New Mobile Phone Project

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As the initial investments differ for the three proposals, the profitability index (PI) is computed in order to arrive at a common measure to compare the profitability of the three projects. The profitability index indicates that Project F is the most profitable one. In order to analyze the sensitivity of the three projects, the Internal rate of return (IRR) is used, as it gives a clear picture of the margin of safety. The calculations indicate that Project S has the highest IRR value of 26.8%. However as the returns are comparatively lesser, Project F with IRR of 23.33% is taken as the less risky project.

The non – financial factors are also analyzed and from these arguments, it is clear that the best choice for Fones 4 U is to go ahead with Project F. The main reasons are that, this project has considerable returns (£ 6.16 million) and is risk free and also the IRR is considerably higher indicating that the project will not undergo losses for significant changes in the profit estimates.

Fones 4 U has three options to launch a new mobile phone. The investments required for these three project proposals are estimated and the profit estimates are also made for the useful life of the project, which is 10 years. The project proposals have to be completely analyzed using the various investment appraisal techniques, in order to get a clear picture of the returns. The non – financial factors should also be given importance before making the final decision. These factors are analyzed in the following sections.
It is clear that the management should analyze any investment in terms of financial gains, before funding the project. Hence it is absolutely necessary that the management practices appropriate investment appraisal techniques to make informed decisions and have constructive control over the funds available for investments (Samuels et al, 2000). Investment appraisal is defined as the“Evaluation of the attractiveness of an investment proposal, using methods such as average rate of return (ARR), internal rate of return (IRR), net present value (NPV), or payback period (PP). Investment appraisal is an integral part of capital budgeting and is applicable to areas even where the returns may not be easily quantifiable such as personnel, marketing, and training” (Gotze et al, 2007, p24) (Fisher and Martin, 1994).