According to the current situation of Glee Plc, this company is underperforming in term of profit and the new projects are not going as well. To solve this problem, the manager of Glee Plc should conducts investment appraisal to appraise the investment opportunities.
Investment appraisal refers to the ”evaluation of proposed investment ”(DC, Blood, 2010) and also known as capital budgeting. In order to improve the profit, Glee Plc should undertake the projects which may give sustainable competitive advantage to them. However, they will be faced with different investment projects such as launching a new product or opening a new outlet and purchasing new machinery. Normally, such investment projects might take a long term period (more than a year) and a lump sum will be involved, but a company will have a limited amount of funds to invest. As such, investment appraisal needed to be conduct by the manager of Glee Plc to evaluate whether which investment project is more profitable.
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The main factor that caused Glee Plc underperforming probably is that they have no making any investment analysis during the decision making process and therefore the company unable to make evaluation of the investment project and could lead the company to loss or earn lesser profit. By conducting the investment appraisal, the manager of Glee Plc able to compare and evaluate which investment proposal is better and should be undertake. Thus, investment appraisal is playing an important role during the decision making process.
There are four techniques can be apply into the evaluation of investment proposal such as Payback Period (PP), Accounting Rate of Return (ARR), Net Present Value (NPV) and Internal Rate of Return (IRR).
Payback method is a method that uses to ”measure the time required for the cash inflow from the investment project to recover the initial investment cost” (INVESTOPEDIA, 2010). Usually, a manager using payback method is to calculate whether how long the time their cash inflow can cover the cost of the investment project.
Based on the appendix 1, a company planning to purchase new machinery but there are two different machines available and the cost of machine also different. From the payback method, it resulting that the payback period for machine X is 2 year and 8months and the payback period for machine Y is 3 years. Thus, the company might considered machine X first since the payback period is shorter and the investment risk will be lower and the capital will not be tied up and compared to machine Y the payback period is longer and probably the investment risk will be higher.
Payback method is the quickest and simplest to understand method among others method of investment appraisal.
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