The financial aspect of the company is studied using various methodologies such as cash flow analysis and various investment appraisal methods. In this project we have chosen to use NPV and IRR methods of investment appraisal because of several reasons. Investment appraisal could have also been performed by other methods like Payback Period, but the drawback of this method is that it does not consider cash flows that arrive after the payback period and hence can lead to nonsensical decision in some cases. On the other hand NPV and IRR both are more reliable because they consider all cash flows till the end of the project. Further in Payback Period method equal weight is given to all cash flows arriving before payback period, in spite of the fact that more distant cash flows are less valuable. This problem is also overcome with NPV and IRR methods because both consider time value of money. Again NPV and IRR methods also help to ensure whether the investment will increase the firm’s value. Other methods cannot provide this information. The accounting rate of return method of investment appraisal has also been rejected for use in this project because it considers only profits that do not equal cash and also it does not consider time value of money.
Cash Flow Analysis - It is performed for each model to analyse the company's financial health over the model time of 5 years. On the other hand, investment appraisal is required to evaluate the attractiveness of an investment (in this case business model) and is an integral part of capital budgeting. For this project investment appraisal is performed by the following methods.
Net present value (NPV) is the difference between the present value of cash inflows and cash outflows and can be used to analyse the profitability of an investment or project. To calculate this value for each model firstly the cash flow over 5 years is calculated. Next, the cash flow is discounted using the relevant discount rate for a particular business model, to get the present value of cash flows for each year. Then the discounted cash flows or present value for each cash flow over 5 years model time is calculated. The resulting value is the NPV for that business model.
Internal rate of return (IRR) is the discount rate at which the net present value of all cash flows from a particular project equal to zero. To calculate this value a discount rate that is different from the discount rate used to calculate NPV for a particular business model is assumed and the NPV is recalculated. The process is continued till the new value of NPV is negative. Next using the interpolation method IRR is derived for that business model.
The classic approach to strategic marketing plan involves the recognition of 3 fundamental questions namely, the current business as it is, the environmental factors affecting the business and the direction the business has to take to maximize its market share and profits (Hooley et al,...