Wonderland Confectionaries is a well – developed chain of restaurants that is willing to invest large sums of money into a theme park, based on the model of their competitor and surrogate company, Alice Limited. Given the facts, I will now try to establish whether the management’s decision to invest into this project is a well-documented and viable one. Further on, I will try to prepare a report analysing a few important aspects that managers should take into account when making such an investment appraisal, like the analysis of two main models used primarily when assessing the risk and return of one investment, the net present value model (NPV) and the capital asset pricing model (CAPM), along with each model’s limitations. Further on, I
…show more content…
The expected market return on equity 12% is much greater than the discount rate of 3.517%. This means that Wonderland should accept the project of a theme park, because the risk involved is clearly smaller than the return. As seen in the calculations above, when using both methods, the Wonderland project seems a good investment plan, because both Net Present Value (NPV) reveals a positive value, and the Capital Asset Pricing Model (CAPM) states that the project is viable because the market return on equity being greater than the discount rate.
However, a manager in this situation, is likely to choose the Net Present Value method as the Capital Asset Pricing Model studies that the investment project takes place over one year only, this being not the case here, as Wonderland is a five years project. In this respect, many authors admit that Capital Asset Pricing Model has, among other limitations, the “single period time horizon”, as mentioned by (Kürschner, M., 2008, p. 6).
Moving on to the second question, I should go into further details about financial and non – financial issues that a company’s management takes into account when calculating the corporation’s performance. Hence,