The main objective of this report is to evaluate whether Amaryllo Ltd
should purchase a new machine to manufacture product ‘HD iCam’ for a four-year
period as it operates in an industry which is rapidly developing.
The findings of the report reveal that the proposed investment in ‘HD
iCam’ is financially acceptable based on the net present value
(NPV) and internal rate of return (IRR). Additionally, all investments projects cannot entirely be described in
terms of monetary costs and benefits; non-monetary aspects are also relevant
and should not be considered as less important. Companies differ in their
approach to pricing. The most suitable
pricing approach for Amaryllo Ltd to implement is determined.
This report is prepared for the Board of Directors of Amaryllo Ltd who
have to make a capital investment decision.
Table of Contents:
present value of the proposed investment in ‘HD iCam’ 4
rate of return of the proposed investment in ‘HD iCam’ 5
of the two approaches to making capital budgeting decisions. 6
and non-monetary aspects. 6
suitable pricing approach. 7
present value of the proposed investment in ‘HD iCam’
The NPV of the
proposed investment in ‘HD iCam’ is £160,456.15 at the discount rate of 12%. The NPV is positive therefore the proposed investment is
financially acceptable and if accepted the shareholder wealth will increase by
£160,456.15 (Mackevi?ius and Tomaševi?, 2010).
Figure 3: Notes relating to the
estimation of NPV
rate of return of the proposed investment in ‘HD iCam’
The IRR of the
proposed investment in ‘HD iCam’ is 17.37%. The proposed investment is financially acceptable since the IRR is higher than the discount rate used by
Amaryllo Ltd (Bosri,
2016). The proposed investment is also accepted if the company’s hurdle rate is lower than the IRR (Kierulff, 2008). The company’s hurdle rate is not provided. Assuming the
company’s hurdle rate is above 17.37%, this proposed investment should be
rejected. However, if the hurdle rate is below 17.37% this proposed investment
should be accepted.
of the two approaches to making capital budgeting decisions
NPV and IRR are the capital budgeting techniques typically used to
evaluate investments. The time value of money and all the cash flows of the project over its useful life is considered.
IRR is preferred in individual investments. In comparison, NPV is
preferred in mutually exclusive investments (Bosri, 2016). NPV is expressed in
terms of currency, whereas IRR is expressed as a percentage and it is easily
understood (Arshad, 2012). The timing of cash
flows and size of projects can give contradicting NPV and IRR results. For
instance, when a project returns cash instantly, NPV is lower and IRR is higher
(Kierulff, 2012). The NPV method
assumes that cash flows are reinvested at the project’s discount rate, whereas
the IRR method assumes that the cash flows are reinvested at the project’s IRR (Bosri, 2016). The reinvestment assumption of NPV provides a more
reliable result. NPV takes into account additional shareholder’s wealth when
calculating the profitability of the investment, but IRR does not (Arshad, 2012). NPV can be used to
evaluate investments where there are changes in cash flow, but the IRR method
cannot. If there are multiple sign changes, there would be multiple IRR results
(Kierulff, 2012). Both NPV and IRR
have their benefits and limitations.
and non-monetary aspects
All investments projects cannot entirely be described in terms of
monetary costs and benefits; non-monetary aspects are also relevant. The
numerical analysis is important in order to estimate the costs and benefits
involved in a particular project. Also, the most feasible investment project is
evaluated using the quantitative investment appraisal techniques (Drury, 2015). The decision rule
of these techniques is easy to understand. Lastly, the techniques are simple to
However, the qualitative factors might lead to a decision which
contradicts the results of the investment appraisal techniques. Many non-monetary aspects are not easily
translated into monetary terms and are difficult to evaluate, this could be due
to their intangible nature (Lindvall
and Larsson, 2017). This means that it is not
worthwhile to implement non-monetary aspects into the company.
On the other hand, it is important to include
non-monetary aspects into the company. For the reason that all stakeholders
should be considered equally, not only shareholders but also employees, the
community, customers and environment for a
successful investment appraisal (Bamber and Parry, 2017).
The customer satisfaction is an important
qualitative factor to consider when deciding whether to accept the proposed
Northcott and Schuster, 2008). Amaryllo Ltd has spare capacity in its
existing factory and the purchase of this new machine is likely to increase
capacity. Higher capacity utilisation can reduce unit costs, satisfying the
customer’s needs. Very high capacity utilisation can meet the demand for ‘HD
iCam’ and when performing at a very high production
level means less time can be spent on quality control (Drury, 2015). This can damage Amaryllo Ltd reputation, resulting in
unsatisfied customers and a decrease in sales.
The implementation of corporate social responsibility
(CSR) programs create a competitive advantage and distinguish them from
competitors. Hence, the corporate image and reputation are improved (Lindgreen and
Swaen, 2009). However, the manufacture of ‘HD iCam’ can
also increase competition as Amaryllo Ltd
operates in an industry which is rapidly developing. The competitors may
respond by starting a price war.
existing employees will operate in the manufacturing of ‘HD iCam’. Hence, employees will need to be trained, this may not
be effective and delay production. Employee
morale is very important they can become stressed and demotivated due to a
heavy workload. Customers will notice these unhappy employees. For that reason,
employee morale is an important qualitative factor to consider (Lindgreen and
The impact on the environment should also be considered (Meyer and Kiymaz, 2015). The new machine
should manage waste and energy efficiency for example when it is not required
it should be switched off. Ultimately, the final decision should take into
consideration the qualitative factors for a successful project appraisal.
suitable pricing approach
The three most common pricing approaches that companies employ include cost-based pricing, competition-based pricing and demand-based
pricing (Pride, Hughes and Kapoor, 2016).
Ltd can take all of the pricing approaches into consideration to determine the
selling price of ‘HD iCam’.
There are a number of reasons why competition-based pricing is not a
suitable approach. First of all, customers could be willing to pay more if
Amaryllo Ltd prices higher than its competitor’s. However, if Amaryllo Ltd
chooses to price lower than its competitors’, customers may doubt the quality
of ‘HD iCam’. In addition, production costs may be ignored if the company
focuses on the prices set by competitors. Finally, Amaryllo Ltd can be forced
into price wars and may need to find new ways of attracting customers (Faith and Edwin, 2014).
Cost-based pricing is also not a suitable approach. It is difficult to
determine the accurate costs of producing ‘HD iCam’. This is because the
inflation rate has been assumed to be a constant rate of 5% on selling price and
8% on variable cost. Furthermore, if costs increase so
must the price to produce a profit. It
does not consider what customers are prepared to pay. The approach ignores demand, the price elasticity of
demand and its competitors’ prices (Singh, 2013).
The purchase of the new machine to manufacture product ‘HD iCam’ has a
short product life-cycle. Therefore, price skimming is a useful strategy for
Amaryllo Ltd to introduce. This involves setting a high price initially in
order to maximise short-term profitability then settle at a reduced price (Singh, 2013). Amaryllo Ltd is a worldwide pioneer in home security
robotics so price discrimination strategy can also be used. Price
discrimination is charging different prices to different customers. In this
case, Amaryllo Ltd can market ‘HD iCam’ at different prices in
different countries (Pride, Hughes and Kapoor, 2016).
suitable pricing approach that Amaryllo Ltd should
select is demand-based pricing because the customer is the foundation of a
successful business (Faith and
Edwin, 2014). Hence, customer loyalty and customer retention can be achieved with
satisfied customers. However, with unsatisfied customers, Amaryllo Ltd could go out of business. In comparison to the cost-based and competition-based
pricing considers what customers are prepared to pay
a price based on customer demand (Pride, Hughes and Kapoor, 2016). This approach allows
Amaryllo Ltd to set the maximum possible price to charge customers in order to
This report presented and discussed whether the worldwide pioneer in
home security, Amaryllo Ltd, should purchase a new machine to manufacture
product ‘HD iCam’. Hence, both the NPV and IRR calculated suggested that the
proposed investment is financially acceptable. Additionally,
investments projects should consider the non-monetary aspects, such as the action of the competitors and the impact on the
environment, as well as the monetary costs and benefits. The most suitable
pricing approach that Amaryllo Ltd should prefer is demand-based pricing
because the customer’s perceived value of the product is more important than
the competition and the cost of making ‘HD iCam’.