INDIVIDUAL EXAMINATION

INDIVIDUAL ASSIGNMENT

Subject: Corporate Finance

IEMBA SBF.08

Name : Nguyen Tuong Nam

Intake : 8
ID : VN1002102
Date of completion : 01/11/2022
Lecturer : Dr. Tran Tat Thanh

Topic: Analyzing and choosing Grey Ltd investment projects

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TABLE OF CONTENTS
CHAPTER 1: ANALYZING THE CRITERIAS OF INVESTMENT PROJECTS IN GREY LTD
COMPANY................................................................................................................................................5

1.1. The information of investment projects in Grey LTD company....................................................5

1.1.1. The overview of investment projects in Grey LTD company...........................................5

1.1.2. Analyzing the overview investment projects in Grey LTD company...............................5

1.2. Calculating the criterias of the investment project.........................................................................8

1.2.1. Payback period...................................................................................................................8

1.2.2. Discounted payback period................................................................................................9

1.2.3. Average Return on Capital Employed.............................................................................10

1.2.4. Net present value..............................................................................................................11

1.2.5. Internal rate of return.......................................................................................................12

1.2.6. Modified internal rate return............................................................................................13

1.2.7. Profitability index............................................................................................................14

1.3. Choosing the project investment in the Grey LTD company.......................................................15

1.4. The advantage and disadvantage of criteria above.......................................................................16

1.4.1. The payback period..........................................................................................................16

1.4.2. Discounted payback period..............................................................................................17

1.4.3. Average Return on Capital Employed.............................................................................17

1.4.4. Net present value (NPV)..................................................................................................18

1.4.5. Internal return rate (IRR).................................................................................................18

1.4.6. Modified internal return rate (MIRR)..............................................................................19

1.4.7. Profitability index............................................................................................................20

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TABLE OF FIGURES AND TABLES

Table 1.1. The overview of investment project in Grey LTD company....................................................5
Table 1.2. The analyzing of X investment project in Grey LTD company (unit:£)..................................6
Table 1.3. The analyzing of Y investment project in Grey LTD company (unit:£)..................................7
Table 1.4. The payback period of project X..............................................................................................8
Table 1.5. The payback period of project Y..............................................................................................8
Table 1.6. The discounted payback period of project X............................................................................9
Table 1.7. The discounted payback period of project Y............................................................................9
Table 1.8. The average return on capital employed of project X...........................................................10
Table 1.9. The average return on capital employed of project Y............................................................10
Table 1.10. The net present value of project X........................................................................................11
Table 1.11. The net present value of project Y........................................................................................11
Table 1.12. The internal return rate of project X.....................................................................................12
Table 1.13. The internal return rate of project Y.....................................................................................12
Table 1.14. The modified internal rate return of project X......................................................................13
Table 1.15. The modified internal rate return of project Y......................................................................13
Table 1.16. The profitability index of project X......................................................................................14
Table 1.17. The profitability index of project Y......................................................................................14

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INTRODUCTION
Based on the information of Grey Ltd company’s investment projects, the essay will analyze the
business ration and several criterias in order to figure out the suitable investment project for the Grey
Ltd company.

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CHAPTER 1: ANALYZING THE CRITERIAS OF INVESTMENT

PROJECTS IN GREY LTD COMPANY
1.1. The information of investment projects in Grey LTD company
1.1.1. The overview of investment projects in Grey LTD company
The company has two investment projects include project X and project Y. The following
information of each project are shown below:
Table 1.1. The overview of investment project in Grey LTD company

Criteria Project X (unit:£) Project Y (unit: £)

Initital outlay 240,000 220,000
Profit for year
1 60,000 30,000
2 60,000 30,000
3 70,000 60,000
4 30,000 80,000
Estimated resale value at end of year 4 40,000 30,000
Cost of capital 10%
Depreciation Straight line
Residual value Equal to resale value
(Source: Author)
1.1.2. Analyzing the overview investment projects in Grey LTD company
Because the company is not loan in any kind of project then the point of view: Equity point of views
(EPV) and Total investment point of views (TIP) is the same. In this essay, the essay will utilize the
bottom up approach in order to analyze project X and Y
Based on the overview information of Grey LTD company’s investment projects some information
could be analyzed in the following table below:

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Table 1.2. The analyzing of X investment project in Grey LTD company (unit:£)

Year 0 1 2 3 4
Cash outflow -240,000
Cash inflow(*) 110,000 110,000 120,000 120,000
Profit 60,000 60,000 70,000 30,000
Residual value 40,000
Depreciation(**) 50,000 50,000 50,000 50,000
Net cash flow based of -240,000 110,000 110,000 120,000 120,000
EPV bottom up
appoarch (NCF_EPV
(bottom up appoarch))
(***)
Cost of equity 10%
Present Value (PV) -240,000 100,000 90,909 90,158 81,962
Net present value
123,028
(NPV)
(Source: Author)

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Table 1.3. The analyzing of Y investment project in Grey LTD company (unit:£)

Year 0 1 2 3 4
Cash outflow -220,000        
Cash inflow(*)   77,500 77,500 107,500 157,500
Profit   30,000 30,000 60,000 80,000
Residual value         30,000

  47,500 47,500 47,500 47,500

Depreciation(**)
Net cash flow based of
EPV bottom up
appoarch (NCF_EPV -220,000 77,500 77,500 107,500 157,500
(bottom up appoarch))
(***)
Cost of equity 10%        
Present Value (PV) -220,000 70,455 64,050 80,766 107,575
Net present value
102,845        
(NPV)
(Source: Author)

(*): Because the profit is calculated after deducting the straight line depreciation then it is necessary to
add it back into the cash inflow
(**): Because the depreciation is straight line then the depreciation is the same in each year and based
on the following equation:
Initial outlay of asset −residual value
Depreciation for each year =
The number year of project
Based on the following equation then the depreciation for each year of project X is
240,000−40,000
Depreciation for each year of project X = =50,000(£ )
4

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Based on the following equation then the depreciation for each year of project Y is
22 0,000−3 0,000
Depreciation for each year of project X = =50,000(£ )
4
(***):
The net cash flow based of EPV bottom up appoarch is calculated by the following equation:
NC F EPV ( Bottom up aproach )=Net income+ Depreciation−Initial Payment

1.2. Calculating the criterias of the investment project

1.2.1. Payback period
Table 1.4. The payback period of project X

Year 0 1 2 3 4
Net cash flow based of
EPV bottom up
appoarch -240,000 110,000 110,000 120,000 120,000
(NCF_EPV (bottom
up appoarch)) (***)
Accumlated NCF_EPV -240,000 -130,000 -20,000 100,000 220,000
Payback period (year) 2.167
(Source: Author)

Table 1.5. The payback period of project Y

Year 0 1 2 3 4
Net cash flow based of
EPV bottom up
appoarch -220,000 77,500 77,500 107,500 157,500
(NCF_EPV (bottom
up appoarch)) (***)
Accumlated NCF_EPV -220,000 -142,500 -65,000 42,500 200,000
Payback period (year) 2.604
(Source: Author)
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1.2.2. Discounted payback period

Table 1.6. The discounted payback period of project X

Year 0 1 2 3 4
Net cash flow based of
EPV bottom up
appoarch -240,000 110,000 110,000 120,000 120,000
(NCF_EPV (bottom
up appoarch)) (***)
Cost of equity 10%
Present Value (PV) -240,000 100,000 90,909 90,158 81,962
Accumlated NCF_EPV -240,000 -140,000 -49,091 41,067 123,029
Discounted Payback
period (year) 2.55
(Source: Author)

Table 1.7. The discounted payback period of project Y

Year 0 1 2 3 4
Net cash flow based of
EPV bottom up
appoarch -220,000 77,500 77,500 107,500 157,500
(NCF_EPV (bottom
up appoarch)) (***)
Cost of equity 10%
Present Value (PV) -220,000 70,455 64,050 80,766 107,575
Accumlated NCF_EPV -240,000 -140,000 -49,091 41,067 123,029
Discounted Payback
period (year) 3.05
(Source: Author)

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1.2.3. Average Return on Capital Employed

Table 1.8. The average return on capital employed of project X

Year 0 1 2 3 4
Net income   60,000 60,000 70,000 30,000
Average net income 55,000        
240,00 190,00 140,00 90,00 40,00
Fixed asset
0 0 0 0 0
Depreciation(**)   50,000 50,000 50,000 50,000
Average Fixed asset for
  215,000 165,000 115,000 65,000
each year
Average fixed asset 140,000        
Average Return on Capital
39%        
Employed

(Source: Author)
Table 1.9. The average return on capital employed of project Y

Year 0 1 2 3 4
Net income 30,000 30,000 60,000 80,000
Average net income 50,000
Fixed asset 220,000 172,500 125,000 77,500 30,000
Depreciation(**) 47,500 47,500 47,500 47,500
Average Fixed asset for
196,250 148,750 101,250 53,750
each year
Average fixed asset 125,000
Average Return on
40%
Capital Employed

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(Source: Author)
1.2.4. Net present value
Table 1.10. The net present value of project X

Year 0 1 2 3 4
Net cash flow based of -240,000 110,000 110,000 120,000 120,000
EPV bottom up
appoarch (NCF_EPV
(bottom up appoarch))
(***)
Cost of equity 10%
Present Value (PV) -240,000 100,000 90,909 90,158 81,962
Net present value
123,028
(NPV)
(Source: Author)
Table 1.11. The net present value of project Y

Year 0 1 2 3 4
Net cash flow based of
EPV bottom up
appoarch (NCF_EPV -220,000 77,500 77,500 107,500 157,500
(bottom up appoarch))
(***)
Cost of equity 10%        
Present Value (PV) -220,000 70,455 64,050 80,766 107,575
Net present value
102,845        
(NPV)
(Source: Author)

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1.2.5. Internal rate of return

Table 1.12. The internal return rate of project X

Year 0 1 2 3 4
Net cash flow based of -240,000 110,000 110,000 120,000 120,000
EPV bottom up
appoarch (NCF_EPV
(bottom up appoarch))
(***)
Internal return rate 32%
(IRR)
(Source: Author)
Table 1.13. The internal return rate of project Y

Year 0 1 2 3 4
Net cash flow based of
EPV bottom up
appoarch (NCF_EPV -220,000 77,500 77,500 107,500 157,500
(bottom up appoarch))
(***)
Internal return rate
27%        
(IRR)
(Source: Author)

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1.2.6. Modified internal rate return

Table 1.14. The modified internal rate return of project X

Year 0 1 2 3 4
Net cash flow based of EPV
bottom up appoarch
-240,000 110,000 110,000 120,000 120,000
(NCF_EPV (bottom up
appoarch)) (***)
Cost of equity 10%
Cash of outflow (COF) -240000
Total present value of COF -240000
Reinvest rate 10%
Future value of CIF (cash
146410 133100 132000 120000
inflows)
Total present value of CIF 531510
Modified internal rate (MIRR) 22%
(Source: Author)
Table 1.15. The modified internal rate return of project Y

Year 0 1 2 3 4
Net cash flow based of EPV
bottom up appoarch (NCF_EPV -220,000 77,500 77,500 107,500 157,500
(bottom up appoarch)) (***)
Cost of equity 10%
Cash of outflow (COF) -220,000
Total present value of COF -220,000
Reinvest rate 10%
Future value of CIF (cash
103,152.5 93,775 118,250 157,500
inflows)
Total present value of CIF 472,677.5
Modified internal return rate
21.1%
(MIRR)
(Source: Author)

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1.2.7. Profitability index

Table 1.16. The profitability index of project X

Net cash flow based of EPV

bottom up appoarch -240,000 110,000 110,000 120,000 120,000
(NCF_EPV (bottom up
appoarch)) (***)

Cost of equity 10%

Present Value (240,000) 100,000 90,909 90,158 81,962

PV of inflow cash 363,028

PV of outflow cash (240,000)
Profitability index 1.513
(Source: Author)
Table 1.17. The profitability index of project Y

Net cash flow based of EPV

bottom up appoarch -220,000 77,500 77,500 107,500 157,500
(NCF_EPV (bottom up
appoarch)) (***)

Cost of equity 10%

Present Value -220,000 70,455 64,050 80,766 107,575

PV of inflow cash 322,845

PV of outflow cash -220,000
Profitability index 1.467
(Source: Author)

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1.3. Choosing the project investment in the Grey LTD company

Based on the numerous criterias in the aforemention part, I would to recommend the Grey LTD
company to choose the project investment in the following table:
Criteria Project X Project Y
Payback period (year) 2.167 2.604
Discounted Payback period (year)
2.55 3.05

Average Return on Capital

39% 40%
Employed
Net present value (NPV) 123,028 102,845
Internal return rate (IRR) 32% 27%
Modified internal return rate
22% 21.1%
(MIRR)
Profitability index 1.513 1.467
Recommend project The IRR ratio of project X is higher 5% than project Y.
Besides, The profitability index of project X is also higher
than project Y (1.513 > 1.467). The NPV of project X is also
higher than project Y. Furthermore, the payback period and
the discounted payback period are also shorter than project
Y

Therefore, the project that I want to recommend for the

company is project X because the project has higher in the
majority criterias and with shorter payback period.

(Source: Author)

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1.4. The advantage and disadvantage of criteria above

1.4.1. The payback period
 Advantage
First, Useful and Simple to Understand. This is one of the payback period's most important benefits.
Comparatively simpler to calculate than other capital budgeting techniques, the method requires a small
number of inputs. The project's original cost and annual cash flows are all you need to know to
determine the payback period. Other approaches require more assumptions even though they also use
the same inputs. For instance, managers must make a number of assumptions when using the cost of
capital, which is used by other methodologies.
Second, managers can compute the payback period of the projects fast because it is simple to calculate
and requires few inputs. This facilitates decision-making for the management, which is crucial for
businesses with constrained resources.
Third, an affinity for liquidity. No other capital planning approach offers the important information
about the payback period. A project with a shorter payback period typically carries less risk. For small
firms with few resources, this information is absolutely essential. Small businesses must swiftly recoup
their costs in order to use those funds to invest in new prospects.
Fourth, Useful in Uncertain Situations. In industries with a high degree of uncertainty or that
experience quick technological change, the payback technique is highly helpful. It is challenging to
forecast the coming year's yearly cash inflows because of this uncertainty.
 Disadvantage
First, disregards the time value of money. One of the main drawbacks of the payback period is that it
disregards the time worth of money, a crucial business concept. According to the theory of the time
value of money, money obtained sooner has a higher value than money received later due to the
possibility of a higher return if it is reinvested. The PBP technique ignores this, which deviates from
the real value of the cash flows. There is a solution here. To overcome this drawback, use the
Discounted Payback Period.
Second, some cash flows are not covered. Only the cash flows up to the initial investment is recouped
are taken into account by the payback method. It disregards future cash flows that will occur in
following years. You might be forced to overlook a project that could produce profitable cash flows in
its later years if you have such a constrained perspective of the cash flows.
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Third, not close to reality. The payback approach is so straightforward that it disregards typical
business conditions. The majority of the time, capital investments are ongoing. Instead, many
initiatives also require more funding in the years that follow. Projects also frequently experience erratic
cash streams.
1.4.2. Discounted payback period
 Advantage
First, Because it takes time worth of money into account when calculating payback period, discounted
payback period is preferred by many management in the firm.
Second, It analyzes whether or not the investments made are recoupable and the actual risk associated
with a project.
 Disadvantage
First, when the payback time is calculated using the discounted payback period approach, it is
impossible to tell if the investment will raise the firm's worth or not.
Second, the project that could last longer than the repayment time is not taken into account. All
calculations performed beyond the discounted payback period are disregarded.
Third, the main issue with this payback time is that it does not provide the manager with the precise
information needed to make an investment decision. To calculate the payback period, the business
manager must make an assumption about the interest rate or the cost of capital.
Fourth, if there are several negative cash flows over the course of an investment period, the
computation for the discounted payback time may become complicated.
1.4.3. Average Return on Capital Employed
 Advantage
First, one of the few financial measures that accounts for the financial return on both equity and debt.
As a result, the majority of investors consider it as one of the factors for their investing strategy and
portfolio.
Second, it aids in comparing businesses with various financial structures, making it an excellent tool
for peer comparison.

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 Disadvantage
First, the manipulation of risk accounting that could lead to higher returns is exposed to the ROCE.
One example of such accounting manipulation is the classification of long-term liabilities as current
liabilities.
Second, The return does not accurately reflect market value because the ratio is determined using book
value.
1.4.4. Net present value (NPV)
 Advantage
Frist, the main advantage of adopting NPV is that it takes into account the idea of the time value of
money. Because of its earning potential, a dollar now is worth more than a dollar tomorrow. The
discounted net cash flows of an investment are taken into account in the NPV calculation to assess its
viability.
Second, businesses can make decisions using the NPV technique. It aids in not only comparing projects
of the same size but also in determining whether a given investment is profitable or not.
 Disadvantage
First, No standardized methods to determine the required rate of return . The basis for computing NPV
is to use the needed rate of return to discount future cash flows to their present value. There aren't any
rules for calculating this rate, though. Companies are free to choose this percentage figure, and there
may be cases where the NPV was incorrect due to an incorrect rate of return.
Second, not applicable for comparing projects of various sizes. The inability to compare projects of
various sizes is another drawback of NPV. NPV is not a percentage but an absolute number. As a
result, a project of a larger scale would certainly have a higher NPV than one of a lower size. The
smaller project may have returns that outweigh its investment, but the entire NPV value may be lower.

1.4.5. Internal return rate (IRR)

 Advantage
First and foremost, when assessing a project, the internal rate of return takes the time value of money
into account. The accounting rate of return, average rate of return, and payback period have all

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significantly decreased as a result. The interest rate at which the PV of future cash flows equals the
necessary capital investment can be used to calculate IRR.
Second, the most lovely aspect of this procedure is how easy it is to understand once the IRR has been
determined. Accept the project only if the IRR is greater than the cost of capital. It is preferable since it
is simple for managers to picture.
Third, the needed rate of return is estimated roughly by managers, however the IRR calculation does
not entirely depend on this figure. We can contrast the IRR with the hurdle rate once we reach it. The
manager can safely choose either option if the IRR is significantly lower than the predicted needed rate
of return. He can also leave room for estimating blunders.
 Disadvantage
First, ignoring economies of scale. The IRR technique has the drawback of ignoring the benefits' true
financial value.
Second, unrealistic implicit reinvestment rate assumption. When using the IRR approach to analyze a
project, it is implicitly assumed that the positive future cash flows will be reinvested at an IRR for the
remainder of the project's lifespan. In contrast, if the other project has a very high IRR, it will assume a
reinvestment rate at a very high rate of return. If a project has a low IRR, it will assume reinvestment at
a low rate of return. This scenario is not real-world relevant. Having the same amount of investing
opportunities when you receive those cash flows is uncommon. A corporation will invest at a higher
rate if it has more opportunities for reinvestment rates.
Third, Unusually high numbers can often occur when a significant amount of the project’s cash flows
occur early in the life of the project.
1.4.6. Modified internal return rate (MIRR)
 Advantage
MIRR avoids all the drawbacks of traditional IRR and NPV approaches, making it a better and
enhanced tool for project appraisal. It considers the reinvestment rate that is practically feasible. It's
also not particularly complicated to calculate.
 Disadvantage
The MIRR has the drawback of requiring two additional decisions, namely the determination of the
financing rate and the cost of capital. Again, these could just estimations, and managers in the actual
world could be hesitant to include these two more assumptions.
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1.4.7. Profitability index

 Advantage
First, profitability index is used by businesses since it enables them to estimate their potential revenue.
In other words, it can assist in avoiding selecting the incorrect project. This can be the result of their
investments or choices over a specific time frame. Managers can use this to determine whether or not
an investment was successful.
Second, The performance of various businesses can also be compared using the profitability index.
Consider two businesses with comparable resources and methods of operation. The profitability index
will demonstrate which business is making more money. This can mean that one organization has a
management structure that is more effective. It might also imply that customers of one business are
prepared to spend more.
 Disadvantage
Frist, utilizing a profitability index has the drawback of not always measuring a business's value. It
merely demonstrates the business's capacity to make money off of investments. It may occasionally be
a sign of poor management practices. Consistently making investments in unsuccessful ventures is one
illustration of this.
Second, another drawback is that some companies may place a heavy emphasis on financial assets like
stocks or bonds. This makes estimating the amount of return on your investment challenging.
Third, the profitability index is still among the most significant financial indicators. Businesses,
investors, and analysts all use it. It may offer insightful information on the management team of a
company. It might also reveal their capacity to generate income via investments. The use of this
financial metric has various benefits. Use profitability index in conjunction with other metrics like
ROE and liquidity ratio for the best results.

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