Analyse the Corporate Finance and Investment Techniques Report Writing - Accounting Assignment Help

Assignment Task

Task
INTRODUCTION -The purpose of this report is to analyse the corporate finance and investment appraisal techniques adopted by a listed organization in the UK. In this context, the report will briefly provide an overview of the organization and identify the key resources, objective and key challenges. Further, the report will discuss the importance of capital investment decisions in the business and the benefits of budgeting and planning in the organizations. The concept of corporate governance will be analysed and also the roles and responsibilities of the board and shareholders. The standard governance code of the UK will be referred for evaluating the corporate governance.The company selected for this report is Rio Tinto, which operates in the metals and mining sector of the UK. The company produces essential metals, such as Aluminium, Iron Ore and Copper and other minerals. According to the latest annual reports, the underlying earnings of the company is $12.4 billion as of 2020, which is $2.1 billion higher than 2019 (Riotinto.com 2022). The current EBITDA of the company is $23.9 billion, which is $2.7 billion higher than 2019 (Riotinto.com 2022). This shows that the financial position of the company has strengthened in the financial year 2019-20. The key resources of the company can be physical assets, such as manufacturing facilities, vehicles, and distribution networks; human assets and financial resources. The challenges faced by Rio Tinto are centred on its iron ore and copper businesses. The company faces difficulties in measuring the risks of the new Heritage Act that was imposed in Pilbara.
CAPITAL INVESTMENT DECISION- Capital investment techniques are also referred to as capital budgeting, which measures the effectiveness and profitability of future investment project. The rate of return calculated from capital budgeting helps in determining whether a project is acceptable. A capital budgeting decision serves the dual purpose of financial commitment and investment. When a business takes a project, it makes a financial commitment and also invests for gaining a long-term profit (Petkovi? et al. 2021). The popularly known technique is NPV, which finds out the difference between the present value of all cash outflow and an initial investment of the firm. The other two methods, that is, IRR or PB methods, are used for selecting a project. When a company has limited funds, it applies the payback period to understand the period of investment recovery. In such cases, the company selects only one major project at a time.The internal rate of return presents the discounted rate at which the net present value of the project will be zero. When IRR is higher than the weighted average cost of the capital, the project is accepted, while on the contrary situation, the project is rejected. To derive an IRR, a financial analyst relies on trial and error methods. Software like Microsoft Excel is also available for the calculation of IRR (Hegeman & Sørheim 2021). The ideal rate is when the initial cost of investment and the present value of cash flows match each other. If two projects have the same costs, then the one with the highest IRR is selected.
Arroyo et al (2019) some of the common approaches to capital budgeting are;

• Payback period (PB)
• Internal rate of return (IRR),
• Accounting rate of return
• Net Present Value (NPV) method

Payback periodThe payback period is the amount of time required to recover the cost of an investment. Ignores effect on inflation and also ignores the complexities of investments with potentially unequal cash flows over time. When a company's liquidity is limited, the payback period is preferred because it shows how long it should take to recover the money invested in the project.
For Example:

• Rio-Tinto company has three potential projects planned. Each investment requires a total cost of £180,000. Each has a three-year life. The three projects are:
• Project 1: has an expected net cash inflow of £90,000 per annum, after deducting all expected cash outflows.
• Project 2: has a fixed three years contract expected cash inflows; £60,000 per annum after deducting all expected cash outflows.
• Project 3: has an expected cash inflows of £50,000 in Year 1, £55,000 in Year 2 and £75,000 in Year 3, after deducting all expected cash outflows.
• Outlays 180,000 180,000 180,000
• Cash inflows, after deducting all outflows of the year Year 1 90,000 60,000 55,000
• Year 2 90,000 60,000 60,000
• Year 3 90,000 60,000 70,000
• Payback period 2years 3years 2yrs 6mths
• (Expressed in years and months) 2yrs 0mths 2yrs 2mths 2yrs 8mth
• Workings 90 + 90 =180 60+60+60/60 50+50+35/70.

Internal rate of returnThe internal rate of return calculation is use to determine if a particular investment is valuable by evaluating the interest that should be yielded over the course of a capital investment. The internal rate of return (IRR) is a financial analysis metric used to estimate the profitability of potential investments. “Internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate” (Jason Fernando,2021). It can be misconstrued or misinterpreted if used outside of appropriate scenarios. Issues can also arise when using IRR to compare projects of different dimension in some cases.Example: IRR may have multiple values if there are positive cash flows followed by negative ones and then by positive ones. If all cash flows have the same sign (i.e., the project never makes a profit), then discount rate will result in a zero NPV.Net present value methodNet present value (NPV) is the difference between the present value of cash inflows and cash outflows over a period of time. A project may frequently need unforeseen expenditures to get off the ground, or it may need additional expenditures at the project's conclusion. For example, Rio Tinto wants to invest in a project with the option of an immediate pay out of £200,000 or £100,000 for the next 2 years with a 10% rate of return. Based on this it is best for Rio Tinto to take an out right payment of £200,000 because the future value of a 100,000 pounds for the next 2 years at 10% rate of return does not have the same value as today’s £200,000.Accounting rate of returnIt is a formula that shows the percentage rate of return presume on an investment, compared to the initial investment's cost. It does not differentiate between investments that generates different cash flows over the period of the project. It’s useful when investors or managers need to compare the return of a project without considering the period scheduled but rather just the benefits.

 

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