Archer’s Organic Foods
Topic essay
INTRODUCTION:Archer’s Organic Foods plc - Investment appraisals of two farms
1 I. Introduction
Archer’s Organic Foods plc is a producer and distributor of organic foods. The company is looking to expand the business by acquiring a farm in the North of England. This report analyses the financial viability of two farms by using a number of investment appraisal methods. The two farms differ in their initial investments, sales and costs. The freehold of option 1 farm will be acquired at the beginning of the project. The farm in option 2 will be taken on a 10-year lease with deposit and annual rent payments. The report makes a recommendation on the final selection of a farm by evaluating the results, strengths and weaknesses of four investment appraisal methods.
The four investment appraisal methods used in this report are the Accounting Rate of Return (ARR), payback period, Net Present Value (NPV) and Internal Rate of Return (IRR). The results of the four investment appraisal methods may not be similar because of differences in their approaches and calculations. Hence, it is beneficial to use more than one investment appraisal method and understand the benefits and limitations of each method before making a final decision.
2 II. Investment appraisal methods
The four investment appraisal methods can be classified into two main categories. The ARR and payback period are non-discounting methods whereas the NPV and IRR are discounting methods. The ARR method measures the accounting profit rate by dividing the average income by the average investment (Hansen and Mowen, 2007, p. 568). The method is simple to use but has major limitations. It ignores the time value of money which is a major drawback in case of projects with long lives. Also, a benchmark rate is required for comparison.
The payback period calculates the time required to recover initial investment from the operating cash flows of a project (Brigham and Houston, 2007, p. 373).
INTRODUCTION:Archer’s Organic Foods plc - Investment appraisals of two farms
1 I. Introduction
Archer’s Organic Foods plc is a producer and distributor of organic foods. The company is looking to expand the business by acquiring a farm in the North of England. This report analyses the financial viability of two farms by using a number of investment appraisal methods. The two farms differ in their initial investments, sales and costs. The freehold of option 1 farm will be acquired at the beginning of the project. The farm in option 2 will be taken on a 10-year lease with deposit and annual rent payments. The report makes a recommendation on the final selection of a farm by evaluating the results, strengths and weaknesses of four investment appraisal methods.
The four investment appraisal methods used in this report are the Accounting Rate of Return (ARR), payback period, Net Present Value (NPV) and Internal Rate of Return (IRR). The results of the four investment appraisal methods may not be similar because of differences in their approaches and calculations. Hence, it is beneficial to use more than one investment appraisal method and understand the benefits and limitations of each method before making a final decision.
2 II. Investment appraisal methods
The four investment appraisal methods can be classified into two main categories. The ARR and payback period are non-discounting methods whereas the NPV and IRR are discounting methods. The ARR method measures the accounting profit rate by dividing the average income by the average investment (Hansen and Mowen, 2007, p. 568). The method is simple to use but has major limitations. It ignores the time value of money which is a major drawback in case of projects with long lives. Also, a benchmark rate is required for comparison.
The payback period calculates the time required to recover initial investment from the operating cash flows of a project (Brigham and Houston, 2007, p. 373).
References: Arya, A., Fellingham, J.C., and Glover, J.C., 1988. Capital budgeting: Some exceptions to the net present value rule. Issues in accounting education, Vol. 13, No. 3, pp. 499-508. Brigham, E.F., and Daves, P.R., 2009. Intermediate Financial Management. 10 edn. South-Western Cengage Learning. Brigham, E.F., and Houston, J.F., 2007. Fundamentals of financial management. 11 edn, Thomson Higher Education. Delaney, C.J., Rich, S.P., and Rose, J.T., 2008. Financing costs and NPV analysis in finance and real estate. Journal of Real Estate Portfolio Management, Vol. 14, Issue 1, pp. 35-40. Hansen, D.R., and Mowen, M.M., 2007. Managerial accounting, 8 edn. Thomson South-Western. Howe, K.M., 1992. Capital Budgeting Discount Rates Under Inflation: A Caveat. Financial Practice & Education, Vol. 2, Issue 1, pp. 31-35. Kinney, M.R., & Raiborn, C.A., 2011. Cost Accounting – Foundations and Evolutions. 8 edn, South-Western Cengage Learning, Mason. Read more: http://www.ukessays.com/essay-examples/accounting-essay-examples/investment-appraisals-two-farms.php#ixzz2ExBsbjiK