Financial projection and evaluation are one of the most important parts at the time of taking the decision for the project. As per the view of La Torre et al. (2018), the valuation of the required profitability and effectiveness of the project has been analyzed based on the accurate use of the financial projection on each project. GCUIT Ltd has also made implications on using the required financial projection that can help in analyzing the effectiveness of the project and make an effect on the taking the accurate decision in an appropriate manner. In that case, it is necessary to use the proper financial projection and indicator in terms of evaluating "Net present value, payback period, internal rate of return and payback period" of the respective project in an appropriate way. The use of these methods has the major implication that can help the company in taking the proper investment decision in an appropriate way.
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It has basically two major options for investment in terms of project A and project B. In the opinion of Allen et al. (2020), it is needed to provide the proper financial calculation to show which of the projects is more beneficial as compared to the other. The valuation of the effective decision for investment in the adequate project has a clear implication of accumulating proper profitability for the company in an appropriate way. The calculation for each factor has been clearly shown in the below table:
“Project A |
Project B |
||||||
Year |
Project A |
Discount rate (9%) |
Present value of the project A (£) |
Cumulative cash flow |
Project B (£) |
Present value of the project B |
Cumulative cash flow |
0 |
-30,000 |
1 |
-30000 |
-30,000 |
-40,000 |
-40000 |
-40,000 |
1 |
4,500 |
0.917431193 |
4905 |
-25,500 |
-5,000 |
-4587.155963 |
-45,000 |
2 |
5,500 |
0.841679993 |
6534.55 |
-20,000 |
7,000 |
5891.759953 |
-38,000 |
3 |
6,000 |
0.77218348 |
7770.174 |
-14,000 |
11,500 |
8880.110021 |
-26,500 |
4 |
10,000 |
0.708425211 |
14115.8161 |
-4,000 |
12,000 |
8501.102533 |
-14,500 |
5 |
12,000 |
0.649931386 |
18463.48746 |
8,000 |
15,000 |
9748.970794 |
500 |
6 |
12,500 |
0.596267327 |
20963.75139 |
20,500 |
18,000 |
10732.81188 |
18,500 |
Net present value |
42752.77894 |
-832.4007787 |
|||||
Payback period |
4.666666667 |
4.033333333” |
The payback period of both projects for GCUIT Ltd has been evaluated based on the proper valuation of each aspect that is related to the investment decision. The valuation of the payback period mainly refers to the required taken time by the company to recover the overall amount of the investment. Based on the view of Mujiatun et al. (2021), the payback period is mainly the required "length of time" that the company takes to reach the required break even point. Payback period has the proper integration on analyzing the effectiveness of the project as a shorter payback period is more attractive for the company as the company has quickly reached the break-even point and then has profit till the project end. Table 1 includes the proper valuation of the payback period that has to make an effect on understanding the effectiveness of each project after the investment. For project A, the amount of the total investment is £30,000 for the time of 6 years. As per the reference of Imteaz et al. (2021), the accumulation of the required payback period has been computed with the valuation of cumulative cash flow for each year based on using the cash flow value. The use of the estimated cumulative cash flow has the required integration in analyzing the total time for the payback period.
The value of the payback period has been evaluated by the use of the required formula as "a year before break-even point +(uncovered amount cash flow in the recovery year)". The valuation of the payback period has been analyzed as 4.67 years and 4.033 years for project A and project B respectively. The evaluated amount for the payback period has the major estimation in terms of understanding that project B is more effective as compared to project A. The payback period for project B is less than that of project A. That means project B can reach its breakeven point in less time.
Return on investment has been another indicator for the financial projection as this has been also used in terms of evaluating the effectiveness of the proposed project with the comparison of both in an appropriate way. Based on the view of León et al.(2020), the valuation for the ROI has been analyzed on both projects as this has the major configuration for analyzing the required value of each project based on the return percentage value. The ROI is the effective measurement of the required percentage profitability on the investment value. The valuation of the ROI for project A and project B has been properly analyzed with the required implication of each aspect as total investment value and the average profit. The valuation of the ROI has been analyzed with the use of the required formula as "Average annual profit/Total investment *100".
"The calculation for return on investment |
||
Return on investment |
Project A |
Project A |
Average annual profit |
8416.666667 |
9750 |
Total investment |
30000 |
40000 |
ROI for Project A |
28.05555556 |
24.375" |
Table 2: Calculation for return on investment
The estimation of both projects' value for return has been analyzed with the use of the provided formula. The average annual profit of project A has been also evaluated with the use of each year's profit value. The acquired profit value of the project is £8416.666667 and the total investment is £30000. On the other hand, the value for total investment and average annual profit is £40000 and £9750 respectively for project B. The value for the ROI of both projects has been evaluated as 28.055% and 24.375% respectively.
The valuation of the NPV for both projects has been evaluated for both projects under the financial projection for GCUIT Ltd. The analysis of the valuation of the NPV has also helped in taking the decision of investment based on the profitability value. As per the view of Allouhi et al. (2019), NPV is one of the most important financial metrics that has been used to capture the analyzed total value of the required investment opportunity as well. The use of the NPV has helped the company in accumulating the required "future cash inflows and outflows' ' that have been properly associated with the investment. The valuation of the NPV is one of the most required approaches as it can make an effect on accuracy. The accuracy range of the NPV is quite higher as compared to the other. It is a simple process that has been analyzed with the proper consideration of the fact "time value of money".
It has effectively calculated the value of the NPV with the use of the discounting rate of 9% for each project and help in taking the decision of the investment in an appropriate manner. The total time for the investment is 6 years for both projects. Table 1 has clearly shown the value of the NPV as it has the required integration to take an adequate decision for investment in an appropriate manner. The evaluated value for the NPV has been estimated for project A and project B are "£42752.77894 and -£832.4007787" respectively. The analyzed value for the NPV has a clear implication for analyzing the effectiveness of the project at the end of the investment year. The value for project A has shown the profitability range as compared to project B. The NPV value of project B shows a negative balance that makes implication a major loss if the company can invest in Project B.
The valuation of the IRR and its diagram has been prepared based on the required valuation of the discounting rate value of both projects. Based on the research work of Parameshachari et al. (2020), the estimation of the IRR and preparation for the diagram has a major integration at the time of evaluating the IRR value in an appropriate manner. The preparation of the IRR graph can mainly need the proper use of the cash flow for each project. It is needed to take the cash flow of each respective project and then effectively calculate the discount rate that can basically produce the NPV zero. Use of the different discounts in the project can mainly help in producing or plotting the IRR graph in an effective manner. The below graph shows the specific value of each project that has mainly been produced based on using the two discount rates in which one is higher and another can be lower.
It has taken the discount rate of 9% that has already been provided and the other one assumed, which is higher than the taken graph. The assumed discount rate for producing the graph can be 15%. It has used a 15% discount rate that can help in producing the graph for projects A and B in an appropriate manner. The value of the used discount rate has been shown on the X-axis and NPV on the Y-axis.
Figure 1: IRR diagram for Project A
The valuation of the IRR graph can help in analyzing the NPV value at both discount rates. The above graph makes an implication on showing that the NPV at the 15% discount rate shows a negative balance. On the other hand, the value of NPV at the discount rate of 9% has shown positive and higher NPV values. The preparation of the graph has clearly made implications for the IRR value that is around 14.88%.
Figure 2: IRR diagram for Project B
The IRR graph for project B has been also prepared which has been effectively shown in the above figure in an appropriate manner. It has also used the two discount rates of 9% and 15%. The higher discount rate shows a negative balance of NPV and the lower rate shows a positive value for the project. The above graph for the IRR has effectively made a reflection on showing the IRR value around 14.02%.
The calculation for the IRR has been effectively accumulated based on the proper use of the data and information provided for project A and project B. As per the reference of Goya-Outi et al. (2018), the valuation of the IRR has been completely dependent on the effective valuation of the projected cash flow value for each project. The required formula for evaluation of the IRR has been shown in the figure below that can help in better understanding. In order to use the provided formula, it is required to take the value of cash flow and then discount them twice at the taken rate of 9% and 15%.
“Project A |
|||||
Year |
Project A |
Discount rate (9%) |
Present value of project A at a rate 9% (£) |
Discount rate (15%) |
Present value of project A at a rate 15% (£) |
0 |
-30,000 |
1 |
-30000 |
1 |
-30000 |
1 |
4,500 |
0.9174 |
4905 |
0.8696 |
3913 |
2 |
5,500 |
0.8417 |
6534.6 |
0.7561 |
4158.8 |
3 |
6,000 |
0.7722 |
7770.2 |
0.6575 |
3945.1 |
4 |
10,000 |
0.7084 |
14116 |
0.5718 |
5717.5 |
5 |
12,000 |
0.6499 |
18463 |
0.4972 |
5966.1 |
6 |
12,500 |
0.5963 |
20964 |
0.4323 |
5404.1 |
42753 |
-895.3” |
||||
ra |
9% |
||||
rb |
15% |
||||
Na |
42752.8 |
||||
Nb |
-895.32 |
||||
IRR |
14.88% |
Table 3: Calculation of IRR for project A
The estimation of the IRR mainly needs to choose the discount rate which one can provide a positive and another can provide a negative balance. The estimated value for the NPV in the project at the two different discount rates 9% and 15% is £42752.77894 and -£895.3207286 respectively. The analyzed value of NPV has both a positive and negative balance. The valuation of the IRR for the project has been analyzed with the use of the above formula and the evaluated value is 14.88%.
“Project A |
|||||
Year |
Project A |
Discount rate (9%) |
Present value of the project A at rate 9% (£) |
Discount rate (15%) |
Present value of the project A at rate 15% (£) |
0 |
-40,000 |
1 |
-40000 |
1 |
-40000 |
1 |
-5,000 |
0.9174 |
-5450 |
0.8696 |
-4347.82609 |
2 |
7,000 |
0.8417 |
8316.7 |
0.7561 |
5293.005671 |
3 |
11,500 |
0.7722 |
14893 |
0.6575 |
7561.436673 |
4 |
12,000 |
0.7084 |
16939 |
0.5718 |
6861.038947 |
5 |
15,000 |
0.6499 |
23079 |
0.4972 |
7457.651029 |
6 |
18,000 |
0.5963 |
30188 |
0.4323 |
7781.896726 |
47966 |
-9392.79704” |
||||
ra |
9% |
||||
rb |
15% |
||||
Na |
47966 |
||||
Nb |
-9393 |
||||
IRR |
14.02% |
Table 4: Calculation of IRR for project B
On the other hand, the IRR value for project B has been evaluated with the use of the estimated formula. The use of the proper implications has a clear reflection in terms of using the cash flow and discount rate value as well. The estimated value of NPV at both discount rates is £47965.67414 and -£9392.79704. These NPV values have been used for evaluating the IRR and the analyzed IRR is 14.02%.
The use of the IRR methods is very easy and clear to understand for the computation of the "investment appraisal techniques''. In the opinion of Lu and Yin (2021), the main advantage of the valuation of the IRR technique at the time of investment is its accuracy and consideration of the fact as "time value of money". IRR is simply evaluated with the use of the provided cash flow value and makes an implication of analyzing the required return after the investment in the particular project. On the other hand, it is the rate quantity and mainly indicates the efficiency, yield and quality of the proposed proposal with the valuation of the investment value as well. The above valuation of the IRR for both projects has effectively made implications for the company to take the decision for investment.
GCUIT Ltd has effectively used the "investment appraisal method" strictly and made implications on the analyzed effectiveness of both projects at the time of taking the decision. It has strictly used financial measures and used techniques in terms of the "Net present value, payback period, internal rate of return and payback period" before taking the decision for investment. With the overall valuation, it can be recommended to GCUIT Ltd invest in project A as compared to Project B.
The valuation of the payback period for both projects has been estimated as "4.67 years and 4.03 years''. On the other hand, the value of the NPV has been evaluated for both projects and analyzed that the value of project A is 42752.77894 which is higher than that of project B. In fact, Project B's NPV value shows a negative balance that can help in understanding that this project can be full of losses if the company can invest in this project. On the other hand, the ROI value has made a reflection showing that the return on project A is 28.5% that is higher than project B that is 24.37%. Moreover, the value of IRR has also been reflected in showing that project A is better for GCUIT Ltd as compared to project B.
Reference
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