Finance Case
There are six types of key steps in the capital investment decision-making process. The first step is identifying the businesss objectives, so normally maximizing the wealth of the shareholders is the main principal financial objective for all decision. This step is very important as the decision maker must know what direction they should go or achieve before they can proceed to other steps. The next step is identifying the possible investment opportunities and this step should not be left out as a good investment opportunity does not reach your doorsteps automatically; they must be sought out. Staffs are encouraged to identify new markets, new products and new approaches to production.
The third step will assembling relevant data for an investment proposal and this step needs to carry out by financial manager or a specialist. Relevant cost and benefits must be taken carefully and it is danger that bias can influence some of the cost estimates. So, the chosen financial manager should have great commitment towards the proposal. The following step is assess the data and reach a decision, the data must key into the decision-making model that the business is using. For example the business model should be NPV if the business is wealth maximize. Once again this process needs certain technical skills and freedom from bias, so it is best carried out by trusted members.
Action need to be taken in the step of implementing the decision in order to get the project get going. A project team may well be established to take the necessary steps. The last step is monitoring the effects of the decision and also known as post audits. One of the reasons for this is to ensure the quality of the decision-making process, so that improvement can be made in respect of future decision. Furthermore, it also prevents the same factor that has taken to be used again in future decisions of the proposal.
The role of investment appraisal in this process is to seek opportunities of investment such as whether to invest the project or not. Investment appraisal has different objective with financial accounting because financial accounting seek to measure profit whereas investment appraisal seek to assess a project over its entire life. Making decision in investment appraisal is very important because it provides profit or losses for long-term and not for short-term.
Question 2
The net present value is positive, $ 150,000 which means that the cash inflows from the investment have earned back the cost of capital. So the proposal can be accepted because the cost of capital also known as accounting rate of return.
Question 3
Calculation of NPV simply shows whether a project provides value to the firm or not. The net present value method of investment appraisal helped the shareholders to maximize their wealth. It also take consideration in