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Your assignment is to prepare and submit a paper on financial decision making and risk.
Your assignment is to prepare and submit a paper on financial decision making and risk. The new assembly cell will require three call programmer/operators who will be recruited at a salary of £20,000 per year each. The cell robots are expected to last for 5 years, after which they can be sold off for an estimated price of £1,000 each. Your company’s cost of capital is currently 10%.
As the Financial Director of your company, you are required to submit a detailed report to the Managing Director and your fellow Board members evaluating the proposed investment, fully justifying any recommendation you will make and identifying any potential problem areas and offering potential solutions.
“Investment appraisal is the process of assessing potential investment projects to see which ones are most viable (and profitable) for the firm.” (Samuels et al, 2000). This report is aimed at understanding whether investing in the automated assembly cell will be beneficial for the company. To analyze the benefits of the investment a number of different calculations including the payback period and sensitivity analysis have been made. These have been included in the next few sections along with the investment decisions based on the calculations.
Payback period is one of the simplest methods of investment appraisal. This method is generally beneficial for short-term projects and for projects where the returns are fixed and accurate. The most beneficial feature of this method is that it takes into account the liquidity of the project, which is useful for businesses to understand and concentrate on the cash flows of the company. Also, this is a very simple method comparatively (Samuels et al, 2000).
Net Present Value (NPV) is the most commonly used method and it utilizes the discounted cash flows to compute the returns from an investment. In this method, initially, all the future cash flows that will be generated by the project are discounted to present value. .