Investment Appraisal Report Example: NPV, ARR, Payback and WACC for a UK Firm Buying a Spanish Company

This investment appraisal report example is a sample our team wrote to a master's-level international finance brief. A UK organic food producer is deciding whether to buy a family-owned Spanish organic food company for €1.1m. The report answers with NPV, IRR, ARR, payback, discounted payback and a WACC built from market values, all traced to a five-sheet Excel workbook.

We checked every figure against that workbook in October 2026, and the numbers below are the corrected ones. The case data are the brief's, set in 2021.

If your brief gives you a real annual report instead of case data, our guide to reading an annual report for a case study shows where each ratio input lives.

What Did the Assignment Ask?

The brief asked for a full appraisal of the purchase, from the cash flows to a recommendation the board could act on. Reconstructed from the report and its workbook, in our words, it had six parts, and the headings below take them in order.

1. Appraise the €1.1m purchase with NPV, ARR, payback and discounted payback, against the board's limit of five years for payback.
2. Estimate the acquirer's current cost of capital from its debentures, ordinary shares and preference shares.
3. Test how the result changes with the trading outlook.
4. Compare the two companies' liquidity, gearing and return on capital.
5. Assess the exchange-rate risk and the ways to finance the purchase.
6. Recommend, taking account of non-financial factors.

Cash flows are in thousands of euros (€k), the acquirer's capital in thousands of pounds, and the case converts at €1.16 to the pound, so the €1.1m price is £948.3k.

Executive Summary: Should the Firm Buy the Spanish Company?

Yes, on these numbers and with conditions. Discounted at the acquirer's weighted average cost of capital of 7.34%, the purchase has an NPV of €224.1k and an IRR of 13.5%. It pays back in 3.86 years, or 4.40 years discounted, inside the board's five-year limit. The main risk is the poor trading case, in which NPV falls to −€173.2k.

The appraisal at a glance

Net present value at 7.34%

€224.1k €1,324.1k of inflows today, less the €1,100k price

Internal rate of return

13.5% 6.1 points above the WACC

Payback

3.86 years About 3 years 10 months

Discounted payback

4.40 years About 4 years 5 months

ARR on average investment

39.5% 19.8% on the initial €1.1m

WACC at market-value weights

7.34% Equity 8.75%, preference 3.92%, debt 3.19% after tax

The sections below hold the full appraisal in report order, each method with its working, ending with the recommendation and how a marker would grade it.

What Cash Flows Does the Acquisition Produce?

Net cash flow rises from €175.0k in year 1 to €531.9k in year 5, €1,692.0k in all against a €1,100k price. The workbook grows sales by 15% a year, labour by 9%, other variable costs by 6% and fixed costs by 5%, deducts depreciation, the target's €32k of interest and 25% Spanish tax, then adds depreciation back.

Year 1 uses the target's current figures; growth starts in year 2. Figures are rounded; later calculations use the unrounded values.

Operating profit grows more than fivefold, from €104.0k to €579.9k, because sales outgrow every cost line. That growth rate carries the appraisal, and the sensitivity section tests it.

What Is the NPV and IRR?

The NPV is €224.1k: at the 7.34% WACC, the five cash flows are worth €1,324.1k today against a €1,100k price. The IRR, the discount rate at which NPV falls to zero, is 13.5%, 6.1 points above the WACC, so both rules say accept.

NPV = Σ CF_t ÷ (1 + r)^t − I₀, with r the 7.34% WACC built below and I₀ the €1,100k price.

The workbook's IRR function returns 13.46% on the same flows. These flows are after the target's €32k of interest, so strictly they are flows to equity: discounted at the 8.75% cost of equity, the NPV is €166.9k, and the decision is the same. Both NPVs count nothing after year 5, a cautious choice for a business that will go on trading.

How Long Is the Payback and Discounted Payback Period?

Payback is 3.86 years, about 3 years 10 months, and discounted payback at 7.34% is 4.40 years, about 4 years 5 months. Both sit inside the board's five-year limit. Each is the last year still short of the outlay, plus that shortfall divided by the next year's cash flow, assuming cash arrives evenly through the year.

Cumulative cash flow, undiscounted and discounted at 7.34%

Chart data

Point (years)	Undiscounted	Discounted at 7.34%
0	-1,100 €k	-1,100 €k
1	-925 €k	-937 €k
2	-682.2 €k	-726.3 €k
3	-358.8 €k	-464.8 €k
3.86	0 €k	—
4	60.1 €k	-149.2 €k
4.4	—	0 €k
5	592 €k	224.1 €k

Payback = 3 + 358.8 ÷ 419.0 = 3.86 years
Discounted payback = 4 + 149.2 ÷ 373.3 = 4.40 years

ACCA's payback and discounted payback article interpolates the same way (5,000/17,500 × 12 months). The same article names the limit: "Cash flows after the payback period are ignored". Here that is €592.0k: the last €60.1k of year 4 and all of year 5's €531.9k, so payback supports the NPV rather than replacing it (Brealey et al., 2023, section 5-2).

What Is the Accounting Rate of Return?

The ARR is 39.5% on the average investment, or 19.8% on the initial €1.1m. Average annual profit after tax is €217.4k, and the average investment is (€1,100k + €0) ÷ 2 = €550k, assuming no residual value, as the NPV does. Because the two bases give answers a factor of two apart, the report has to say which it uses.

Average profit after tax is the five years' €1,087.0k divided by 5. ACCA's accounting rate of return article settles the basis: "If the question does not give the information, then use the average investment method, and state this in your answer." The third row shows the profit measure matters as much. ARR uses profit, not cash, and ignores timing, so it sits beside the NPV as the figure a board sees in its accounts, not as the decision rule.

How Is the Acquirer's WACC Calculated?

The WACC is 7.34%. Each source of capital is costed, then weighted by its market value: ordinary shares are 73.55% of the £3,018.25k total at 8.75%, debentures 18.00% at 3.19% after tax, and preference shares 8.45% at 3.92%. The weighted costs add up as 6.44 + 0.57 + 0.33 = 7.34%.

Cost of Debt

The acquirer's £500k of 7% debentures trade at £108.65 per £100 and are redeemed at par in four years. Interest earns tax relief, so debt is costed after tax, K_d(1 − t), as ACCA's capital structure article sets out. At the case's 21% tax rate, each £100 costs 7 × (1 − 0.21) = £5.53 a year, and the after-tax cost is the rate that equates the price with those payments:

108.65 = 5.53 ÷ (1 + k) + 5.53 ÷ (1 + k)² + 5.53 ÷ (1 + k)³ + 105.53 ÷ (1 + k)⁴, so k = 3.19%

That is the workbook's own IRR cell. The bond-yield approximation, [5.53 + (100 − 108.65) ÷ 4] ÷ [(100 + 108.65) ÷ 2] = 3.3675 ÷ 104.325 = 3.23%, comes close. Both are after-tax costs. Before tax the redemption yield is 4.58%, below the 7% coupon because the debentures trade above par; tax relief takes it to 3.19%. The 21% is the case's rate; a brief set today would use the UK main rate of 25% for profits over £250,000 (HMRC, Corporation Tax rates and allowances).

Cost of Equity (CAPM)

The capital asset pricing model prices equity at the risk-free rate plus beta times the market's premium over it, E(r_i) = R_f + β_i(E(r_m) − R_f), as in ACCA's CAPM article. With the case's risk-free rate of 0.25%, beta of 1.7 and market return of 5.25%:

K_e = 0.25% + 1.7 × (5.25% − 0.25%) = 8.75%

A beta of 1.7 puts the premium at 8.5 points over the risk-free rate, which makes equity the dearest source, more than twice the after-tax cost of debt.

Cost of Preference Shares

Preference dividends are fixed and earn no tax relief, so their cost is the dividend divided by the market price, with no tax adjustment: K_p = D ÷ P₀ = £0.10 ÷ £2.55 = 3.92%. ACCA's March/June 2023 examiner's report puts it plainly: "The tax rate is not applied when valuing preference shares". So preference capital costs more than the debt, 3.92% against 3.19%: only the debt carries tax relief.

Market-Value Weights

Each source is weighted by what investors would pay for it today: units in issue times market price, not book value. The preference capital is £200k of £2 shares, so 100,000 shares at £2.55 are worth £255.0k.

The £1,393k profit and loss reserve is not added: the share price already reflects it, and the same examiner's report lists "Including retained earnings in the market value of equity" as an error. The weights follow ACCA's rule that they "are in proportion to the market values of equity and debt" (Lynch, n.d.), with preference capital as a third source. One limit applies: a WACC suits a project only while it leaves the firm's business risk and capital mix unchanged (Brealey et al., 2023, section 18-1).

How Sensitive Is the NPV to the Trading Outlook?

It is most sensitive to sales. NPV reaches zero if selling prices fall 6.2%, volume 11.8%, or annual growth slows from 15% to 11.6%; total inflows can fall 16.9%, or the price paid rise 20.4%. The workbook's three trading cases, rerun at 7.34%, give NPVs of +€422.7k, €224.1k and −€173.2k, and the poor case has a probability of 0.15.

NPV by trading case at 7.34%

Chart data

Item	Value (€k)
Good	422.7 €k
Base	224.1 €k
Poor	-173.2 €k

Scenario analysis. The workbook scales every year's cash flow by 1.15 in a good trade-deal case, 1.00 in the base case and 0.70 in a poor one, with probabilities of 0.30, 0.55 and 0.15. This is a scenario analysis with probabilities (Brealey et al., 2023, section 10-1), which ACCA's answers call probability analysis; it is not a sensitivity analysis.

The expected NPV equals the base NPV by construction. NPV moves in proportion to the cash flows, and the weighted multiplier is 0.30 × 1.15 + 0.55 × 1.00 + 0.15 × 0.70 = 1.00 exactly, so 0.30 × 422.7 + 0.55 × 224.1 + 0.15 × (−173.2) = €224.1k. The useful output is the spread, not the mean.

Sensitivity analysis. Sensitivity moves one variable at a time. ACCA's F9 sample answers (March/June 2017, question 32) describe it as calculating "the relative (percentage) change in a given project variable which is needed to make the NPV zero", and note that it "does not consider risk as measured by probabilities". A report needs both tests. For the discount rate the break-even is simply the IRR; for sales it is the NPV break-even set out in Brealey et al. (2023, section 10-2).

What it means. Selling price is the critical variable, the one that needs the smallest change to remove the NPV, so pricing and the growth path are the assumptions to check first. The poor case's 30% cut is well past the 16.9% break-even for inflows.

What Do Liquidity, Gearing and ROCE Show?

Both companies cover their short-term debts, the acquirer has room to borrow, and the target's past return looks weak. Current ratios are 1.68 for the acquirer and 1.77 for the target. The acquirer's debt to equity is 0.19 with reserves, or 0.24 at market values. The target's return on capital employed is 1.1%, far below the 7.34% cost of capital.

Gearing needs its basis. Share capital alone leaves out £1,393k of reserves owned by the same shareholders and more than doubles the ratio, to 0.42. On either fuller basis the acquirer is lightly geared; preference capital is left out of both sides.

ROCE needs a check. Before leaning on 1.1%, test the input: capital employed of €10.12m is more than nine times the €1.1m price. If it is right, the target earns little on its assets today, and the case for buying rests on the projected growth, not on its record. For the full method, with DuPont analysis across two years, see our Godrej Properties financial analysis sample.

How Does Exchange-Rate Risk Affect the Deal?

The acquirer reports in pounds and the target earns in euros, so a stronger pound lowers the sterling value of euro profits: a 10% rise in the pound cuts it by about 9%, since 1 − 1 ÷ 1.10 = 9.1%. At the case's €1.16, the €224.1k NPV is worth about £193.2k, and that figure moves with the rate.

Euros per pound, annual average, 2015 to 2025

Chart data

Point (€ per £)	Euros per pound
2015	1.38 € per £
2016	1.22 € per £
2017	1.14 € per £
2018	1.13 € per £
2019	1.14 € per £
2020	1.13 € per £
2021	1.16 € per £
2022	1.17 € per £
2023	1.15 € per £
2024	1.18 € per £
2025	1.17 € per £

The case's €1.16 matches the 2021 annual average of €1.1633 per pound in the Bank of England's series. From 2017 to 2021 the annual average stayed between €1.125 and €1.163, so the rate did look stable when the case was set. Just before, it had not been: the average fell from €1.378 in 2015 to €1.141 in 2017, a 17% loss for the pound. A stable record is not a forecast.

Euro sums the acquirer will convert, such as dividends from the target, can be fixed with forward contracts. The target's value in the group accounts is translation risk, which ACCA's foreign currency risk article says "can be partially overcome by funding the foreign subsidiary using a foreign loan" (Garrett, n.d.). The method for valuing euro cash flows in pounds is in our international investment appraisal example.

How Should the Acquisition Be Financed?

Mostly with debt, part of it in euros. The acquirer is lightly geared at 0.24 on market values, debt is its cheapest source at 3.19% after tax, and a euro loan sets euro liabilities against the euro asset. Any new borrowing changes the capital mix, so the 7.34% WACC has to be recalculated afterwards.

Equity, at 8.75%, suits whatever lenders will not cover. ACCA's article on analysing the suitability of financing alternatives supports the table: "Debt finance is generally both cheaper and easier to raise than equity", "If debt is to be raised, security may be required", and "if equity is raised control may change". Size matters too. Borrowing the whole £948.3k would lift debt to equity at market values from 0.24 to about 0.67, (543.25 + 948.3) ÷ 2,220, and "As gearing increases, the financial risk to shareholders increases, therefore Keg increases" (Lynch, n.d.), Keg being the cost of equity in a geared company. Our Ryanair financial analysis applies the same capital-structure theory, Modigliani and Miller included, to a real airline.

Recommendation: Buy, and on What Conditions?

Buy, on three conditions. The price stays at or below €1.1m, since a 20.4% overrun removes the NPV. Part is financed in euros. And the board accepts a 15% chance of the poor case, an NPV of −€173.2k. Every method with a decision rule says accept, but all rest on 15% annual sales growth; below 11.6% the NPV turns negative.

What each method answers, and its answer here

Point of comparison	Question it answers	Result here	Blind spot
NPV	Question it answers Does it beat the cost of capital?	Result here +€224.1k at 7.34%: accept	Blind spot Only as good as the rate
IRR	Question it answers What return does the cash earn?	Result here 13.5% against 7.34%: accept	Blind spot Says nothing about size
Payback	Question it answers When is the outlay back?	Result here 3.86 years, inside five: accept	Blind spot Ignores timing and later cash
Discounted payback	Question it answers When is it back at 7.34%?	Result here 4.40 years, inside five: accept	Blind spot Ignores cash after payback
ARR	Question it answers What accounting profit on the investment?	Result here 39.5% on average investment	Blind spot Profit, not cash; basis changes it

Non-financial factors. The purchase was meant to widen the product range and take the acquirer into retail. Three factors decide whether the projected cash arrives.

• Management: a family-owned company often runs on its owners' relationships with growers and customers; retention terms, or part of the price paid later against results, protect the cash flows.
• Control at a distance: managing in another country and language costs time and travel the cash flows leave out.
• Demand: the 15% growth needs market evidence, and a study before the offer is cheaper than a poor case after it.

How a Marker Grades This Report

Our original version made five kinds of slip, each of which costs marks. The first three are corrected above. The last two are built into the case's cash-flow model, so the figures above keep them; the notes show what a marker expects and what fixing them does.

• Interpolate on the recovery year. Divide the shortfall by the next year's cash flow, not the outlay: 3.86 years, not 3 years 3 months; 4.40 discounted, not 4 years 1 month.
• Value every source in full, after tax where tax applies. Our first version valued the preference shares at £127.5k instead of £255.0k and used a 3.63% cost of debt, labelled "before tax", instead of 3.19% after tax. Together they gave a 7.57% WACC and an NPV of €214.5k.
• Name every basis and trace every figure. ARR needs its base, gearing its definition, a probability table its real name and a 1.1% ROCE its benchmark.
• Do not count financing twice. These flows deduct the target's €32k interest and are then discounted at a WACC, but "all financing costs should be ignored as the cost of financing is accounted for in the discount rate used" (Parrott, n.d.). As flows to equity at 8.75% they still give an NPV of €166.9k (Brealey et al., 2023, section 18-2).
• Discount euros at a euro rate. A sterling WACC on euro cash flows mixes two currencies' interest rates; our USA vs Europe NPV example at spot and forward rates shows the fix.

Related samples: our investment analysis sample on diversification and the Sharpe ratio appraises a portfolio of shares, not a single project, with different tools. More finance and strategy work sits in MBA assignment samples, and our MBA assignment help for finance modules covers investment appraisal, the cost of capital and sources of finance.

Need an investment appraisal report, a WACC calculation or an NPV workbook built for your own case, with every formula shown? Send us the brief and your deadline on WhatsApp.

Sources

• ACCA (n.d.) Accounting rate of return. Foundations in Financial Management technical article, written by a member of the FFM examining team. accaglobal.com. Accessed 14 October 2026.
• ACCA (n.d.) Payback and discounted payback. Foundations in Financial Management technical article, written by a member of the FFM examining team. accaglobal.com. Accessed 14 October 2026.
• ACCA (n.d.) The capital asset pricing model, part 1. Financial Management technical article. accaglobal.com. Accessed 14 October 2026.
• ACCA (2017) Paper F9 Financial Management: March/June 2017 sample answers and examiner's commentary, question 32(c). accaglobal.com. Accessed 14 October 2026.
• ACCA (2023) Financial Management (FM) examiner's report, March/June 2023. accaglobal.com. Accessed 14 October 2026.
• Bank of England (2026) Bank of England Database: annual average spot exchange rate, euro into sterling (XUAAERS), 2015 to 2025. bankofengland.co.uk. Accessed 14 October 2026.
• Brealey, R.A., Myers, S.C., Allen, F. and Edmans, A. (2023) Principles of Corporate Finance. 14th edn. New York: McGraw Hill, sections 5-2 (the payback and accounting rate of return rules), 10-1 (sensitivity and scenario analysis), 10-2 (break-even analysis), 18-1 (the after-tax weighted-average cost of capital) and 18-2 (WACC vs the flow-to-equity method). mheducation.com. Accessed 14 October 2026.
• Garrett, K. (n.d.) Foreign currency risk and its management. ACCA Financial Management technical article. accaglobal.com. Accessed 14 October 2026.
• HM Revenue and Customs (2026) Corporation Tax rates and allowances, updated 1 April 2026. GOV.UK. gov.uk. Accessed 14 October 2026.
• Lynch, P. (n.d.) Optimum capital structure. ACCA Financial Management technical article. accaglobal.com. Accessed 14 October 2026.
• Parrott, W. (n.d.) Advanced investment appraisal. ACCA Financial Management technical article. accaglobal.com. Accessed 14 October 2026.
• Parrott, W. (n.d.) Analysing the suitability of financing alternatives. ACCA Financial Management technical article. accaglobal.com. Accessed 14 October 2026.