Paper type: Essay Pages: 4 (844 words)
Q3) Using quantitative and qualitative information, suggest which school Felix and Holly should invest in.
In the case study we are told that Felix and Holly are finding it hard to decide whether to invest in a soccer school or a netball school. They can use many different investment appraisal techniques which are both qualitative and quantitative in order to identify which investment would be most appropriate or worthwhile. They need to consider the level of risk involved, how quickly the investment will take to pay off and whether the investment will be profitable.
There are three main types of quantitative investment appraisal techniques that Felix and Holly could use to identify which investment is most profitable. The first investment appraisal technique is payback and this measures how quickly the investment can be paid back. Using the estimations that Felix and Holly have submitted, the payback period for the soccer school is 3 years and 4 months. The payback period for the netball school is 2 years and 8 months.
This means that Felix and Holly would be better off investing in the netball school as it would take a shorter period of time to cover their cost. Another investment appraisal technique that could be used is accounting rate of return. This appraisal measures the profitability of any investment and the profit is expressed as a percentage.
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For the soccer school the accounting rate of return is 8.8% whereas it is 17.6% for the netball school. The comparison between these two proves that the netball school would be a better investment as the percentage of accounting rate of return is much higher than that of the soccer school. In addition, another quantitative method of appraisal is net present value. Unlike payback and ARR, this investment appraisal considers the value of money over time. It converts all monetary values into today’s values to allow for a realistic assessment of the returns of the years ahead. At 8% over 5 years, both the soccer school and netball school investments have a positive value which means that they are both worthwhile. However the value of the netball school is £12,430 which is a lot higher than the soccer school value at £6,950. This means that the netball school would be much more profitable for Felix and Holly as the value of the money is still greater than the soccer school.
Qualitative methods of investment appraisal can also be used to identify which school would be most worthwhile for Felix and Holly to invest into. Some important factors that would need to be taken into consideration by Felix and Holly for their business are their objectives, resources available and the economy. A qualitative method of appraisal that can be used is internal rate of return. This investment appraisal allows specific information such as the return on the investment to be calculated. When calculated for the netball school, the internal rate of return is over 20% whereas the internal rate of return for the soccer school is between 16% and 20%. This means that the netball school has a higher rate of return than the soccer school.
In conclusion, after using both quantitative and qualitative methods of investment appraisal I have identified that the most worthwhile appraisal would be the netball school. My reasons for this is because it has a shorter payback period which means that it would take a much shorter period of time to pay back. In addition, the accounting rate of return of the netball school was much higher than the soccer school. Moreover, the net present value proves that the value of the money invested within the netball school will be much higher than that invested in the soccer school over a 5 year period. Consequently, the internal rate of return shows that the rate of return on the investment of the netball school is higher than the return on the soccer school. Overall, all the various investment appraisal techniques that have been used have their advantages and limitations.
A payback appraisal is quick and easy to calculate and can be easily understood but it does not calculate the overall profitability of the investment or consider timing of cash flows within the payback period. Whereas an accounting rate of return does take cash flows into consideration. It also focuses on the profitability of the investment and is a good source for comparisons. Its limitations are that it ignores the timing of cash flows and the value of money over time. A net present value appraisal considers both timing and size of cash flows but it is a fairly complex system to use. Lastly, the internal rate of return can be easily used to compare different investments but is also very complex to understand and use. All appraisal techniques have many limitations but they are valuable methods to consider when deciding on a particular investment. In this case all four appraisal techniques have been used to conclude that the most appropriate investment would be to invest in the netball school.
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Investment Appraisal Essay Question. (2017, Feb 03). Retrieved from https://studymoose.com/investment-appraisal-essay-question-essay