Investment Appraisal Decision Making

1. INTRODUCTION

The research is performed in the incomplete fulfillment of degree of MBA. The dissertation targets the investment appraisal in the Indian hotel industry. Shareholders and Creditors invest capital within an business in the expectation of increasing a go back. For loan collectors they might need interest and also a return of the capital, while shareholders require dividends and maintenance or increase of share prices. The capital invested is channeled through the organization and invested in capital jobs, which must create results commensurate with the objectives of the providers of that capital. Capital investment within any group is crucial and very important to the organization's well-being and long time survival. Capital opportunities are those that have long-term results on the organization by giving benefits over quite a few years. This dissertation also shows the different types of investment appraisal and shows the business where to commit and where to not commit. Questionnaire is designed to collect major data along with supplementary data accumulated during books review. Conclusions depends based on data gathered from questionnaires. Supplementary data and advice will be shown that will improve the decision making process manufactured in the Indian hotel industry by the investment appraisal methods.

2. OVERVIEW OF INVESTMENT APPRAISAL

Capital costs decisions are necessary to the long-term viability, success and survival of the company. Capital investment appraisal provides a framework in which capital projects can be viewed as, screened and assessed. Due to the inflexible characteristics of capital jobs, risk and doubt, and environmental change, e. g. ; the taxes factor, changes in government policy and technological change, it is vital that they are carefully selected, to ensure that they can help the business to attain its targets. Therefore, Financial commitment is one of the key decision areas of financial management.

An investment decision can be defined as one that will involve the firm making a cash outlay with the aim of receiving, in return, future cash inflows. Decisions about buying a new machine, building a factory, increasing warehouse, increasing a delivery service, instituting an employee training plan or launching a fresh product line are all examples of investment decisions that need to be made by the industry. In order to make such decisions and also to ensure they are consistent with each other, a common method of appraisal is required that can be applied similarly to the whole spectral range of investment decisions and that ought to help to make a decision whether any particular investment will assist the business in increasing shareholder wealth. Therefore, investment appraisal methods cannot replace managerial judgement, however they really helps to make that judgement more acoustics. Investment appraisal is also referred to as 'capital budgeting' (Lumby. S, 1988).

The decision making includes different periods:

  1. Planning
  2. Identifying the alternatives to be considered and their change into workable proposals.
  3. Appraising the alternatives and selecting the best one in regards to to the organ isation's goals.
  4. Implementing the decision.
  5. Reviewing the decided on investment job (R¶hrich. M, 2007).

3. RESEARCH Goals & OBJECTIVES

Every organization has problems in its investment areas, so a proper investment appraisal must solve these problems. The role of investment appraisal is to ensure that appropriate information is compiled associated with the investment alternatives. Capital investment decisions allocates resources within the business to offer the best potential of getting together with its aims. It maintains and improves profit performance and increase market talk about. It achieves balanced product stock portfolio. Investment appraisal methods are highly relevant to all decisions that form area of the investment planning process. Understanding different investment appraisal methods, their assumptions, limits and possible usages will lead to an increased knowledge of different decision making and an informed choice of methods. This should greatly improve decision making in regard to both solo investment jobs and investment programmes. It boosts various alternatives to use different methods of investment appraisal to make business decisions. In addition, it evolves higher order skills through having to consider other factors, aside from quantitative methods, that a business may need to consider to make business decisions. The main goal of long-term decision making is that the firm must deal with the investment in order to earn income greater than the funds devoted. To be able to cope with these decisions, organizations must have to make an evaluation of how big is the outflows and inflows of funds, the life expectancy of the investment, the degree of risk fastened and the price tag on obtaining funds. The primary focus of this research is to investigate the decision making process made in the Indian hotel industry by the investment appraisal methods. Taj Residency Plc, Abad Plaza Plc are the hotels in India that are included in this research. This dissertation will try to answer pursuing questions using investment appraisal methods depending on problems determined during the research and searching for alternatives. Key factors in making investment decisions are:

  1. Should an investment be undertaken or rejected?
  2. In the case of mutually exclusive investment tasks, which one should be preferred?
  3. For just how long should n investment job should be utilized?
  4. When should the investment task be started out?
  5. What is the range of the investment - can the company find the money for it?
  6. How long might it be prior to the investment starts off to yield returns?
  7. Which of the investment projects should be preferred and carried out when limited financial budget restricts the quantity that can be undertaken t once?
  8. How long does it take to pay back the investment?
  9. What are the expected earnings from the investment?
  10. Could the money that has been ploughed into the investment yield higher returns in other places?
  11. Does the proposed investment participate in the organization's tactical objectives?
  12. What are past proposals to see which techniques the business uses?
  13. How the business permits risk and inflation in investment proposals?
  14. Which investment appraisal techniques would the companies wish to consider to make long term investment decision?

Investment appraisal in the Indian Hotel Industry

Hotel Industry in India has made marvelous increase in the recent years. Hotel Industry is inextricably from the tourism industry and the progress in the Indian travel and leisure industry has fuelled the development of Indian hotel industry. The hotel industry and tourism industry in India are straightly linked to each other.

Revenues of Hotel and Restaurant (H&R) industry in India during the financial year 2006-07 was INR604. 32 billion, a growth of 21. 27% over the prior year, primarily powered by foreign vacationer arrivals, which increased by 14. 17%. at the moment, there are 1, 980 hotels approved and categorized by the Ministry of Tourism, Federal government of India, with a total capacity of about 110, 000 hotel rooms. The travel and leisure industry is displaying excellent performance, in terms of foreign visitors arrival. It is estimated that over another two years 70, 000-80, 000 rooms will be added across different categories throughout the country.

The thriving market and increased work at home opportunities in India have acted as a benefit for Indian hotel industry. The cheaper airlines rates to India has also made progress in the domestic and international travelers which helped the industry very successfully. Lately the Indian authorities has taken several measures to boost travel & travel and leisure that have benefited hotel industry in India. Opportunities in travel and leisure infrastructure are essential for Indian hotel industry to accomplish its probable. But instead there are few issues confronted by the Indian Hotel industry. They may be lack of cost structure, scarcity of efficient manpower, scarcity of resources etc, so a proper investment appraisal must select and screen the assets properly. The hotels which are included in this research are Taj Residency Plc, Abad Plaza Plc.

Taj Residency Plc is a 5 star hotel which is situated in Cochin, kerala, India. From the hotel which includes 108 rooms including 12 spacious suites. The hotel provides all the services for the clients. The hotel can be found near the sea, so it focuses mainly on international vacationers. The Taj Residency Group is focusing on creating a new hotel under the same name in another devote kerala, India.

Abad Plaza Plc is a 5 star hotel which is situated in Cochin, kerala, India. It's a hotel which involves 80 fully furnished luxury rooms. The hotel provides much more quality services for the satisfaction of customers. Friendliness and hospitality has always been the strong items of this hotel. It really is located near the railway place and close to bus train station as well. The hotel is wanting to expand the business enterprise by way of building another hotel in another city in kerala, India and they're planning to prolong the existing hotel into more bigger one in order to create more rooms and offer more service facilities to customers. So, a good decision must be produced by using reliable investment appraisal techniques to be able to purchase the right place and in the right time.

4. LITERATURE OVERVIEW OF INVESTMENT APPRAISAL

An investment is 'any plan of action which involves sacrifices now or in the near future in anticipation of higher future benefits' (Pike and Neale, 2003).

Investment appraisal is affected by the fact that external shareholders and potential traders have access to accounting data and make their quotes of firm's economical rte of go back with accrual-based accounting quantities. As a result, there is a continuing background of research analysing and relating accounting rate of come back and economical rate of return concepts. Accounting information affects investment appraisal in lots of ways (Danielson & Press, 2003).

There are four basic approaches for the appraisal of capital investments that happen to be :

Payback (PB) measures enough time that it will take to recover the total funds committed to an task. It shows enough time required for the full total cash inflows to equal the total cash outflows.

A Project is known as attractive if it has brief payback period. Assignments with short payback periods allows managers to recuperate their investment quickly and give them more overall flexibility to reinvest these cash in future. There is also fewer risks than assignments with longer payback cycles. The payback period is popular solution to evaluate capital assets. The shorter the payback period is, the more appealing the investment. As the payback period targets short-term results, it does not require managers to forecast cash flows significantly out in to the future.

Accounting rate of return (ARR) measures the percentage return the job achieves over its life in terms of success. Accounting rate of come back is often used internally when choosing projects. It actions the performance of tasks and subsidiaries in a organization. ARR is almost a lot like payback period method but the important difference is that it will favour higher risk decisions, whereas use of the payback period leads to overly conventional decisions(Broadbent. M, Cullen. J, 2003).

Internal rate of go back (IRR) steps the percentage go back the project achieves over its life-time in discounted cash moves. The benefit of using IRR method is that it does not consider the time value of money and therefore is more exact and sensible than the ARR method. The shortcomings of this method are that it's frustrating to compute (Shim. K. J, 2000).

Net present value (NPV) compares the initial cost of the task with the future discounted cash flows it generates. It allows the company to screen the company projects potential success by discounting future cashflow expectations and looking at the sum of the cash flows to the original capital expenditure necessary to fund the project. Though a lot like IRR method, NPV does not calculate an opportunities exact rate of return but instead calculates the precise dollar amount an investment exceeds, or fails to meet, the expected rate of come back. NPV provides an outstanding decision criterion for ventures. NPV does not suffer from the disadvantages of the payback or IRR methods. NPV is the method most recommended by financial experts to make investment decisions. IRR continues to be used to determine the exact rate of go back for an investment, but NPV has nothing of the problems that IRR have with abnormal investments (McAllister. E. W, 2005).

5. RESEARCH METHODOLOGY

A research design offers a framework for the collection and analysis of data (Bryman and Bell, 2007). Data is split into four types; secondary, major, quantitative and qualitative. Selection of data type relies largely on the kind of research (Buckley, 1995). The study targets justify that descriptive research is the most practical method to accomplish research objectives. The methods used in this research to collect major data are as follows:

Questionnaire

It is a popular technique in quantitative research methods. The primary advantage of using questionnaire to accumulate primary data is that it collects data in a format that is not hard to analyze. The questions to be asked in the questionnaire are dictated by the study objectives. Questionnaire provides good sampling control and flexibility and control in relation to location and time. It is frustrating if several segments are involved. The research undertaken will use questionnaire to collect main data. The mainrationale behind choosing questionnaire is the fact that the study requires the managed responses from the individuals. Time limitation for the dissertation also facilitates selecting questionnaire for major data collection as it is less frustrating to perform.

Personal interviews

A Personal interview is thought as a purposeful discussion between several people (Kahn and Cannell, 1957). The info accumulated using personal interview is very reliable. Interviews can be un-structured or structured (Saunders et al, 2007). Set up interviews are a organized goal focused process. They power organized communication between the knowledge engineer and the expert. A organized interview is a question and answer program, which is recorded for some reason. Personal interviews provide the visual verification of respondents characteristics and referrals to sources may be used to verify facts. However, personal interviews may be expensive and difficult to set up. Also respondents may formulate the answers depending upon their profiles.

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