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Introduction

The process of appraising the project in relation to its feasibility and potential profits is a challenging task that is based on applying certain appraisal techniques and analyzing the accounting reports and projections. These procedures are important in order to guarantee the reasonable decision-making based on the detailed assessment of the situation in the context of the company’s strategic goals and objectives (Pike and Neale 140). A new computer numerically controlled milling machine is planned to be used in Medlock Cones & Tubes Plc. The analysis of accounting reports and forecasts is initiated for the purpose of concluding on the potential successfulness of the project. While referring to the analysis of the financial data regarding the project implementation, it is possible to provide certain recommendations on the further actions. The purpose of this report is to discuss the appropriateness of the information collected for the appraisal of the project, analyze the approaches used to determine the economic value of the proposed projects, and discuss the ways of assessing the strategic factors associated with the project implementation.

The Information Used for the Decision-Making

The information that is relevant to analyzing the forecasts and appraising projects should include the financial information on profits and losses in order to conduct the incremental cash flow analysis and conclude about costs and benefits of the project. The focus should also be on the quantitative and qualitative data provided by the managers because the full analysis is expected to draw the relevant conclusions (Van Horne and Wachowicz 112). Finally, it is necessary to note that the decision should be made with references to the projection of the inflation and discount rates that can influence the financial feasibility of the project in the future (Vernimmen 54). Therefore, the complex approach to collecting the data should be applied.

The information available for deciding on the feasibility of the project can be discussed as partially relevant to assist financial experts in appraising the project. The available accounting forecasts and analysis that demonstrate the profits and losses associated with the project implementation can be used in order to illustrate the expected changes in the project feasibility (Pike and Neale 142). The other important information is the results of the cash flow analysis discussed in the meeting. For the project appraisal, it is relevant to discuss only those fixed overheads that are additional because the reliance on fixed overheads is not relevant to this case, and the information on depreciation can also be not taking into account (Pike and Neale 142). Having the access to the accountant’s analysis, it is important to conduct the incremental cash analysis for the situation of implementing and non-implementing the project (Collier 158; Pike and Neale 143). For this type of the analysis, the information can be discussed as lacking, and the conclusions are based on the analyses that were made by accountants and other managers in the company.

From this point, the information provided by the accountant, the production manager, the marketing director, and the chief engineer should be examined additionally in order to assess the results for several situations, including the rejection of the project, the project development, and the machine replacement in the context of the role of the project for the whole process, not only for the progress of concrete departments. In this context, it is necessary to state that there is no enough information to assess the project and the possible replacement. Thus, the conclusions can be influenced by the evaluations made by the accountant, the production manager, the marketing director, and the chief engineer; therefore, the provided financial statements and notes of managers require the re-examination. In addition, the information on the taxation is rather limited, and the data on the predicted inflation rates is difficult to access. However, these data are also important to be taken into account while appraising the project.

The Approaches to Assessing the Economic Value of the Project

In order to evaluate the worth of the project or a certain proposal, it is possible to apply the traditional methods, such as the payback methods, or refer to the discounted cash flow techniques, such as the Internal Rate of Return (IRR) and the Net Present Value (NPV) (Brigham and Houston 122; Pike and Neale 140). The problem is in the fact that it is almost impossible to state what approach can be viewed as the best one for the analyzed case. It is important to note that discounted cash flow techniques are more actively used today than the traditional payback method. In order to receive the adequate assessment results regarding the project value, it is reasonable to use all these methods depending on the purpose of the evaluation. However, for the current project, the NPV can be viewed as the most appropriate choice because of simplicity of its application to the analysis. In order to support this decision, it is necessary to provide the comparison of the methods’ advantages and disadvantages.

The payback method is used when it is necessary to calculate the profitability of investing in the project based on the certain period of time. However, the main disadvantage of the approach is the reference to the certain single payback period while ignoring the other ones (Bierman and Smidt 138; Pike and Neale 144). It is possible to note that this fact limits the application of the method to the work with the long-term projects because of the high level of the uncertainty in the made calculations and assumptions.

The application of the NPV allows the assessment of benefits associated with the use of the computer numerically controlled milling machine. For this case, the NPV can be used in order to demonstrate what investment opportunities can be expected to accentuate the value of the proposal, and how cash flows can be maximized (Van Horne and Wachowicz 118). The other approach to measuring the future benefits of the project, as well as the return on investment, is the IRR. This approach allows selecting the project which IRR can overcome the expected rate of return (Brigham and Houston 129). Disadvantages associated with using discounted cash flow techniques include the necessity of careful calculations when discount rates and cash flows are measured on the same pre-tax or post-tax basis (Pike and Neale 154). These disadvantages should be taken into consideration during the analysis.

In spite of the fact that the NPV can be easily used to assess the discussed value, the use of the IRR can also be appropriate because the current proposal can be viewed as the conventional project demonstrating the unexpected changes in profits and losses for the analyzed four years (Pike and Neale 157). Taking into account the advantages and disadvantages of the proposed techniques that are used to calculate the value of the project, it is possible to state that the choice of the approach depends on the manager’s skills in working with these techniques and on the special features of the cash flow forecasts (Van Horne and Wachowicz 134). Additionally, the use of several techniques can also be appropriate. For the purpose of this project appraisal, it is possible to check the results while applying not only the payback method but also the NPV and the IRR.

Assessment of Strategic Factors

The decision regarding the project implementation and development also depends on the assessment of strategic aspects. The important strategic factors include the business area, the level of the competition, the company’s short-term and long-term goals and objectives, and the strategic direction (Bierman and Smidt 151). While assuming that the life of the discussed project is only four years, and it cannot become profitable during this period of time, it is possible to state that this project does not contribute to the strategy of Medlock Cones & Tubes Plc. From this perspective, the strategic assessment can be conducted with the focus on comparing the project opportunities with the strategic goals and objectives, comparing the determined value with the expected cash and outcomes, and comparing the project value according to the market opportunities and alternatives that can be used in order to replace this proposal and achieve the strategic goals for the purpose of increasing the company’s competitiveness (Pike and Neale 159).

It is possible to expect that the discussed project can be regarded as a loss for the company, as it is noted by the accountant. While focusing on the strategic goals, it is possible to assess what other approaches to completing the proposal can be strategically effective for the company (Brigham and Houston 134). In this context, the analyses proposed by the production manager and the marketing director can also be assessed in order to state whether the cessation of the project or its continuation can be strategically advantageous for the company (Bierman and Smidt 67; Pike and Neale 155). The preliminary assessment of strategic factors indicates that for the realization of the short-term goals, the cessation of the project can be advantageous for different departments of the company. Thus, the cash received because of selling the machine can be used for addressing the short-term goals. However, with the focus on the long-term goals, the specialists working in the company can advise continuing the project. Still, the detailed analysis of the cash flows associated with the project realization can demonstrate that the focus on the proposal is not strategically advantageous even from the long-term perspective.

From this perspective, it is significant to pay attention to the strategic importance of using the computer numerically controlled milling machine in Medlock Cones & Tubes Plc. While referring to the assessment of strategic factors, the use of the machine cannot provide the expected improvement of the company’s processes as the costs of the project are extremely high to guarantee the significant outcomes and profits.

Recommendations

The conducted proposal appraisal allows providing the following recommendations regarding the project development in Medlock Cones & Tubes Plc:

  1. The available information is only partially relevant to making the supported decision regarding the project development, and the further examination of the cash flow projections is recommended with the focus on the project period, taxation, and inflation rates.
  2. The available data demonstrates that the project can become a loss for the company, and the further analysis of the replacement alternatives is recommended with the focus on the information provided by the accountant, the production manager, the marketing director, and the chief engineer.
  3. For assessing the potential value of the project, it is recommended to apply not only the payback method but also the NPV and the IRR in order to receive the full picture regarding the investment opportunities and the project feasibility (Pike and Neale 140).
  4. The analysis of the project’s financial feasibility is recommended to be conducted in the context of evaluating the strategic factors such as the business field, the organization’s short-term and long-term goals and objectives, and the strategic direction of the company that influence the opportunities for the project realization.

Conclusion

The report discusses the appropriateness of using the collected information for the procedure of appraising the project in Medlock Cones & Tubes Plc. The approaches to assessing the economic worth of the projects before and during their implementation are also discussed in the paper. Finally, the procedure of assessing the influential strategic factors is discussed in the context of appropriateness of the project implementation. It is possible to state that the accountants can choose their approaches to evaluating the worth of projects and refer to the use of discounted cash flow techniques, such as the Internal Rate of Return (IRR) and the Net Present Value (NPV). However, the conducted analysis can support the idea that the proposal is not relevant to be launched in the company because of the low net present value. While focusing on the available information, it is possible to expect the failure of the project as it is not relevant to be used as the long-term project, but it cannot be profitable while being implemented as the long-term project.

References

Bierman, Harold, and Seymour Smidt. The Capital Budgeting Decision: Economic Analysis of Investment Projects. New York: Routledge, 2012. Print.

Brigham, Eugene, and Joel Houston. Fundamentals of Financial Management. New York: Cengage Learning, 2011. Print.

Collier, Paul. Fundamentals of Risk Management for Accountants and Managers. New York: Routledge, 2009. Print.

Pike, Richard, and Bill Neale. Corporate Finance and Investment: Decisions and Strategies. Upper Saddle River: Pearson Education, 2006. Print.

Van Horne, James, and John Martin Wachowicz. Fundamentals of Financial Management. Upper Saddle River: Pearson Education, 2008. Print.

Vernimmen, Pierre. Corporate Finance: Theory and Practice. New York: John Wiley & Sons, 2014. Print.

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