STRATEGIC CORPORATE FINANCE

STRATEGIC CORPORATE FINANCE

Introduction

Project appraisal factors in fundamental and technical aspects of the project to determine its viability. Appraising a project enables, the project managers and organization at large to invest in projects that have considerable high returns compared to other projects that involve the same level of risk (Damodaran, 2012). In appraising the project various methods are employed, that include, net present value, discounted payback period, sensitive analysis modified the rate of return and internal rate of return (Jannasch, 2004). By calculating this figures, a project manager can be able to draw a comparative approach that will help to select and invest in the project with the highest likelihood of bringing more returns to the company (Larrabee and Voss, 2013). The ensuing segments present an analysis of tow manufacturing plants proposed by the CarMaker Ltd.

TASK ONE

Projects Appraisal

The appraisal of the two manufacturing plants for the CarMaker Ltd will be carried out using the discounted cash flow analytical techniques. This techniques factor in time value of money given that costs and benefits of the project are expected to occur in a different lifetime of the projects. The methods used are net present value, internal rate of return, accounting rate of return, and payback period.

The Two Manufacturing Plant Projects Evaluation

1. Net Present Value (NPV)

Net present value discounts all the expected net benefits of the [project and compares them with the initial investment costs (Periasamy, 2009). Positive NPV illustrates the ability to cover the initial investment cost (Schön, 2007). For the proposed manufacturing plant the net present value is £ 58, 598. This shows that over the ten years the project will have more benefits than the costs. On the other hand, the net present value of the larger project for the same period is £ 205, 301. A project that has a potential of generating high NPV is considered more appropriate for the entity (McLean, 2003). As such using the NPV method, the large project would be more appealing for the company.

1. Internal Rate of Return (IRR)

This is the rate at which the net present value is expected to be zero (Shim and Siegel, 2010). This is the rate of growth that a particular project is expected to generate to the company. A project is considered more profitable when its IRR exceed its cost of capital. The cost of capital for the CarMaker Company is 12%. This means that the acceptable projects by the company have to have the IRR that is greater than 12%………………….