Financial Performance And Management Assessing The Value...

Name Professor Course Date Financial Performance and Management Assessing the value of investment is a vital consideration any organization needs to undertake before embarking on an investment or a strategic plan. Most organizations fail due to failure in follow through and research of proposed strategies. Some of the strategies developed by organizations are utterly dysfunctional, while others are very efficient but the implementation lets the strategies down. Investment analysis is the systematic process of assessing the functionality and performance or organizational investments. Arguably, one of the key strategies employed in investment analysis is the use of multiple techniques to assess the performance of any given investment.†¦show more content†¦As such, the expected service from the machine is a total of 7 years, with a goal of achieving revenue of $25 million by 2015, three years from the investment is introduced to the organization. The organization expects a 10% return on investments with an 8% cost on capital. This paper seeks to evaluate if the purchase would lead to organizational success or steer the organization into a financial pitfall. As such, evaluation of this investment is crucial for the success of the business. A complete investment analysis using the aforementioned techniques is conducted below. Investment Analysis Accounting rate of return (ARR) ARR = Average Accounting Profit Average Investment Annual Depreciation = (Initial Investment − Scrap Value) à · Useful Life in Years Annual Depreciation = ($950,000 – 0) à · 7 = $135,714.30 Average Accounting Profit = $95,000 − $135,714.30= -$40,714.30 -$40,714.30 / $950,000 = -0.04286 Accounting Rate of Return = -4.2% or 4.2% annual loss. Payback period Payback Period = Cost of Project / Annual Cash Inflows Payback Period = 950,000/95,000 = at least 10 years. However, the machine loses its value in 7 years and will have no salvage value. Net present value (NPV) Year 0 2013 2014 2015 2016 2017 2018 2019 -950,000 95,000 95,000 95,000 95,000 95,000 95,000 95,000 -$950,000 + 95,000/(1.08)1 + 95,000/(1.08)2+ 95,000/(1.08)3 + 95,000/(1.08)4 + 95,000/(1.08)5 +95,000/(1.08)6 + 95,000/(1.08)7 = 87962.96296 + 81447.1879 + 75414.06 +