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| BytWave Innovations | ||||
| Investment Appraisal for Project A | ||||
| Years | Cash Flow | DF@12% | Present Value | Cumilative Cash Flow |
| 0 | -£ 2,20,000.00 | 1.00 | -£ 2,20,000.00 | -£ 2,20,000.00 |
| 1 | £ 70,000.00 | 0.89 | £ 62,500.00 | -£ 1,50,000.00 |
| 2 | £ 55,000.00 | 0.80 | £ 43,845.66 | -£ 95,000.00 |
| 3 | £ 35,000.00 | 0.71 | £ 24,912.31 | -£ 60,000.00 |
| 4 | £ 70,000.00 | 0.64 | £ 44,486.27 | £ 10,000.00 |
| Net Present Value | -£ 44,255.76 | |||
| Payback Period (Years) | 3.86 | |||
| Accounting Rate of Return | 26.14% | |||
| BytWave Innovations | ||||
| Investment Appraisal for Project B | ||||
| Years | Cash Flow | DF@12% | Present Value | Cumilative Cash Flow |
| 0 | -£ 2,00,000.00 | 1.00 | -£ 2,00,000.00 | -£ 2,00,000.00 |
| 1 | £ 40,000.00 | 0.89 | £ 35,714.29 | -£ 1,60,000.00 |
| 2 | £ 35,000.00 | 0.80 | £ 27,901.79 | -£ 1,25,000.00 |
| 3 | £ 50,000.00 | 0.71 | £ 35,589.01 | -£ 75,000.00 |
| 4 | £ 95,000.00 | 0.64 | £ 60,374.22 | £ 20,000.00 |
| Net Present Value | -£ 40,420.70 | |||
| Payback Period (Years) | 3.79 | |||
| Accounting Rate of Return | 27.50% |
“Payback Period” for Project A and Project B is evaluated as 3.86 years and 3.79 years, indicating that recovery of initial outlay in Project B is marginally superior to A. Chang (2023), stated that “Payback Period” establishes in initial financial feasibility available to a project and excludes the consideration of “time value of money”.
From the above figure of calculations, the “accounting rate of return or return on capital employed” for Project A and Project B includes numerical values of 26.14% and 27.50% respectively. This symbolises those non-discounted returns on capital investments for Project B are comparatively to Project A and can be selected by the managerial concern of ByteWave innovations if further selection criteria’s meet eligibility.
“Net present value” for Project A and Project B involves numerical expressions of GBP -44,255.76 and GBP -40,420.70 respectively which indicates that net present value of Project B is comparatively better placed than Project A. As stated by Kasprowicz et al. (2023), “Net present value” is perhaps identified as the most superior method of “investment appraisal” which takes into account “time value of money”.
Based on the above financials interpreted for 'investment appraisal' opportunities relating to Project A and Project B, it is recommended to the managerial concern of ByteWave innovations to reject both projects. The rejection of both projects is substantiated based on negative values detected for 'Net present values' which can impact financial longevity of the organisation in future.
| Calculation of Cost of Equity Using CAPM method | |
| Particulars | Total |
| Risk Free Rate (Rf)- Treasury Bill Yield | 8% |
| Market Risk Premium (Rm) | 9.10% |
| Equity Beta of StellarStyle Creations (B) | 1.25 |
| Cost of Equity (Rf B*(Rm-Rf) | 9.38% |
From the above assessment of capital asset pricing module, it can be determined that 'cost of equity capital' has been calculated as 9.38%. The computation of 'cost of equity capital' considers the inclusion of treasury bills, market risk premium and equity beta of StellarStyle Creations respectively.
| Calculation of Weighted Average Cost of Capital for StellarStyle Creations | |
| Particulars | Total |
| Value of 9% Bonds | £ 1,300.00 |
| Value of 9% Bank Loans | £ 1,100.00 |
| Total Value of Debt | £ 2,400.00 |
| Value of Ordinary Equity Finance including reserves | £ 700.00 |
| Value of Preference Shares | £ 600.00 |
| Total Value of Equity | £ 1,300.00 |
| Combined Value of Debt and Equity (Capital Employed) | £ 3,700.00 |
| Weightage of Debt (Wd) | 64.86% |
| Weightage of Equity (We) | 35.14% |
| Cost of Debt (Kd) | 9% |
| Cost of Equity (Ke) | 9.38% |
| Corporate Tax Rate (t) | 30% |
| Weighted Average Cost of Capital | |
| (Wd*Kd) (We*Ke)*(1-t) | 8.14% |
“Weighted average cost of capital” expresses numerical value of 8.14% for StellarStyle Creations. As per explanations of Brusov and Filatova (2023), the “weighted average cost of capital” is predominantly applicable for investment purposes in which a lower percentile value usually leads to higher expected future returns and also offers coverage for unexpected financial losses. In order to evaluate “Weighted average cost of capital” total value of debt and total value of equity have been subsequently calculated as GBP 2400 and GBP 1300 respectively. The cumulative value of debt and equity (capital employed) has been performed simultaneously to arrive at weightage of debt and equity that contains numerical values of 64.86% and 35.14%. Moreover, the cost of debt is taken as the interest rate applicable for bank loan and bonds which is considered as 9% while “cost of equity capital” has been considered through CAPM calculations containing a value of 9.38%. Applicable tax rate for calculations has been ultimately considered as 30% to arrive at the consequent “weighted average cost of capital” value.
Brusov, P. and Filatova, T., 2023. Capital structure theory: past, present, future. Mathematics, 11(3), p.616.
Chang, K.P., 2023. Internal Rate of Return, Profitability Index and Payback Period Methods. In Corporate Finance: A Systematic Approach (pp. 59-69). Singapore: Springer Nature Singapore.
Kasprowicz, T., Starczyk-Ko?byk, A. and Wójcik, R.R., 2023. The randomized method of estimating the net present value of construction projects efficiency. International journal of construction management, 23(12), pp.2126-2133.
