Investment Advice Report: Ang Thong Pty Ltd’s No-Snore Device

Introduction to No-Snore device and the four market-entry options

Investment decision is based on rule where that decision is implemented upon certain applicable situations. The base of the rule depends upon the three elements that is Cash flows, life of the project and discounting factor. The decision is how much effective is relied upon the assessment of these elements. In depth, understanding of the project is the basic requirement of the project for estimating the cash flows specifically in macro and micro view of the economy. Foremost thing is project life to be closely assessed before making an investment decision. Long term investment decision is quite crucial because of some cause. The role of key management of the entity is involved in the decision making in respect to the investments for long term. The key feature for taking long term decision for investment are

Risk and uncertainty involved,

Longevity of time that is 5 years or more than 5 years,

Large amount of resources,

Initial investment involved a higher cash investment and the return of the initial investment is identified over the period

Risk of reserve without losing of substantial capitals.

Capital investment choice are important at two levels one is for the upcoming operability of the company building the investment and for the economy of a country as a whole. Direction of vital resources towards specific area of economic action. So all together, the economic position of a county in a near future is being impacted by the capital investment decision of an individual company.  At an entity stage, the commitment of resources to long-term capital assets has inferences for many phases of processes. Concern involved in capital investment is about the purchase and change of plant and machinery so that the range, cost, innovation, quality and leadership of the products are all pretentious by Capital Investment decision. (Baños-Caballero, García-Teruel and Martínez-Solano 2014).

Capital investment generally involves:

• Existing asset needed to be replaced.
• Requirement of expansion of the existing assets.
• Marketing or manufacturing of production technologies.
• Non-monetary motivated expenditures.

Capital investment is done through a process that is involved in the decision-making. The process is involved in the certain steps as identifying the potentiality of investment, defining and screening of project, evaluating and accepting the project, implementing the findings of the project. (DAILY, KIEFF and WILMARTH JR 2014).

The information that helps in changing the decision for capital investment is consider to be relevant for assessing the feasibility of that investment. That is, principal investment decision taker must recognize relationships between either the assessments made, costs or reimbursements that accrue from it instantaneously or in the upcoming time. Common examples of the information is cost of installation and purchase of capital asset, requirement of increased working capital and changes in charges or proceeds.

Key considerations for long-term capital investment decision-making

Financial analysis is the foremost thing to be done before investing capital in several options. There are certain views to measure the performance of investment and they are considered as the technique of concluding the decision of investing at which options. The techniques are either termed as monetary or economy concepts or accounting concepts. These technique are named as traditional method.

In term of accounting concept if the options are relevant for long-term investment success is measured at profitability. For this computation of profitability index can help in decision-making. If the options are chosen for short-term investment decision-making should be based on the liquidity terms of the investment.  Where as in economic terms it is seen that fiscal achievement is concerned based on maximization of stockholders wealth as well as considering the risk. Capital investment decision is effected by allocating resources. As, it follows that the success available options of capital investment are those that increases the worth of the company. If this is considered as the base of decision-making then those options are accepted for capital investment whose predictable cash returns outstrips its predictable cash outlays, to decrease the importance of liquidity and profitability of such investments.

The grouping of assumed wealth expansion objectives a risk considered has led to the progress of capital investment evaluation methods are quite dissimilar in comparison to the traditional method. Those methods are net present value, internal rate of return, profitability index and discounted payback period.

The methodologies have been divided into two groups:

• Investment method under certainty
• Investment method under Uncertainty

This is also divided into groups

• Pay Back Period (PBP)
• Accounting Rate of Return (ARR)

• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Profitability Index (PI)

The above-mentioned methods are discussed below:

The payback period (PBP) is the outmoded manner of capital investment.  It is the modest and conceivably, the utmost extensively used measureable method for assessing capital costs decision. (Graham, Harvey and Puri 2015).

Pay Back Period less than the maximum acceptable payback period = Accept.

Pay Back Period greater than the maximum acceptable payback period = Reject.

This method is used to do the comparison between the actual and standard payback period that is decided by the management of the company to recover the initial investment. This method is also used to rank the project. Ranking is done according to the duration of payback period.

• It is cost effective.
• Helps in dealing with the risk.
• Selection of the option available for early recovery of the investment.

• In this method time value of money is not considered.
• Cash flow beyond the PBP is ignored for a reason the sustainability inflows of the projected is rejected.
• Recovery of the invested amount is measured not profitability. This is the sole reason that this method is not used in the concluding the decision of accepting or rejecting the project.
• It is an idiosyncratic decision as no logic base of concluding the decision for the options.

• The PB method might be valuable for the firms going from a liquidity crunch.
• It is very beneficial for those firms that accentuates on petite run receiving recital rather than its long-term evolution.
• The communal of PBP is a decent guesstimate of IRR that else requires experimental and blunder method.

The other name of this method is return on investment and capital employed (ROI, ROCE).

 For selecting the investment proposal ARR can be used.

ARR higher than the minimum rate= Accept

Capital investment decision-making methodologies

ARR less than the minimum rate = Reject

• It is constructed on accounting information that is willingly accessible and acquainted to business man.
• It contemplates advantage over whole life of the options.

• Time value is not taken into consideration so the advantages cannot be valued at par both in earlier as well as later years.

The ARR can be improved and used as recital appraisal quantity and switch devise but it is not desirable to use as a verdict making condition for capital disbursements of the firm, as it is not using cash flow data.

The Net Present Value is an individual of the cut-rate cash flow before period-accustomed practice. It distinguishes that cash flow rivulets at unlike time old-fashioned varies in worth and can be calculated single when they are uttered in rapports of communal denominator that is present value.

If the

NPV is greater than 0= accept

NPV is less than zero= reject.

This method is used in selecting the options where mutually exclusive projects are available for investment. The firm’s market value rises up if the available option with positive NPV is accepted for investing. (Hartman and Schafrick 2014).

• It clearly identifies the time value of money.
• Takings into justification all the years cash flows rising out of the project concluded its convenient life.  
• It is a complete degree of productivity.
• It is continuously reliable through the firm’s objective of stockholders treasure growth.

• This technique involves assessment of cash flows that is very grim owing to suspicions existing in corporate creation owing to so many uncontainable ecological influences.
• When schemes under deliberation are equally special, it may not elasticity accountable results if the schemes are having unacceptable lives, dissimilar cash flow outline, unlike cash expenditure.
• It does not clearly deal with indecision when appreciating the project and the degree of organization’s suppleness toward reply to doubt over the lifetime of the scheme.

NPV is very considerable in capital investment decision practice actuality a true effectiveness degree.  

Profitability Index processes the present value of revenues per rupee capitalized. It is observed in inadequacy of NPV that, actuality a complete measure; it is not a dependable method to gauge schemes necessitating unlike early investments. It is a qualified measure and can be distinct as the ratio that is attained by dividing the present value of upcoming cash inflows by the present value of cash expenditures.

Accept the project when PI>1

Reject the project when PI<1

May or may not accept when PI=1 , the firm is indifferent to the project.

• PI contemplates the time value of money and entire cash flows created by the scheme.  
• It is reliable with the stockholders’ prosperity expansion.

• When cash outflow ensues beyond the existing period, the PI is inappropriate as a collection standard.
• It necessitates approximation of cash flows with accuracy that is very tough under ever altering sphere. (Ivanets 2017).

It is beneficial in appraising capital disbursements schemes being a comparative amount.

The internal rate of return (IRR) is the reduction rate that compares the NPV of an investment chance with Rs.0 since the present value of cash inflows contemporaries the initial investment. It is the multifaceted annual rate of return that the firm will receive if it devotes in the scheme and accepts the given cash inflows. (Islam, Xayavong, and Kingwell  2014).

IRR is greater than the cost of capital= accept the scheme.

IRR is less than the cost of capital=reject the scheme.

Ang Thong Pty Ltd has the four options available and computation of NPV, IRR and profitability index is been done to conclude the investment decision. The discounted cash flow criteria is opted.

Option 1

Calculation  of NPV & IRR
Year	0	1	2	3	4	5
Rate	4%
CFAT	(14,050,000)	9,698,000.00	8,751,500.00	12,349,912.50	6,685,141.94	1,591,089.72
Discounting Factor	1	0.961538462	0.924556213	0.888996359	0.854804191	0.821927107
PV of CFAT	-14050000	9325000	8091253.70	10979027.24	5714487.35	1,307,759.77
NPV	$21,367,528.05
IRR	58%

Calculation of Profitability Index
Total Cost	14,050,000
Total of PV	21367528.05
Profitability Index	1.52

Option 2

Calculation  of NPV & IRR
Year	0	1	2	3	4	5
Rate	4%
CFAT	(14,150,000)	9698000	8761500	12370162.5	6715898.19	1,632,614.87
Discounting Factor	1	0.961538462	0.924556213	0.888996359	0.85480419	0.821927107
PV of CFAT	-14150000	9325000	8100499.26	10997029.42	5740777.92	1,341,890.42
NPV	$21,355,197.02
IRR	51%

Calculation of Profitability Index
Total Cost	$ 14,150,000.00
Total of PV	$ 21,355,197.02
Profitability Index	1.51

Option 3

Calculation of NPV and IRR
Year	0	1	2	3	4	5
Rate	4%
CFAT	(14,050,000)	11,885,000.00	10,135,000.00	13,643,750.00	8,251,218.75	367,374.22
Discounting Factor	1	0.961538462	0.924556213	0.888996359	0.854804191	0.82192711
PV of CFAT	(14,050,000)	11427884.62	9370377.22	12129244.07	7053176.37	301954.83
NPV	$26,232,637.10
IRR	72%

Calculation of Profitability Index
Total Cost($)	14,050,000
Total of PV($)	40282637.1
Profitability Index	2.87

Option 4

Calculation of NPV & IRR
Year	0	1	2	3
Rate	4%
CFAT	(5)	(5.98)	4.63	(5.98)
Discounting Factor	1	0.961538462	0.924556213	0.888996359
PV of CFAT	(5)	(5.75)	4.28	(5.31)
NPV	$                 (11.78)
IRR	_

Profitability Index
Initial Investment	$5
Total of PV	($6.78)
Profitability Index	-1.36

Decision:

Option 1, 2 and 3 can be accepted according to the decision rule discussed above as NPV, IRR and profitability index full fills the accepting criteria. Option 4 is not fruitful as the NPV is negative and PI is less than 1.

Payback Period (PBP)

Conclusion:

In this report, numerous techniques of capital investment under the supposition of certainty as well as uncertainty have been conversed, emphasizing their virtual fortes and faintness. The investment verdict made by directors will regulate a numeral of momentous subjects like the cash flows created by the corporation, the dividends remunerated out by the business, the market value of the business, the existence of the business etc. Many managers talk about the superior skilled expertise that allows them to suggest a scheme should be commenced even though it does not seem to have a positive NPV. It is tough to enumerate their worth, so the “instinctive feel” method is often just to “estimate” that the scheme is commercial and then to go gaining with it. In fact, the use of capital investment techniques permit for much more conversant decisions with the attention that their submission does convert more challenging in a period of rapid technical and fiscal change. In such a state, some form of processer based imitation approach may well turn out to be of countless applied use. However, methods as if RO plunders suppleness but it cannot substitute the standard capital investment practices (example NPV) rather it increases on and progresses the insights of strategic assessment. However, computer analyzes practically all capital investing methods, so it is informal to compute and list all the choice events, because each one delivers decision makers with a slightly dissimilar piece of applicable material.

Reference:

Agrawal, A., Catalini, C. and Goldfarb, A., 2015. Crowdfunding: Geography, social networks, and the timing of investment decisions. Journal of Economics & Management Strategy, 24(2), pp.253-274.

Baños-Caballero, S., García-Teruel, P.J. and Martínez-Solano, P., 2014. Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), pp.332-338.

Chiaroni, D., Chiesa, V., Colasanti, L., Cucchiella, F., D’Adamo, I. and Frattini, F., 2014. Evaluating solar energy profitability: A focus on the role of self-consumption. Energy Conversion and Management, 88, pp.317-331.

DAILY, J.E., KIEFF, F.S. and WILMARTH JR, A.E., 2014. Introduction. In Perspectives on Financing Innovation (pp. 13-16). Routledge.

Genakoplos, J., Mitchell, O.S. and Zeldes, S.P., 2000. Would a privatized social security system really pay a higher rate of return (No. w6713). National bureau of economic research.

Goodman, T.H., Neamtiu, M., Shroff, N. and White, H.D., 2013. Management forecast quality and capital investment decisions. The Accounting Review, 89(1), pp.331-365.

Graham, J.R., Harvey, C.R. and Puri, M., 2015. Capital allocation and delegation of decision-making authority within firms. Journal of Financial Economics, 115(3), pp.449-470.

Hartman, J.C. and Schafrick, I.C., 2014. The relevant internal rate of return. The Engineering Economist, 49(2), pp.139-158.

Heckman, J.J., Moon, S.H., Pinto, R., Savelyev, P. and Yavitz, A., 2010. A new cost-benefit and rate of return analysis for the Perry Preschool Program: A summary (No. w16180). National Bureau of Economic Research.

Islam, N., Xayavong, V. and Kingwell, R., 2014. Broadacre farm productivity and profitability in south?western australia. Australian Journal of Agricultural and Resource Economics, 58(2), pp.147-170.

Inanest, I., 2017. Capital Investment Decisions.

Kahlo, K.M. and Stutz, R.M., 2013. Access to capital, investment, and the financial crisis. Journal of Financial Economics, 110(2), pp.280-299.

Kelleher, J.C. and McCormack, J.J., 2004. Internal rate of return: A cautionary tale. The McKinsey Quarterly, 20, p.2004.

Settergren, O. and Mikula, B.D., 2005. The rate of return of pay-as-you-go pension systems: a more exact consumption-loan model of interest. Journal of Pension Economics & Finance, 4(2), pp.115-138.

Warscher, M., Strasser, U., Kraller, G., Marke, T., Franz, H. and Kunstmann, H., 2013. Performance of complex snow cover descriptions in a distributed hydrological model system: A case study for the high Alpine terrain of the Berchtesgaden Alps. Water resources research, 49(5), pp.2619-2637.

Weber, T.A., 2014. On the (non-) equivalence of IRR and NPV. Journal of Mathematical Economics, 52, pp.25-39.