Contents
Introduction ......................................................................................................................................... 2
Methodology........................................................................................................................................ 2
Part 1: Calculation of NPV, IRR, and Payback Period for Projects Aspire and Wolf .. 2
Net Present Value (NPV) ........................................................................................................... 2
Payback Period ........................................................................................................................... 3
Internal Rate of Return (IRR) ................................................................................................... 3
Part 2: Analysis and Evaluation of Investment Project Options .................................. 3
Part 3: Assessing the Sources of Finance for Investment ........................................... 4
Project Aspire: ................................................................................................................. 6
Project Wolf ..................................................................................................................... 7
Project Aspire: ....................................................... Ошибка! Закладка не определена.
Project Wolf ........................................................... Ошибка! Закладка не определена.
Conclusion ........................................................................................................................................... 7
Recommendation ................................................................................................................................... 7
References ........................................................................................................................................... 8
Appendix .............................................................................................................................................. 9
Introduction
This report educates AYR company on which respective projects, Projects "Aspire"
and "Wolf" represent the best investment option to build the company's market share.
The financial examination utilizes a blend of financial ratios and techniques including
payback period, net present value (NPV), and investment (IRR) to accomplish its
target. The rest of this report is illustrated in this way; the following segment examines
estimates from the NPV, IRR, and payback period for the two projects. Part 2 depends
on examination and assessment of the project investment alternatives and presents a
suggestion on the project to seek after including defences for the favoured venture
and a synopsis of different components to consider in settling on an ultimate
conclusion. The last part examines the two sources of finance viable by the executive
board of AYR Co. with an emphasis on equity and debt and the cost of each source
of fund, examination of the impact of the financing decision on AYR organization's
weighted normal expense of capital, and effect evaluation of the chosen financing
choice on current and expected investors and banks.
Methodology
Part 1: Calculation of NPV, IRR, and Payback Period for Projects Aspire and Wolf
Net Present Value (NPV)
The Net Present Value (NPV) utilizes the idea of the time value for money. It started
on the understanding that cashflow with higher NPVs have the best potential to
increase investors wealth. For two totally mutually benefited projects like Aspire and
Wolf, the NPV is presumably the most reasonable technique for settling on an
educated investment choice. We found the NPV of the two projects by recognizing the
sum and timing of the project's cashflows, using a discount rate to find the current
value of the project's cashflow, and adding the estimated present values. We are
guided in choosing the better project option by the overall standard of NPV calculation
by choosing the project with the highest positive NPV of cashflows.
From the calculation (see Appendix), consistent cashflow from Project Wolf over the
5-year time frame have a closest dollar net present value of $1,351,247 whiles that for
Project Aspire over a similar period has a closest dollar NPV of $573,529. From these,
Project Wolf seems a far better investment than Project Aspire.
Payback Period
This is one of the most well-known strategies for investment because of its straight
forwardness in instinct and application. The payback period is basically the time it
takes for a firm (for our situation, AYR Co.) takes to recuperate its underlying interest
in a project. For the two Projects Aspire and Wolf, the required starting cost is
$2,500,000. The payback time frame counts as set out in Tables 1 and 2 in the
Appendix show that cashflows from Project Aspire present a positive payback toward
the finish of Year 4 whiles Project Wolf presents a positive return toward the finish of
Year 3. In this manner, Project Wolf takes care of the initial investment sooner than
Project Aspire. In view of the Payback Period alone, the last project is less attractive
as a project choice than Project Wolf.
Internal Rate of Return (IRR)
The IRR is a measure of investment’s future rate of return. A project’s IRR is the
discount rate that would give NPV of zero whenever used to limit the project's
cashflow. The calculations of IRR exclude some external factors, for example, money
related dangers, swelling, and cost of capital. In this report, the IRR is determined
utilizing the MS Excel PC bundle.
The outcome shows an IRR of 19% for Project Aspire and 32% for Project Wolf. Our
point in this endeavour is look at the profitability of the two capital projects with regards
to their rate of return. To increase returns, we consider a project with higher IRR as
more attractive for investment. Once more, Project Wolf assures more desirability than
Aspire based on the IRR calculation.
Part 2: Analysis and Evaluation of Investment Project Options
In light of the estimations in Section 1, we suggest that the AYR Co. attempts Project
Wolf over Project Aspire. It is of the view that the suggested project is more practical
financially and that putting resources into it will yield net profits for AYR Co. whiles
paying for itself in shorter time span. This proposal is fortified by the consistent results
of estimations utilizing the payback period, internal rate of return, and net present
value technical analysis.
The report recommends anyway that the Board of AYR Co. consider different factors
excluded from the estimation, for example, tax savings, capital allowance and inflation
in closing their project investment choice.
Part 3: Assessing the Sources of Finance for Investment
This area examines the sources of finances choices being considered by the board of
AYR organization to fund their capital investments. In particular, the conversation
centres around getting new debts through bank loans at a fixed interest rate and
increasing equity by giving or floating new ordinary shares.
Finance is defined as the management of money and includes activities such as
investing, borrowing, lending, budgeting, saving, and forecasting (Corporate Finance
Institute, 2020). Financing describes the means by which a company raises capital to
fund investment activities. There are various sources of finance depending on the time
between investment and returns. For instance, when a firm requires short-term
funding, it might depend on working capital. For long-term investments which are being
considered in this study, long-term equity options like retained earnings and ordinary
shares are more suitable. Also, there are diverse providers of finance including (but
not limited to) individuals, venture capitalists, institutional investors, and business
angels. These providers consider factors such as level of expected returns, amount of
risk (potential for liquidating investment in case of default), tax position, and degree of
control the investor is likely to acquire as a consequence of investing among others
when making finance provision decisions. Hence, a business in need of investment
finance can either resort to equity or debt sources. A company may decide between
debt or equity after the following considerations:
1. Availability due to business size: large companies may be listed on the stock
exchange and can therefore issue public bonds to raise capital whiles smaller
companies must necessarily take on debt by obtaining loans from their banks
2. Duration of the loan: the length of loan must match the life of the assets, or the
length of time that the assets will be generating revenue.
3. Fixed or floating rate: expectation of interest rates will determine whether a
company chooses to borrow at a fixed or floating rate. Fixed rates provide
certainty and allows the company to plan for the long-term whiles floating rates
provide less certainty but may be ultimately cheaper depending on government
monetary policy.
4. Security: choice of finance may be determined by the assets business is
prepared to offer as security such as availability of suitable collateral
Debt may be broken down into redeemable and irredeemable. Debt presents a low
risk option for investors and for the company, cheaper source of finance. However, the
company will still have service interest on the loan at the agreed time irrespective of
earnings and may be faced with volatile interest rates where rates are determined by
the market. Debt may also impact cashflows and for highly geared companies, there
may be funds to pay dividends after servicing debt.
On the other hand, equity involved higher risks and therefore usually requires higher
returns. Equity may be sourced from retained earnings and issuing new shares.
Retained earnings refer to foregone shareholder dividends from the previous financial
period. Retained earnings are therefore profits from the previous period used to
finance new investments.
No matter the selected financing option for a project, there is an effect on the
company’s weighted average cost of capital (WACC). The weighted cost components
(debt and equity) of any financing package determine whether or not a project will be
undertaken. The WACC is normally expressed as the weighted average of the
required rate return for equity and the required rate of return for debt and is therefore
based on the company’s current debt or equity. The WACC is useful for investment
appraisal provided;
– The historic proportion of debt and equity has not changed
– The operating risk of the firm will not be changed
– The finance is not project specific i.e. the projects are financed from a pool of
funds; or
– the project is small in relation to the company so any changes are insignificant
The general approach is to calculate the cost of each individual source of finance and
then weight it according to its importance in the financing mix. The weights for the
sources of finance could be book values (represents historic cost of finance) or market
values (representing current opportunity cost of finance). Calculating the WACC
involves the following steps:
1. Calculate weights for each source of capital
2. Estimate cost of each source of capital
3. Multiply proportion of total of each sources of capital by cost of that source capital
4. Sum the results of step 3 and divide by the total weights in step 1 to give WACC
Project Aspire:

The project period and initial investment are equal for both projects and are
respectively 5 years and $2,250,000

We have taken the market research expenditures as a sunk cost because it is
already equally spent and can’t be recovered for both projects, hence the
$120,000 was not included in our calculations for both projects (Scicluna, 2018).

We have considered a scrap (Salvage) value of $375,000 as a taxable cash
inflow at the end of investment period (i.e. year 5)

We have ignored a change in working capital equivalent to $140,000 due to the
fact that:
There is no clear information on whether this money will make change on cash flows
It’s not also clear whether this capital will be equally distributed throughout the
investment period (each year) or whether it tracks the growth of spending rates.
Therefore, we decided to not take into account this working capital because as
Leonidas (2018) suggests: “these details are critical for us to decide if the working
capital increases or decreases the cash flows during the investment period of the
project”
Since Project Aspire has Capital allowances, we have considered relevant tax benefits
as cash inflows. This is because capital allowance themselves are not cash flows but
allowable tax depreciations that reduce tax obligations (Scicluna, 2018)
We have considered the Corporation tax of 20% which is paid one-year in arrears and
we used this rate to calculate the tax benefits relevant to capital allowances. While we
assumed that the discount rate equals the cost of capital (10%), we have also not
taken into account the depreciation of non-current assets since these last are not part
of our calculations (Scicluna, 2018)
Project Wolf
The above assumptions also apply to project Wolf, except the fact that this project
doesn’t have both the scrap value and the capital allowances.
Conclusion
In conclusion, all three investment appraisal methods; NPV, IRR, and payback period,
suggest that Project Wolf is a better investment option than Project Aspire. This report
therefore recommends that AYR Co. consider investing in Project Wolf. Finally,
whether financing is sourced through equity or debt, there is an impact on the
Weighted Average Cost of Capital of AYR Co. However, increasing equity by issuing
ordinary shares presents a safer option to raise financial capital than taking out a longterm loan from the bank.
Recommendation
We recommend AYR Co to choose the project Wolf giving assumptions that other
considerations are made. As far as picking a source of finances, we have broken down
number of elements that influence cash flows, for example, inflation, expected rate of
return on investments, financial risk, management and shared ownership and so on.
We agree that further analysis is required, we have prescribed the company to
consider debt financing over equity financing source because of the last being more
costly than debt financing
References
Arnold, G., Corporate Financial Management, FT Prentice Hall.
Atrill, P. and McLaney, E., Accounting and Finance for Non-Specialists, FT Prentice
Hall.
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-financedefinition/
Pike, R., Neale, B. and Linsley, P., Corporate Finance and Investment, Pearson.
Watson, D. and Head, A., Corporate Finance Principles & Practice, FT Prentice Hall.
Appendix
Investment Appraisal Techniques
Average Annual Pr ofit (net of dep ' n)
 100
Average Investment
Pr oject Aspire Cashflows  $3, 775, 454
ARR 
Initial Investment  $2, 250, 000
Scrap value at the end of 5 years  $375, 000
Total depreciation  $3, 775, 454  $375, 000
 $1,875, 000
Pr ofit  Depreciation  $3, 775, 454  $1,875, 000
 $1,900, 454
$1,900, 454
Average annual accounting profit 
5
 $380, 090.8
$2, 250, 000  $375, 000
Average investment 
2
 $1,312,500
ARR 
$380, 090.8
 100
$1,312,500
ARR  28.9593%
Table 1: Payback period for Project Aspire
Cumulative
Year 0 Initial Investment
-2250000
-2250000
Year 1 cash inflow
650000
-1600000
Year 2 cash inflow
698750
-901250
Year 3 cash inflow
751156.25
-150093.8
Year 4 cash inflow
807492.97
657399.22
Year 5 cash inflow
868054.94
1525454.2
NPV for Project Aspire
N
NPV  
t 0
Rt
1  r 
t
R3
R5
R1
R2
R4




2
3
4
1  r (1  r )
(1  r )
(1  r )
(1  r )5
650000 698750 751156.25 807492.97 868054.94
NPV  2250000 




1  0.1 (1  0.1) 2
(1  0.1)3
(1  0.1) 4
(1  0.1)5
NPV  2250000  590909.0909  577479.3388  564354.8084  551528.5636  538993.8218
NPV  R0 
NPV  $573,528.6235
Aspire NPV  $573,529
IRR for Project Aspire = 19%; Based on MS Excel estimation
Table 2: Payback period for Project Wolf
Cumulative
Year 0 Initial Investment
-2250000
-2250000
Year 1 cash inflow
955000
-1295000
Year 2 cash inflow
955000
-340000
Year 3 cash inflow
955000
615000
Year 4 cash inflow
955000
1570000
Year 5 cash inflow
955000
2525000
NPV for Project Wolf
N
NPV  NPV  
t 0
Rt
1  r 
t
R3
R5
R1
R2
R4




2
3
4
1  r (1  r )
(1  r )
(1  r )
(1  r )5
950000 950000
950000
950000
950000
NPV  2250000 




2
3
4
1  0.1 (1  0.1)
(1  0.1)
(1  0.1)
(1  0.1)5
NPV  2250000  863636.3636  785123.9669  713749.0609  648862.7826  589875.2569
NPV  R0 
NPV  $1351247.174
Wolf NPV  $1351247
IRR for Project Wolf = 32%; Based on MS Excel estimation