In this report we discussed the roll of Capital Expenditure and the difference between the Revenue Expenditure through investment appraisal as well as incorporating inflation in respect of risk involved. And discussed the advantage and disadvantage of pay back method and NPV, IRR, ARR. And report on finical and non-finical performance to analyzing the finical statement as well as balance score card and the key ratios.
Introduction:
In present business portfolio there are many ways to analysis the expenditure the companies are using different method to evaluate their business they used different technique and everybody want to get maximum benefit and they search different ways.
An organization used different technique to evaluate the attractiveness of an investment proposal using the method of ARR, IRR, NPV and pay back method. It is a most important factor of capital budgeting and also applicable in that particular area where the return may not be easily applicable. For the success of the company there must need to develop a change and make reforms in it. For the development of company the high level management faces a large number of different projects. Management makes the plan to introduce it. Company always has a limited budget or capital and the people who invest the money always offer short investment to the company. The management makes a plan according to the decided amount that how they will get profit with short budget and how they can sport. There are so many ways witch use for assessing and comparing the feature of the proposals for example.
They present a proposal for the long term plan of the company.
They committed the level of risk in the proposal.
Even if the company has handsome money they look the possibility of other resources.
There is a single one important element and gives the best result in the shape of investment the method of discount cash flow.
The discount cash flow in the most important way to which use in different purposes.
Investor can assess that the money which invest in to the stock market, that according to the company financial scenarios.
It is good invest the money to purchase an asset.
There are four techniques which are used in investment appraisal.
Payback.
Accounting rate of return.
Net present value.
Internal rate of return.
The first two methods are the conversion method and the last method is modern. The conversion is the time taking method and the modern method which comes in ten years.
Net present value:
NPV is the abbreviation of net present value. Is the figure to count the money value and which invested today and the present cash value of the investment? Which received in a future?
1
( 1 + R ) r
Year Cash inflow Discount factor Present value
0 -2.500 12% -2.500
1 750 0.8929 669.675
2 750 0.7972 597.900
3 900 0.7118 640.620
4 900 0.6355 571.950
5 595 0.5674 337.603
Positive NPV 317.748
Internal rate of return:
This method is used in capital budgeting. In this method the capital budgeting make a NPV of cash flow. This is defined that annual % return achieved by a project at which the some of the discounted cash inflow over the life of the project is equal to the discounted cash out flow. For the calculation of IRR must be need 1 positive and 1 negative value of NPV.
IRR=Discount rate of + NPV * Difference between the two discount rate + NPV
+NPV â€"NPV
IRR=12%*20%=8% +317.748
+478.408
12+8%(20%-12%)
12+8*317.748
478.408
12+8*0.6641779
12+5.3134232=17.313%
Define the incorporate inflation:
We can define the inflation that it is a change to spend money on single unit to the country currency to adjust the annual percentage for example. $5000 according to the rate of 1.5% inflation will be worth $4625.00 after one year of inflation on the value of the money effect on the time due to this reason. Like the saving and other investment. The financial planning inflation play and imported role. And provide tips incorporating inflation and the time value of the money.
For example:
Inflation rate 1.5% time 5 year current value $5000.
1 year $5000*1.5%=$75.0=$4925.00
2 year $4925.00*1.5%=$73.875-$4925.00=$4851.125
3 year $4851.125*1.5%=$72.766-$4851.125=$4778.359
The process will continue for 5 year applied inflation rate and the value of the money became low in every year and there is $363.916 the worth of the money after five year inflation and there is a different 7.30% of the actual value of the money.
In the decision making process inflation is a common problem in the entire world inflation is a big problem. If the inflation rate cannot be calculate it will be very difficult for the capital budgeting analysis will be effect. The executive’s management thinks about the exiting incorporate inflation but not take serious.
Outcome 6 Financial Analysis:
It is calculations which provide the data about the measurement of the company. The company can analysis their financials and evaluate the objective and goal of the firm many people are not satisfied with these measurement. They thing that through this process the customers earning and an accounting return and emphasis the value of accounting satisfaction inadequacies in financial performance measure have let to the innovation from the none financial indicator asset and capital can be measure through balance score card to represent the financial and nonfinancial measure.
