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INVESTMENT APPRAISAL

by (Name of Author)

Name of Class
Name of Professor
Name of School
Name of City/State
Date
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Q# 1. John has decided to open an Indian Restaurant in any of two counties named Portsmouth
or Cambridge. Before investing in opening the restaurant John has to consider some investment
analysis techniques which are as follows.
1. Structural Analysis
Some investors want to appraise maximum duration investment decisions that might start
with the structural analysis of an organisationally, an individually, or merchandisingly
(Mun, 2002). This analysis helps to judge to fix the value to asset in contrast to make
asset’s present value in the market. This analysis will help the John whether to invest
with buying undervalued securities or to sell with overvalued.

2. Mechanical Analysis
This is the analysis in which investors evaluate the assets or securities with the help of
sampling or facts and figures. In this technique, investor gets insight of the future
performance of the securities with the past performance of the business or organisation
overall. Mechanical analysis is the short period prediction based evaluation by which
investors make decisions for short period of time. With this analysis, John will be able to
get ideas with predicting these two counties while opening the restaurant.

3. Surveyable Analysis

This analysis can be done by considering actual performance of the organisation as a

whole. This type of analysis can be performed by some accounting ratios. This is also
calculated by some difficult method of calculation as discounted cash flow by initial
investment.

John should initiate all these three techniques for evaluating long term investment, risk
and resale of investment.

Q# 2. Solution
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Project A
Initial investment £100,000
Discount Rate or Rate of return @ 8%
Years Cash In (£) Cash Out (£) Net Cash Discount Present
Flow (£) Factor Value (£)
1 50,000 32,500 17,500 0.93 16,275
2 70,000 45,500 24,500 0.86 21,070
3 150,000 97,500 52,500 0.79 41,475
4 150,000 97,500 52,500 0.74 38,850
5 150,000 97,500 52,500 0.68 35,700
Total 153,370

Net Present Value = £153,370 - £100,000 = £53,370

£ ( 153,370 )
Profitability Index (PI) = =£ 1.5337
£ 100,000
Project A creates value.

Project B

Initial investment £175,000

Discount Rate or Rate of Return @ 8%
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Years Cash in (£) Cash out (£) Net Cash Discount Present
Flow (£) Factor Value (£)
1 50,000 32,500 17,500 0.93 16,275
2 100,000 65,000 35,000 0.86 30,100
3 250,000 162,500 87,500 0.79 69,125
4 250,000 162,500 87,500 0.74 64,750
5 250,000 162,500 87,500 0.68 59,500
Total 239,750

Net Present Value = £239,750 - £175,000 = £64,750

£ ( 239,750 )
Profitability Index (PI) = =£ 1.37
£ 175,000
Here Project B also creates value.
From the analysis of both Project A and Project B, Project B is the most profitable to
invest because its NPV is greater than option A and investor like John should consider
NPV analysis technique as it is the important investment evaluation than others as of PI,
IRR or Payback Period method. (Gitt, 2014)

Q# 3. Accounting Tools to find critical analysis

Project A
Income Statement using Break-even Point
Sales (1,500 meals × £10) £15,000
Less Variable Expenses (1,500 meals × £1) 1,500
Contribution Margin £13,500
Less Fixed Expenses 2,000
Net Income £11,500
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Project B
Income Statement using Break-even Point
Sales (2,000 meals × £12) £24,000
Less Variable Expenses (2,000 meals × £2) 4,000
Contribution Margin £20,000
Less Fixed Expenses 3,000
Net Income £17,000

From above income statements for both projects, I would suggest John to invest in
Project B, because he would get £17,000 monthly from its break-even point analysis
which is greater than Project A. (Egan, 2020)

References
1. Mun, J., 2002. Real Options Analysis. [online] Goodreads.com. Available at:
<https://www.goodreads.com/book/show/730282.Real_Options_Analysis> [Accessed 22 April 2020].

2. Gitt, J., 2014. Profitability Index Vs Net Present Value: Which One Is Better?. [online] Westwood Net
Lease Advisors LLC. Available at: <https://westwoodnetlease.com/profitability-index-vs-net-present-value-
which-one-is-better/> [Accessed 22 April 2020].

3. Egan, C., 2020. Break-Even Analysis 101: How To Calculate BEP And Apply It To Your Business.
[online] Square. Available at: <https://squareup.com/us/en/townsquare/how-to-calculate-break-even-
point-analysis> [Accessed 22 April 2020].
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