INVESTMENT ANALYSIS

Investment Analysis



Investment Analysis

Introduction

The study is related to Pevensey PLC which intends to purchase a machine. The company has four options that is, four potential machines from which one has to be selected. For having an investment in a machine, company has to analyze which machines is feasible for the company. Therefore, it is important to evaluate each machine through their net present value, IRR, payback period etc as it will provide basis while making the decision of purchasing the machine.

Techniques

Net Present Value

The net present value (NPV) is the most popular method when evaluating investment projects in the long term. The net present value to determine whether an investment complies with the basic objective financial: maximize investment. The net present value determines if the investment may increase or decrease the value of small and medium enterprises. This change in the estimated value may be positive, negative, or remain the same. If it is positive means that the value of the firm will have an increase equal to the amount of net present value. If it is negative than that the firm will reduce its wealth in the value yielding the NPV; if the result is zero net present value of the firm does not change the amount of its value. It is important to note that the value of net present value depends on the initial investment prior investments during the operation, the net cash flows, the discount rate and the number of periods throughout the project (Groppelli and Ehsan, 2006, 23-39).

In addition to this, a positive value of NPV is that the capital investment is efficient. The concept of net present value is widely used in investment analysis for the evaluation of investments. The above formula is valid only for the simple case of the structure of cash flows, where all investments are in the beginning of the project. In more complex cases for analysis may be necessary to complicate the formula to take into account the distribution of investment over time. Most often, this investment leads to the beginning of the project is similar incomes. The net present value measure based on information accounting if the investment is expected to achieve the objectives of capital providers. A positive NPV indicates that the investment can be undertaken. However the NPV is a provisional assessment tool based on information remains difficult to predict (Groppelli and Ehsan, 2006, 32-46).

Payback Period

The payback period relies on the time period of the investment, and ignores the profitability factors. Therefore, NPV is the robust technique and incorporates time and profitability factors (John, 1996, 15-17). Payback period is the length of time from the initial moment to the moment of return. The starting point is usually the beginning of the first step or the beginning of operations. The moment of return he is the earliest point in the billing period, after which the current cumulative net cash flow NV are to continue to remain non-negative. The calculation of the payback period is not recommended ...