Unilever Case

Investment Appraisal Report - CNC Milling Machine

In section 1, all available information regarding the investment proposal is sorted out and scanned item-by-item. Useful data is identified and processed into inputs to next-step calculations of NPV, IRR and Payback period. Calculation method and details is described in section 2. Section 3 discusses key strategic factors ought to be taken into account. At last, recommendation is proposed based on above quantitative and qualitative analyses.


Future Cash flow projection through Year 1-4.

To translate previous profit projection into net cash flow projection (to calculate NPV), below items need to be adjusted:

  * Other production expenses
Remove the irrelevant part: 16,000, 24,000, 24,000, and 16,000 (equals 20% of labour cost) according to incremental-basis principle.

  * Depreciation
Add depreciation back when calculating cash flow.

  * Administrative overheads
Since this is not extra expense incurred by the new machine, it ought to be removed according to incremental basis principle.

  * Interest on loans to finance the project
This ought to be removed according to the principle that investment and financing considerations should be separated.

  * Salvage value
The scrape value of £20,000 should be added at the end of the useful life of the machine.

  * Marketing & Advertising

  * Advertising start-up
The £40,000 of advertising and sales promotion at the start of the project should be included in capital outlay of the project.

  * Yearly advertising expense
Add £8,000 of advertising expense into each year’s cash outflow.

  * Consultation expense
The £18,000 of consultation expense should be viewed as sunk cost and thus be ignored.

  * Impact on competing product
The project would lead to reduction in sales of a competing product. This effect should be factored into the incremental cash flows....