Useful in Case of Uncertainty In sectors with high levels of uncertainty or fast technological development, the payback approach comes in handy. Because of this, it's impossible to estimate how much money will be coming in each year in the future. As a result, initiatives with a short PBP reduce the risk of obsolescence-related losses. Time Value of Money is not taken into account while calculating payback period disadvantages One of the biggest drawbacks of the PBP is that it fails to take into account the time worth of money, an essential notion in business. The sooner you get your capital, the more valuable it is because it has the tendency to generate a greater return if it is returned, according to the cash flows idea. Some Cash Flows Aren't Covered Cash flows are only considered until the original investment has been recouped under the payback technique. It doesn't take into account future cash flows. Because of this narrow perspective of cash flows, you can miss a project that generates significant cash flows in its latter years. Non-Realistic Because of the simplicity of the repayment technique, it does not take into account typical business circumstances. As a general rule, capital expenditures aren't one-time purchases. Such endeavors need additional funding over the course of many years. In addition, the influx of funds for projects is often unpredictable. ii. The Accounting Rate of Return. The accounting rate of return (ARR) is a measure of the average net profit. When an asset's predicted revenue is dividing by its average capital cost, represented as a % of the asset's yearly cost, it is calculated. Considerations on capital expenditures are made based on the ARR (annualised rate of return) ( Pawlak and Zarzecki, 2020) . Advantages This accounting method's benefits are as follows.

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Payback period is similar in that it is straightforward to calculate and comprehend. It takes into account the entire proposal's long-term economic benefits or losses. After taxes and depreciation have been taken into account, the net profits are calculated. This is a critical consideration in determining whether or not to proceed with a certain investment plan. When comparing new product initiatives to cost-cutting initiatives or other related projects, this strategy is ideal. Disadvantages There are certain drawbacks or restrictions to this strategy as well. They are outlined in the following paragraphs. There is a difference in the findings based on whether ROI is used or ARR is used. It is difficult to make choices because of this. Time is not taken into account in this manner. The time value of money is neglected when choosing alternative uses of funds using the average return approach. It is impossible to estimate a reasonable rate of return based just on the ARR. In the end, it is up to the management. iii. The Net Present Value. To calculate net present value (NPV), cash flows (benefits) in the future are compared to the amount of money needed to invest now ( Ahuja et al., 2021) . There are a number of advantages, including: • NPV gives an unambiguous metric. • NPV takes the amount of the investment into consideration when estimating future wealth generation in today's dollars. • NPV is a simple calculation that may be used for comparing small forestry investments to multi-billion-dollar projects ( THAN, 2018) . Disadvantages include:

• A discount rate must be specified. To calculate net present value (NPV), a discount rate is assumed to be constant throughout the project’s life. Rates of discount, like those of interest, are subject to annual fluctuations. As an example, look at commercial investment estate's cap rates. The benchmarks are always shifting. The potential costs of different investments vary and alter over time. Assumption 1 of NPV: You can properly estimate and anticipate future cash flows. Your crystal ball may be impenetrable, but mine has sometimes exhibited flaws. It's an idea that's hard for some people to get their heads around. The Internal Rate of Return One way to assess a future investment's return on investment is via calculating its "IRR." If the dcf analysis is performed using an IRR, the NPV of all future cash flows is set to zero. ADVANTAGES OF THE INTERNAL RATE OF RETURN The following are some of the benefits of using the internal rate of return to evaluate investments: The concept of the "return on investment" First and foremost, while assessing a project, the required rate of return takes into account the time value of currency. At an interest rate at which future financial PV equals the capital outlay, IRR may be calculated. Simplicity When the IRR is computed, the most appealing aspect of this approach is that it is extremely easy to understand. Accept the project only if it’s internal rate of return (IRR) is greater than the project's cost of capital. Required Rate of Return Is Not Necessary. There are several factors that go into determining a hurdle rate. The hurdle rate or needed rate of return is not necessary in IRR calculations. Because it is not reliant on the hurdle rate, there is less chance that the hurdle rate will be incorrectly determined ( Kovacova et al., 2019) . DISADVANTAGES

Under the following scenarios, the internal rate of return approach is not very useful: Ignoring the Benefits of Scale The problem with adopting the IRR technique is that it wouldn't take into consideration the financial value of the investment. An 18% return rate is superior to a 50% return rate for just any worthwhile project $1,000,000 or more. There's no need to go further into the differences between the two projects; it's obvious that the first one nets $180,000 in benefits while the second just generates $5,000. It's hard to rank the importance of the two options. As a result, the operation with a 50 % IRR will be rated higher than someone with an 18 % IRR due to the obvious greater financial advantage ( Kadim, Sunardi and Husain, 2020) . Projects That Are both Dependent and Contingent Finance managers sometimes find themselves in a predicament where a project they're evaluating forces them to invest in additional initiatives. People that buy large vehicles need to think about where they're going to park them, for instance. The management must take into account these projects, which are referred to as dependent projects. IRR may allow for the purchase of a car, but if the overall planned advantages are wiped out by needing to organise the parking place, there is no use in investing in it ( García‐Sánchez et al., 2019) .

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Projects are referred to in a variety of ways. As an instance, I'll use two projects of varied durations. One lasts two years, while the other lasts five years. You have two choices. It's possible to reinvest funds for three years after the initial project's second year. This is something that is overlooked while using the IRR method ( Keasey and Watson, 2019) . Question 3 Calculate the value of Dragon PLC using the following valuation methods: a) Price/earnings ratio

b) Discounted cash flow method c) Dividend valuation method d) Critically discuss the problems associated with using the above valuation techniques. Which of the above valuation techniques would you recommend with economic justifications to the board of Kings PLC to pursue in this acquisition. 1. Price/earnings ratio The P/E ratio is an indicator of the value of a company's stock, and it is calculated by comparing the stock value to the company's yearly net income per share. In other words, a high PE ratio suggests that investors are more optimistic about the company's prospects and are thus more likely to want its stock ( Morris, 2018) .

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Occasionally, one-time accountancy gains may inflate (or deflate) a company's stated profits. Therefore, the P/E ratio might be deceptively high or low, depending on the company's outlook. One-time charges for litigation, for instance, or other exceptional occurrences might reduce a company's profitability. The stock's trailing P/E may look to be sky-high as a result of this ( Al- Wattar, Almagtome and Al-Shafeay, 2019) . Third, enterprises with a boom-and-bust cycle, such as semiconductors and auto makers, need more research. A company with a low trailing P/E ratio may seem to be a good investment, but the profits of a cyclical company have been rising rapidly recently, indicating that the stock's value is about to plummet. Similar to this, when the "E" of a cyclical company has bottomed and is ready to start expanding again, the stock will seem most costly ( Hoque, 2018) . Finally, there are two types of P/Es: a following P/E, which utilizes earnings from the previous four quarters to compute the ratio, with a forward P/E, which utilises experts' forecasts of profits for the future four quarters to generate the ratio. In general, the future P/E is less than the following P/E since most businesses are raising their profits year over year. This is especially true for companies that are expanding their earnings at a quick pace. Although Wall Street experts' consensus forecasts of future profits tend to be too positive, they're nevertheless useful information for investors. This implies that in order to get the low forward P/E of a stock, you're essentially betting that all of the company's future "E" will really come to fruition ( Kliestik et al., 2020) . Discounted cash flow method Based on the anticipated value of future cash flows, the analysis attempts to determine the current worth of an investment by comparing it to the value it is projected to create in the future, hence determining its current value. DCF Valuation relies heavily on assumptions about the pace of growth and discount rate for the long term. The DCF Valuation will change widely and inaccurately as a result of even the smallest adjustments.

It usually works whenever there is a high degree of certainty regarding future revenues. A lack of insight in the operations of a corporation means that predicting revenues, operational expenditures, and investment may be challenging. While predicting future cash flows is challenging, extending them indefinitely (which is required for DCF valuation) is nearly unattainable. The DCF approach is hence vulnerable to mistake if these inputs are not adequately accounted for. DCF has been criticised for its excessive reliance on the terminal value (65-75 percent). An even the tiniest change in terminal year expectations might have a major influence on the ultimate value. the changing objective, DCF Valuation calls for ongoing observation and adjustment. Any change in the public's perception of the firm will have an impact on its fair worth. The DCF model is not suitable for short-term investments. Instead, longer-term wealth generation is the objective. Dividend Valuation Method When using the dividend valuation approach, the share value of a certain firm is valued in relation to how much it is valued, and all prospective dividend payments are added together and reduced to their current value accordingly. Most often, this is used to appraise companies based on their future dividends and their net present value. Due to the fact that dividend value does not concentrate on stock buybacks, it is difficult to produce an accurate prediction because of the expectation of revenue from dividends alone. There are many drawbacks to the dividends valuation approach, such as the notion that it only operates on companies that pay dividends; it is biased in that only dividend-paying stocks are considered; and it is unable to account for stock buybacks, which may have a negative impact on a company's value. As a general rule, this strategy should only be used to well-established corporations with a history of regular dividend payments. In this research, it is assumed that dividends are paid and are connected to profits, which may not be the case ( Hoque, 2018) .

2. Recommendations The Price-Earnings ratio is the method of assessment I'd suggest Kings PLC's board use while evaluating their purchase. The P/E ratio is critical, particularly when assessing the relative attractiveness of a certain investing strategy. As long as you have an understanding of how much a firm is worth in relation to its earning potential, you can determine if the market is overvaluing or undervaluing it. Using the P/E ratio, investors can see how much they can expect to pay for a company based on its previous or even future profits. Having a high P/E ratio indicates that the stock's price is high, which suggests that the company's profits may be overestimated. Using the P/E ratio, Kings PLC is able to attract more shareholders since they are able to assess so that investors may choose which share to pay for based on current revenues.

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References: Ahuja, N., Bhinder, J., Nguyen, J., Langan Jr, T., O'Brien-Irr, M., Montross, B., Khan, S., Sharma, A.M. and Harris, L.M., 2021, September. Venous thromboembolism in patients with COVID-19 infection: risk factors, prevention, and management. In Seminars in vascular surgery (Vol. 34, No. 3, pp. 101-116). WB Saunders. Al-Wattar, Y.M.A., Almagtome, A.H. and Al-Shafeay, K.M., 2019. The role of integrating hotel sustainability reporting practices into an Accounting Information System to enhance Hotel Financial Performance: Evidence from Iraq. African Journal of Hospitality, Tourism and Leisure , 8 (5), pp.1-16. García‐Sánchez, I.M., Hussain, N., Martínez‐Ferrero, J. and Ruiz‐Barbadillo, E., 2019. Impact of disclosure and assurance quality of corporate sustainability reports on access to finance. Corporate Social Responsibility and Environmental Management , 26 (4), pp.832- 848. Hoque, Z., 2018. Methodological issues in accounting research . Spiramus Press Ltd. Kadim, A., Sunardi, N. and Husain, T., 2020. The modeling firm's value based on financial ratios, intellectual capital and dividend policy. Accounting , 6 (5), pp.859-870. Keasey, K. and Watson, R., 2019. Financial distress prediction models: a review of their usefulness 1. Risk Management , pp.35-48. Kliestik, T., Valaskova, K., Lazaroiu, G., Kovacova, M. and Vrbka, J., 2020. Remaining financially healthy and competitive: The role of financial predictors. Journal of Competitiveness , 12 (1), p.74. Kovacova, M., Kliestik, T., Valaskova, K., Durana, P. and Juhaszova, Z., 2019. Systematic review of variables applied in bankruptcy prediction models of Visegrad group countries. Oeconomia Copernicana , 10 (4), pp.743-772. Morris, R., 2018. Early Warning Indicators of Corporate Failure: A critical review of previous research and further empirical evidence . Routledge.

Ndanyenbah, T.Y. and Zakaria, A., 2019. Application of Investment Appraisal Techniques by Small and Medium Enterprises (SMEs) Operators in the Tamale Metropolis, Ghana. Pawlak, M. and Zarzecki, D., 2020. Investment Appraisal Practice in the European Union Countries. European Research Studies , 23 (2), pp.687-699. Rahman, M.L. and Shamsuddin, A., 2019. Investor sentiment and the price-earnings ratio in the G7 stock markets. Pacific-Basin Finance Journal , 55 , pp.46-62. Soka, I.M., 2020. Impact of Appraisal Techniques on Investment Returns A Survey of Institutional Investors (Doctoral dissertation, The Open University of Tanzania). THAN, W., 2018. INVESTMENT APPRAISAL AND DECISION IN LPG TERMINAL AND JETTY PROJECT (Doctoral dissertation, MERAL Portal).

APC 308 final

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