Investment Appraisal

Step into the role of a financial analyst! Each case study below presents a real-world business investment opportunity. Your task? Crunch the numbers to calculate the payback period, average rate of return (ARR), and net present value (NPV)—then put your critical thinking skills to the test.

But it’s not just about the math! Every investment comes with specific criteria: a maximum acceptable payback period, a minimum ARR, and a required NPV threshold. Will these investments make the cut, or are they too risky to pursue? Analyze the data, compare it to the conditions, and make the call—would you approve or reject the investment?

GreenTech Ltd. is a company that manufactures solar panels. They are considering investing in a new solar panel production line that costs $500,000. The expected annual cash inflows from the new production line are as follows:

  • Year 1: $100,000
  • Year 2: $150,000
  • Year 3: $200,000
  • Year 4: $250,000
  • Year 5: $300,000

Discount factors for each year:

  • Year 1: 0.91
  • Year 2: 0.83
  • Year 3: 0.75
  • Year 4: 0.68
  • Year 5: 0.62

Conditions for Investment Approval:

  • The company requires a payback period of no more than 4 years to ensure quick returns.
  • The ARR should be at least 20% for the investment to be considered profitable.
  • The NPV should be positive, meaning the discounted cash flows exceed the initial investment.

Task: Calculate the payback period, ARR, and NPV, then determine if the investment meets GreenTech Ltd.’s criteria.

RoboFactory Inc. is a company that specializes in producing industrial robots. They plan to invest $1,000,000 in a new robot assembly line. The expected annual cash inflows for this investment are as follows:

  • Year 1: $200,000
  • Year 2: $300,000
  • Year 3: $400,000
  • Year 4: $500,000
  • Year 5: $600,000

Discount factors for each year:

  • Year 1: 0.89
  • Year 2: 0.79
  • Year 3: 0.71
  • Year 4: 0.63
  • Year 5: 0.56

Conditions for Investment Approval:

  • The company requires a payback period within 3.5 years due to the rapidly evolving robotics industry.
  • The ARR should be at least 18% to ensure sufficient return on investment.
  • The NPV must be at least $200,000 to account for potential future reinvestments.

Task: Calculate the payback period, ARR, and NPV, then determine if the investment meets RoboFactory Inc.’s criteria.

BioPharma Ltd. is a pharmaceutical company planning to invest $2,000,000 in a new research and development facility. The expected annual cash inflows for this investment are as follows:

  • Year 1: $250,000
  • Year 2: $500,000
  • Year 3: $750,000
  • Year 4: $1,000,000
  • Year 5: $1,500,000

Discount factors for each year:

  • Year 1: 0.96v
  • Year 2: 0.92
  • Year 3: 0.89
  • Year 4: 0.85
  • Year 5: 0.82

Conditions for Investment Approval:

  • Due to the high-risk nature of pharmaceutical R&D, the company is willing to accept a payback period of up to 5 years.
  • The ARR should be at least 15% to justify the long-term commitment.
  • The NPV should be positive, ensuring the investment adds value to the company.

Task: Calculate the payback period, ARR, and NPV, then determine if the investment meets BioPharma Ltd.’s criteria.

E-Drive Motors is an electric vehicle manufacturer looking to invest $3,000,000 in a new battery production facility. The expected annual cash inflows for this investment are as follows:

  • Year 1: $500,000
  • Year 2: $1,000,000
  • Year 3: $1,500,000
  • Year 4: $2,000,000
  • Year 5: $2,500,000

Discount factors for each year:

  • Year 1: 0.95
  • Year 2: 0.90
  • Year 3: 0.86
  • Year 4: 0.82
  • Year 5: 0.78

Conditions for Investment Approval:

  • The company needs a payback period of 4 years or less to remain competitive in the EV industry.
  • The ARR should be at least 22% to justify the investment.
  • The NPV must be at least $500,000, ensuring strong financial returns.

Task: Calculate the payback period, ARR, and NPV, then determine if the investment meets E-Drive Motors’ criteria.

AeroDynamics Inc. is an aerospace engineering company that designs and manufactures commercial aircraft. They are considering investing $4,000,000 in a new wind tunnel testing facility. The expected annual cash inflows for this investment are as follows:

  • Year 1: $600,000
  • Year 2: $800,000
  • Year 3: $1,000,000
  • Year 4: $1,200,000
  • Year 5: $1,400,000

Discount factors for each year:

  • Year 1: 0.93
  • Year 2: 0.87
  • Year 3: 0.82
  • Year 4: 0.77
  • Year 5: 0.73

Conditions for Investment Approval:

  • The aerospace industry demands long-term investments, so the company is willing to accept a payback period of up to 5 years.
  • The ARR should be at least 16% to ensure financial viability.
  • The NPV should be at least $750,000 to justify the capital expenditure.

Task: Calculate the payback period, ARR, and NPV, then determine if the investment meets AeroDynamics Inc.’s criteria.