"Task 3 Investment Appraisal Summary of the informationBusiness Expansion Payback ARRNPV5004 years 18% 110 Business Expansion OptionPayback The payback method calculation reveals that it will take 4 years to arrive at equilibrium point.This method is commonly used as first screening method to determine how long it will take toget all money back. Raztech are very optimistic about their success in expansion plan and therefore this is a longterm plan. There is no payback target but for a long term 4 years pay back period isn’t a longgestation period. This reduces the risk to Raztech co. It is advisable to further evaluate if paybackperiod is satisfied. Accounting Rate of Return (ARR)This method is used to measure profit earned as % on initial investment. The current grossmargin is 21.75 % where as the expansion program will fetch 18% which is well above theNicholson expected target of 10 % ARR. It is advisable to go ahead with investment decision.This method is critised as it doesn’t consider time factor. A more reliable method would be netpresent value discussed below. Net Present Value Accounting & Decision Making Page 13 The net present value of this expansion program is positive 110 million. This indicates that thepresent value of cash inflow is greater than present value of cash outflows. This suggests that thisexpansion project is feasible and must be conducted. The business expansion plan will bring benefits to company in terms of high profits, high marketcoverage. Initially the company will have increased cash outflows eventually compensated withpay in after four years. The limitations includes uncertainly of cash inflows due to highcompetition in these markets and risking the reputation. Other non financial factors that directors needs to consider is mode of entry. Company can enterthrough strategic partnering with local manufactures of electronic items or 100% subsidiary ifthe statutory law allows foreign direct investment of up to 100%. The taxation policy ofcountries must be studied as Middle East countries such as UAE, Saudi Arabia and Yemen doesnot impose any tax on importing semi finished or raw material used to manufacture electronicgadgets and no tax on corporate profits. Task 4 Alternatives Sources of Financing Following are two alternatives that Raztech can ponser in case bank are reluctant to finance theirexpansion project. Venture capital funds It is advisable to approach venture capitalist who are willing to lend their money on venture thatare potentially successful. The benefits of venture capital are that if venture capitalist isconvinced, it does not need much documentation. The limitations is that Raztech would needAccounting & Decision Making Page 14 more than five to ten venture capitalist as it not possible to finance by one single venturecapitalist due to huge amount. An easy way is to approach IFCI Venture Capital Association. Corporate Deposit Raztech can borrow from public in form of corporate deposit for a period of five years givinginterest rate of 1.05% Annual Equivalent rate. The advantage associated is that it is the cheapestsource of finance but the limitation outweighs benefits as it is tedious job to collect small amountof money from small investors and there are high chances that the amount may not reach thetargets. References nd ? Davis,T. (2014) Financial Accounting Standards, 2 Edition, Stanley Thornes,Cheltanham. rd ? Drucker, S. (2013) Management Accounting, 3 Edition, Englewoodcliff, Englewood.Accounting & Decision Making Page 15 "