Importance of Investment Evaluation - Expansion Group Ltd

A) Determining Cash Flows of the Project for Evaluation Purpose

Relevant cash flows calculated for Expansion Group Ltd

The above computation shows relevant cash flows being calculated for the company for undertaking a project for seven years in Turkey. The proposal is made whether to accept it or not in the best possible manner. It can be highlighted that the project investment cost is 35,00,000 which is bifurcated into 50,000 of set up costs of the project in the nation and the remaining is capital amounting to 30,00,000. The after-tax cash flows are even ie, they will remain the same throughout the year time spans of the project quite effectually. Furthermore, visits to the national cost is estimated to be nearly 50,000 which will increase in these years.

On the other hand, opportunity cost is identified and valued at around 725,000. This figure will also increase in future course of action. This means that after taking cash flows of 8,00,000, it is required to calculate all the relevant cash flows that will be generated by the project in seven years. It can be interpreted from the above computation that sales revenue and product sales are taken and thus, total cash inflows are computed. In relation to this, outflows are taken and net cash inflow for the project is arrived.

B) Calculation of NPV and Advising CFO for Accepting or Rejecting the Project

Computation of required rate of return (CAPM Model)

 The project is being assessed with the help of NPV which is a commonly used investment appraisal technique for evaluating projects in the best possible manner and making structured decisions. It can be interpreted that as per the given information required rate of return is calculated by taking the CAPM model and thus, the rate comes to 7.40%. Furthermore, net cash inflows are attained and by taking the present value factor, discounted cash flows are calculated for each of year (Investment Appraisal. 2012). The total sum arrived is 2889889.71 while the total initial investment cost is 3500000. It clearly shows that NPV is -610110.28 which is negative and it clears that Expansion Group Ltd should not invest in the Turkey project as NPV is not in positive form. Adequate returns will not be generated, hence, it is advised not to invest in this project.

C) Critical Evaluation of Choices of Funds and Relevant Issues in the Project

There are sources of funds that can be used by the CFO of the company are listed below-

Bank Loans

It is one of the commonly used methods by companies as it helps to take money for investment purposes and also to take for meeting out operational expenses. The principal amount is to be paid along with interest on it in installments (Subramanian and Ramanathan, 2012).

Advantages

• Easy to take a loan and the simplest procedure
• The interest rate is fixed and easy to calculate installment amount

Disadvantages

• Interest is to be paid which limits the use.
• Debt burden increases affecting liquidity

Equity Financing

The shares can be issued by Expansion Group Ltd to equity holders in order to garner funds and effectively meet its operational tasks. It is useful as no liability arises to pay to shareholders only dividends are paid.

Advantages

• No debt burden prevails to pay shareholders
• It is a suitable method of raising funds in comparison to bank loans.

Disadvantages

• Control is being observed by shareholders on money provided by them.
• A certain rate of return is to be paid by the company (Golden and McMahan, 2017).

These alternative options can be chosen by the CFO. There certain issues within this project is as expenses are more in quantum leading to decreased revenue. It has resulted in more cash outflows than inflows. Furthermore, it is required that external factors prevailing in Turkey must be assessed so as to minimise risks up to a high extent. However, it can be interpreted that the project should not be undertaken as NPV is not good.

CONCLUSION

Hereby it can be concluded from the above report that NPV is an effective method for testing the viability of the business. Expansion Group Ltd should not make investment in the project as NPV is negative which means that adequate returns will not be generated. Furthermore, choices of funds are available which can be opted as per the requirement of the firm to meet operational tasks.

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