ACCOUNTING

Business decision making accounting coursework



Business decision making accounting coursework

Part A: Explanation of investment decision

Lambert heating is well known for producing quality radiators and central heating system for both domestic and commercial customers. Meanwhile, in order to enhance the quality of its production and to reduce the cost of production the management of the company is planning to replace it old machines with new and innovative machines (Abdel & Luther, 2006, pp. 336-357). Senior management is affirm that it does not want to compromise of the quality of the products, and hence with detail argument with other board members the team has finalized three possible substitute machines that are manufactured by well known companies. The management has assigned me the task of conducting an in-depth evaluation of three alternatives.

 

Alumier Machine

Big EZ machine

Cial Machine

Net present value

$ 32,347.18 $ (17,732.10)

$ 65,795.65

Internal rate of return

11.86%

8.23%

14.96

Payback period

4.25 years

3 years

3.3 years

For in-depth analysis of each investment alternative, I have use Net present value, internal rate of return method and payback period method for the analysis of these proposals (Alessandri et al, 2004, pp. 751-767). The net present value of Alumier machine is positive which indicates that machines will not only cover its initial investment but will earn comprehensive return for the company. On the other hand, the net present value of BIG EZ machine is negative which indicates that purchasing of these machines would not prove to be fruitful for the company, as this machines is not compatible enough to earn back its initial investment, further, it will earn worse return for the company.

Meanwhile, the net present value of CIAL machine is greater than zero, which indicates that discounted future value is higher than the initial investment, and thus company would be able to get even higher return than expected (Alkaraan & Northcott, 2006, pp. 149-173). However, after using payback period model it was observed that company would recover its initial investment in alternative one in around 4.25 years, whereas, it would recover its initial investment for alternative two in around 3 years. On the other hand, it would take company 3.2 years to recover its initial investment amount in alternative three.

According the general concept of internal rate of return the company must select the project having the higher internal rate of return, based on this concept it was observed the IRR of alternative one is 11.86 percent which is slightly higher than the investment return. Whereas, the internal rate of return of alternative two is 8.23 percent that is lower the investment rate, on the other hand, the internal rate of return of alternative three is 14.96 percent (Bennouna et al, 2010, pp. 225-247).

Objective of NPV, IRR, PBP

The primary objective of the company is to maximize the value of its shareholders wealth, which has a direct relationship with the net present value of the investment. According to the general financial concept, the worth of an investment is calculated using the future cash flows, it generates and then these ...