Alternative Forms Of Finance For Sigma

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Executive summary Table of contents 1.0- Introduction This report is based around the decision of whether or not Sigma plc should invest within a new machine which is to be financed with a bank loan. As directors have set an accounting rate of return of 12% and payback period of 5 years for the project, a series of investment appraisal techniques have been conducted with these constraints in mind in order to evaluate whether investment in the machine would be a wise or risky decision. Figures within the cash flow reflect on all calculations made and all methods will be discussed in depth, with recommendations and a clear conclusion as to what decisions Sigma need to undertake in order to secure a good investment. 2.0- Alternative forms of…show more content…
2.2- Hire purchase This method is ideal for investment of machinery as there’s no immediate cash outlay at the start, so this allows Sigma to better manage other payments (Gurusamy, 2009). Nonetheless, hire purchase holds risk, as there may be a high interest rate charged and borrowers could lose instalments paid in the event of default. Furthermore tax shields on depreciation and investment allowance can be claimed by the hirer (Tripathy, 2004). 2.3- Leasing Leases are ideal as they can be arranged quickly and have lenient requirements for previous financial balance sheets unlike with bank loans (the World Bank, 1996). As the organisation can make periodic payments, leasing would accommodate Sigma as it doesn’t require a heavy amount of investment to use the asset, thus leaving funds for other uses (Babu, 2005). 3.0- Investment appraisal techniques Various investment appraisal techniques including payback, NPV, IRR and ROCE are discussed below to evaluate whether or not Sigma should invest within the machinery. 3.1- Payback The payback method of investment appraisal has been used to determine if an investment should be made in the machinery. The payback figure for this investment project is 4 years and 3 months which is below the target rate set by Sigma of 5 years and therefore unlike with the other investment appraisal methods, this suggests that Sigma should go through with the investment. The payback period is useful as projects with a short
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