When to do Financial Analysis Finance Essay

Financial appraisal methods are seen to be those methods that are used to assess the feasibility of future projects, which is by assessing the value of its net cash flows that may result from its implementation. That is a financial appraisal method is done to see the investment results that may come up from the view of the organisation that is undertaking such an investment. Generally financial analysis are done in order to determine if it is will be profitable for that organisation which is about to undertake such a project. (Anon, 2010).

1.1 WHEN TO DO FINANCIAL ANALYSIS

According to the African Development Foundation Training Module book (2009) a financial analysis is a standalone report that provides financial information about the financial viability and sustainability of a proposed project. Basically financial analyses are useful if the output of a proposed project could be sold in the market or could be valued at market prices. For privately owned organisations, financial analysis are carried out only on project they are interested in undertaking and also financial analysis on potential investment will be determined by the firm's balance sheet and the impact it may have on it. For government and international agencies that sell output such as railway, electricity, telecommunication etc. They will undertake financial analysis on each project they are undertaking, to assess the impact of such projected projects on their budgets. For example, telecommunications operators which offer lower tariffs will need to examine the impact of such decisions on their budget. These bodies regularly undertake financial analysis most especially when the financial analysis has some meaning and in most cases when the output of such investment can be sold.

1.2 WHY DO A FINANCIAL ANALYSIS

One thing is almost certain about a financial (or any other) plan: it will not turn out to be 100% accurate. That's because nobody can exactly predict the future, regardless of what process, information, tools, or models are used. Therefore you need to analyse your financial data to see whether you are on track, forecast your future expected results, and adapt your plans as a consequence of your analysis (Maquet, 2007)

1.2.1 Valuing project profit and cost in a financial analysis

Financial benefits of any project are seen to be those revenues received from implementing a project, in this case if the project was about producing some goods and services for sale, the revenues received from such yearly sales will be the benefits derived from that project Financial costs can be said to be those financial cost of expenditures suffered by an executing agency or firm as a result of undertaken a project. These are cost sustained from the expenditures made to establish and operate a project. These may include the cost of acquiring a lands, equipment, vehicles as well as on-going operating costs for labour, fuel and utilities such as electricity. For a financial analysis, all of those receipt and expenditures will be valued as it will appear in the financial balance sheet of the project and also will be measured in the current market price. Since goods and services obtained for be at current market prices and output received from such implementation will be a current market prices, the financial costs and benefits of the project will be measured in these current market prices. Here markets prices generally refer to the prices in the local economy and may also include taxes, tariffs and commissions.

1.1.2 Real or Nominal Prices

It is important to determine whether the inputs to be obtained and the outputs to be sold by the proposing firm or agency are valued at current market prices that is if at constant (real) or normal. Most importantly, it is necessary to ensure that the analyses are carried out in constant sets of price to ensure that the total value of the project calculated is a real figure. The use of constant prices may not be appropriate in most cases reason been when Drawing up project financing plans. In most cases, expenditures are normally estimated in nominal terms so as to ensure that these intended sources of finance will be enough to cover for all the projected costs. Where the investment is privately operated and will pay company tax. Due to the rate of inflation, depreciation allowances and the cost of holding stocks, financial analysis will need to be done in both nominal and real terms.

1.1.3 Internal Transport and Handling Costs

It should be clear where inputs and outputs are to be priced in any project appraisal. Because net incremental benefit is of interest to the agent, project outputs should be valued at the current market priced at the project gate, meaning transportation price would be deducted from the general price received in the market place. Also the project inputs should be valued at their current market cost at the project gate and these prices will include transport and handling cost of getting them there.

1.1.4 Local and Foreign Costs

There are instances where project appraisals divides costs, and every now and then benefits between locally incurred cost as well as foreign exchange costs and benefits. This typically arises when policy makers want to judge the impact of the project on balance payments or sometimes if foreign financing agents such as multinational banks wish to use the distribution of items appropriate for aid grants and loans. To single the cash flow into local and foreign prices and to also predict the future price of a project inputs and output, it will be important to make projections about future exchange rates. When local inflation is anticipated to be higher than the average for major trading partners, devaluation of the local currency could be projected, meaning increasing both the costs of imported inputs and the local currency value of exported outputs. If local inflation is anticipated to be lower than that of the country's major trading partners, it is likely that the local currency will raise the value of over the life of the project. If appreciation is good, this will lower imported input prices as well as lower the local currency sales from exported outputs and can also reduce the international competition. This research aims at investigating the various financial appraisal methods used in the UK. It also investigates how beneficial it is for using such financial appraisal methods. The objectives of this research include Comparing and contrasting the financial appraisal methods used in the UK. The advantages and disadvantages of the financial appraisal methods used in the UK. Discussing the advantages of having a common approach to the financial appraisal techniques to organisations.

2.0 LITERATURE REVIEW

To determine the financial feasibility of a project, a financial appraisal has to be made on it. For infrastructure for developments such as the construction of highways, power projects, etc, economic appraisal becomes a vital factor and financial appraisal takes the back seat. A project must be able to have a satisfactory return on income so as to cover for the opportunity cost forgone of capital generated. (Singh, 2012).

2.1 Introduction to financial appraisal methods and techniques

Several authors have come with several categorisations of financial appraisal methods. According to Singh (2012) there are two methods of financial appraisal namely the non-discounting methods and the discounting methods. To him the non-discounting financial appraisal method comprises of the payback period and the accounting rate of returns while the discounting financial appraisal method is made up of the discounted cash flow or the net present value, cost benefit analysis, discounted payback period method and the internal rate of returns. Also Iman et al. (2008) also categorises financial appraisal methods also into two types, namely the sophisticated and the unsophisticated method. To them the sophisticated model is made up of the discounted cash flow model, dividend discounted flow model, and the economic value added (EVA) and the price/cash flow. The unsophisticated method is made up of the dividend yield, the price per earnings ratio,PE scaled by earning growth, price to book value multiple, price to sales multiple, enterprise value to sales multiple and the enterprise value to book value multiple. Janakadisa (2008) categorises financial appraisal methods also into two groups, namely the traditional method which is made up of the payback model and the accounting rate of returns model which both of them do not take into account the time value of money into consideration and secondly the discounted cash flow method comprising of the net present value and the internal rate of return which takes into account the time value of money.

2.1.1 Common financial appraisal techniques used

There are different kinds of financial appraisal methods and most generally, they are used for the purpose of knowing whether an investment generates value for shareholders or not. (Viswanathan, 2011)

2.1.1.2 Pay Back Period

According to Singh (2012), the payback period of financial appraising is the simplest method to be used among all the other models. It is that period of time used to recover the initial cash outlay on a project, meaning the shorter the payback period the more attractive a project is. Ahamad and Chauhan (2011) also classifies the payback period as the simplest and most widely used financial appraisal method for apprising capital budgeting. To them this technique is built on the principle that every capital expenditure pays itself back within a certain period out of the additional earning generated from the capital assets. In spite of all this, the payback period method has been widely criticised. According to Baker and Powell (2005), the payback period basically ignores the timing of the cash flows within the payback period and failure to consider the time value of money understates the true payback period. This means that the payback period avoids the basic rule of finance i.e. 'a pound today is worth more than a pound a year later', because we turn to calculate the years where the total investment is recovered. In the true sense, it is only the principal which is covered; the portion of interest still needs to be covered. Ahamad and Chauhan (2011) also criticises the payback period with the same notion as not taking into account the time value of money and also not considering the magnitude and timing of cash flows.

2.1.1.3 Discounted cash flows

According to Estate master (2011), the discounted cash flow method is one of the most widely used financial appraisal model in the world today. It is used in assessing investments, businesses, projects or any other sort of on-going task and investments that may generate income. Obviously this method of appraisal tells the investor how much the investment is worth in the present day terms. Swathern (2011) also explains the discounted cash flow model as a valuation method used to value an investment opportunity. This means that the discounted cash flow tells an investor how a company is worth today based on the all the cash that the company could make available to investors in the future. According to Vinish (2010) the discounted cash flow model is a simple tool to understand and apply as well as, it could be used by both equity shareholders because discounted cash flow on the basis can be used to compare two companies and take decisions on whether to invest in them or not, also they can be used by debt holders to take decisions regarding their companies. Also according to Jun (2008)one of the advantages of using the discounted cash flow model is that it entails the investor to think about the stock of his or her business and then analyse its cash flow rather than its earnings growth. In contrast to this advantages Vinish (2010) also suggested that since the discounted cash flow model is a dependent tool, which relies heavily on inputs used for the purpose of valuation, a slight change in these inputs can result in a huge change in the value of the company. Also Stearns (2008) also emphasized that the discounted cash flow model depends heavily on the assumptions for beta and market risk premium and therefore terminal value may be misleading due to incorrect estimations of either cash flows or terminal multiples. It is obvious that anyone using the discounted cash flow model should also use other methods of valuation along, in order to take right decisions concerning the investment in the company.

2.1.1.4 Net present value

According to Singh (2012), this technique shows the summation of present values of all cash flows linked with a particular project. With this approach, future cash flows are discounted at a certain hurdle rate to arrive at their present value, meaning that a higher NPV shows a good proposal in case the initial investments are similar. This technique takes into consideration the time value of money and as a result of that earnings in past years would have value higher than those earnings earned in the future years. This technique again takes into consideration the inflows and outflows for the entire project including the terminal salvage value.  According to Singh (2012), Even though this technique turns to be very realistic, it turns to give a misleading depiction especially when two projects for comparison involve a widely different initial investment, this however means that a project with a higher initial investment will no normally show high net present value even though return on income may be lower. Anon (2011) also suggested that this model thoroughly undervalues all investment projects. This is due to the strong hidden assumptions made that no decisions would be taken in the future after the investment decision has been made therefore this turn technique ignores the managerial flexibility that has been made. Managers are often known to undertake negative NPV projects in many cases because they are armed with the options of expansion, delay, abandonment and contracting (shrink) the project which has value. The NPV method has been successfully accepted and widely used by all mid-size and large size companies as a primary capital budgeting technique. Survey by Graham and Harvey (2001) shows that 75% of the CFO taken from a large random sample always or almost always use NPV as the preferred capital budgeting technique. They mainly attribute this to the CEO characteristics, the size of the firm and leverage. Another factor can be the availability of huge computing power and sophistication.

2.1.1.5 Discounted payback period

According to Anon (2011), the discounted payback period that period of time required for an initial cash investment in a project to equal the discounted value of the discounted value of the expected cash inflows. This model is similar to that of the payback period model in that it looks at the length of time it takes a project to payback. The only difference between the two is the discounting of the cash flow in the discounted payback period, while cash flows are not discounted in the traditional payback period. Similar to this according to Manish (2012), a discounted payback period is actually the amount of years it would take to recover an initial investment in terms of the present value of that cash flow. Unlike the traditional payback period this model takes into account the time value of money which is an essential factor in making investment decisions. Similarly to this, according to Anon (2012), a discounted payback period also takes into account the time value of money as well as the riskiness of a projects cash flow, through the cost of capital. In contract to this Pradhan (2012) addressed the key disadvantage of using the discounted payback model is that, it ignores all the flows that occur after the cut-off date, thus biasing this criterion towards short term projects and as a result, may discard projects with have positive net present values. Similarly to that Anon (2011) also criticises the model for ignoring cash flows beyond the discounted payback period.

2.1.1.6 Internal Rate of Return (IRR)

According to Ozyasar (2012), an internal rate of return is basically the percentage return an investor expects to gather by investing in a particular project. According to Kumar 2010), an internal rate of return is a very good method of capital budgeting because it gives equal attention to cash flows which are not earlier or late and also there is no need of calculating cost of capital. Also Nayab (2010) talks about the simplicity of using this model and according to him since the model uses one single discount rate in evaluating every investment, making calculation and comparisons turn to be easy. In contrast to this, Victor (2012) talks about the poor assumptions that this model makes about discount rate or the cost of capital. Since markets conditions change from year to year so will this discount rate as well as the cost of capital will and financial analyst have no ways of exactly predicting this future rate. In support to this poor assumptions Nayab (2010) also talks about the unrealistic assumptions this model make s, that is when using this model one assumption has to be created, that is if we invest money on this model, after receiving profit we can easily reinvest our investment profit on the same model and also this model is not good for comparing two projects. In short this assumption is full of assumptions making it difficult to predict.

2.1.1.7 Accounting rate of returns

According to Abeysinghe (2010) the accounting rate of return uses accounting information to measure the profitability of an investment. To him it is one of the simple tools to use and understand and also it can be calculated from the accounting data unlike other the models such as the NVP and the IRR and no adjustments are needed to arrive at cash flows of a project. Similar to that Paramasivan and Subramanian (2012) defines this model as the average rate of return or profit taken for considering a project evaluation and also supports the view that this model is easy in calculating and in understanding and also it is based on accounting information rather than that of cash inflows. In contrast to that Ayoub (2012) claim that this model ignores cash flows while calculating the profitability of investments. Ayoub (2012) defines cash flows as the inflow of cash into or out of a business transaction over a period of time. And this factor is of great importance when determining the rate of returns of a project, business liquidity and also assessing the risks involved in financial transactions of a developing project so since the concept of cash flow is not considered, the profitability assessment may not be accurate. Similarly to that Pietersz (2012) also states that this model does not take into account the time value of money and is also not adjusted for non-cash items, meaning selecting any method for investments based on it is faulty. However this model is similar to that of the payback period particularly in its flaws, as it also does not take into account the time value of money.

2.1.1.8 Price per earnings ratio

Jenkins (2012) explains the PE ratio as measuring the relationships between stock price and its earnings, or profit per share. To him the P/E ratio gives a clue to what the market is willing to pay for a company's earnings, meaning the higher the P/E ratio the more the market for the company's earnings and vice versa. Similarly to that Wilson (2012) talks about how the P/E ratio measures how highly valued a company's earnings are in the market that is by telling you how much an investor is prepared to pay for every £1 of those earnings and secondly the number of years the investor will have to wait to get back his investment through current earnings. But in spite all this according to Warren Buffet in a sentence I his 2000 annual report for his holding company Berkshire Hathaway. Warren Buffett wrote "Common yardsticks such as dividend yield, the ratio of price to earnings or to book value, and even growth rates have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business."

2.2 Financial appraisal methods used in the UK

Knowing the Financial appraisal methods used in the UK is very important because the methods used can have a great effect on the level and nature of capital investment and the international competitiveness on the UK. Drury and Tayles (1997) examined the financial appraisal used in the UK, through the use of questionnaire. A distinctive feature of this survey was that the sample included responses from a wide range of organizations of different size. Even though previous studies suggested that payback was the most widely used method a different picture emerged from this survey when the replies were analysed by size. As in how often or always a particular technique was used, DCF technique was used far more extensively by the larger organizations whereas a small number of the smaller organizations "often" or "always "used either net present value (NPV) or internal rate of return (IRR) discounting method. The reason why NPV and the IRR were lesser used by this smaller organisations could be due to the fact NPV and IRR are more sophisticated and it is a more rather complicated way of evaluating potential investment because choosing the right discount rate to use to calculate NPV is difficult, that is this discount rate needs to take into account the riskiness of an investment project which should at least match your cost of capital. Bu the most important thing you can talk about this discounted rates is that it takes into account the time value of money - that is the fact that money you expect sooner is worth more to you than money you expect further in the future.

Dimon and Marsh (1994) expressed concerns on how most UK companies were using excessive high discount rate to appraise investment and as a result were in danger of underinvesting. They further suggested that with the use of conservative cash flow, combined with incorrect treatment of inflation and excessive discount rates, many UK organisations were rejecting profitability investment, and therefore suggested that discounted cash flow procedures should be abandoned or given little weight in the long term investment decision but recommend that this discounted cash flows used by divisions in an organisation should be established by their corporate headquarters. In disagreement with Dimon and Marsh (1994), these DCF procedures should not be totally ignored or downgraded in importance just because they might be used incorrectly.

Instead, decision makers should identify the potential problems associated with this procedures and carefully ensure that the financial appraisal is performed correctly. In support to this notion that discounted cash flows to be used in divisions in the organisations, should be established by their corporate headquarters, this process will reduce the tendency for divisional managers to overstate risk (and therefore discount rates) by focusing narrowly on a project's total risk, Corporate management will then have to adopt a portfolio approach and recognize that project risk is lower because risk is spread across many projects. On the other hand corporate headquarters can also adjust their discount rates from nominal to real rates and then train divisions to apply these rates to cash flows expressed in real terms. Then again this assumption is not really recommendable because all cash flows are unlikely to increase at the general rate of inflation. In these situations real cash flows are derived by bending current cash flows by the specific rate of inflation and then deflating them using the general inflation rate. Here again this approach is more confusing rather than simply expressing cash flows in nominal terms and using a nominal discount rate.

2.3 Financial appraisal methods used in the UK public sector

According to HM Treasury (2003) The UK Government is committed to the continuing improvement in the delivery of the public services. A major part of this commitment is to ensuring that public funds are spent on activities that provide the greatest benefits to society at large and that they are spent in the most efficient way as possible also. For this implementations to work properly, discount rates are used to convert all costs and benefits to 'present values', so that they can be compared and calculating the present value of the differences between the streams of costs on projects and the benefits derived, offers the net present value (NPV) of an option. This therefore offers the NPV as a primary measure for determining whether government action can be justified or not, because this measure (NPV) takes into full account the risks which would be encountered by that style of procurement and the difference between the present value of a stream of costs and a stream of benefits even though the NPV undervalues all investment projects. This is due to the strong hidden assumptions made that no decisions would be taken in the future after the investment decision has been made.

2.4 Financial appraisal methods used in some UK sectors

Various financial appraisal techniques are been used by different financial analyst sometimes depending on the size and nature of the organisation

2.4.1 Financial appraisal methods used in some UK manufacturing industries

Investment in manufacturing is important in order to speed up the UK economic recovery, quality of life and national economic standing. Wilkes, Samuels, and Greenfield (1996) examined the financial appraisal methods used in the UK between 1989-1994 as to how they were frequently used by managers.Questionares were sent to managing directors of 500 largest manufacturing companies in the UK. The study found that nearly six out of ten firms used three or four methods, with the most popular three methods being the payback, yield and the NPV. Although these three methods were widely used, payback was most considered by most firms because it showed a small but unmistakable increase in usage for them. Inspite of all that, the length of the payback period is a concern because the shorter the required payback period, the more likely its bias against longer-term investments.

Demirakos, Strong, and Walker (2004) developed a positive approach for the valuation practices of financial analysts, this was done by studying the valuation methodologies contained in 104 analysts' reports from international investment banks for 26 large U.K.-listed companies drawn from the beverages, electronics, and Pharmaceuticals sectors. From their report they discovered that analysts normally choose either a PE model or a DCF valuation model as their dominant valuation model, with the PE model being the most generally used form of valuation. Some of the good thing that was said about this model was its simplicity, this is because this PE model yielded a good first approximation for industries that had a fairly uniform and stable growth, also it was simple to use by industries that had costs of capital, accounting methods and capital structures that were comparable across companies and also easy for industries that had transitory earnings items that could be identified and excluded from their analysis, via versa.

2.4.2 Financial appraisal methods used in the UK retail sector

Cowton and Pilz (2006) reports a survey of the capital budgeting practices of UK retailers, concentrating particular in the financial techniques used to appraise proposed investment projects. Even though no previous surveys had concentrated on retailing, there were where disaggregated results had been reported, there has been a suggestion that the retail sector had lagged behind other sectors in its use of relatively sophisticated appraisal techniques that take into account the time value of money. The findings of their survey suggested that the retailing sector is was now similar to the other sectors, with both the sophisticated discounted cash flow techniques and the 'naive' payback being popularly used by analyst which in the case did not take the time value of money into consideration.

2.4.3 Financial appraisal methods used in the UK housing sector

Treanor (2004) in his paper takes a general look at the appraisal process, and the assumptions it required. From his paper, in the private rented sector, the most commonly used method of judging the viability of a housing project was the "yield" which is simply the rental income expressed as a percentage of the capital investment required. The yield was most commonly used in considering the feasibility of commercial premises within a development, such as shops or doctor's surgeries. Although this method turn to be a very rough measure, it can be applied across a wide range of property sectors including residential lettings, offices, shops, factories or almost any type of investment. Also other British associations use the net yield as a rough measure of viability, that is it is calculated as the net rent income in the first year and expressed as a percentage of the finance required.

Although slightly better than the yield, the net yield is only based on one year's performance, and ignores longer term fluctuations in operating costs. Also there are a number of feasibility criteria that uses discounted cash flow in which a discount factor takes account of the costs of carrying debt. Then again this will depend on the judgment of interest rates over the year period, for this reason the "discount" factor is considered because, discount factors reflect the market view of average interest rates for the housing sector over the period of investment, plus a "margin" for risk. In this case there is no clear distinction as to which financial appraisal works better in the housing sector

2.4.4 Financial appraisal methods used in the UK IT service

Milis, Snoeck and Haesen (2009) looked at the investment appraisal techniques for calculating the business value of IS services in the UK.From their report it was noted that that the feasibility study of capital investments in today's companies and organizations were mainly based on financial cost-benefit analysis, conducted using traditional capital investment-appraisal techniques (CIAT). From their research it was realised that the most commonly used appraisals for ICT were the payback period (PP) and the Accounting Rate of Return/Return on Investment (ARR/ROI). Techniques such as the Internal Rate of Return (IRR) and Net Present Value (NPV) which are perceived as being more difficult were used to a lesser extent.

Fig 1

The use of capital investment appraisal techniques

ICT investments 1990's

ICT investments 2000's

techniques Ballantine&Stray 1998, UK (%) Richardson, CSI survey 2004 Richardson, CSI survey 2008 PP 60 ROI 43 55 39 IRR 54 28 17 NVP 49 25 21 Source: Adapted from Ballantine & Stray, 1998 and, Richardson, 2004 & 2008 Fig 1 shows a decline use of the payback period considered as a CIAT for the appraisal of IT projects. This can be due to the fact that projects are judged on the period needed to compensate the initial investmen,t that is projects with fast payback are favoured. As a result, companies using the PP technique will tend to accept too many short-lived projects and reject too many long-lived ones. In a services environment this means that the selection of services that deliver quick results are favoured. The gains generated by reuse are ignored if they are realized after the initial investment is compensated. As such, one of the fundamentals of service architecture and the reuse of services is not fully accounted for. Furthermore, the inability to incorporate risk into the appraisal and the ignorance of the time value of money make this technique inappropriate for the evaluation of IT projects. PP may be an adequate rule of thumb, but, considering the shortcomings, major investment decisions should not be based solely on the results of PP calculations.

The Accounting Rate of Return (ARR)/Return on Investment (ROI) which shows the ratio between the annual gains and the amount of money investment turn to be more satisfactory than the PP because the total lifecycle of the investment is taken into account. Nevertheless, as with the PP, the time value of money is not taken into consideration. Also Risk can be entered into the appraisal to a certain extent by adjusting the hurdle by which the IS services are judged, but this is not useful when dealing with mutually exclusive projects (selecting between similar services offered by two different developers for example).

The Internal Rate of Return (IRR) corresponds to the rate for which the present value of the investment's money in-flows are equal to the present value of the money out-flows. Unlike the previously mentioned techniques, Internal Rate of Return (IRR) takes the time value of money into consideration by introducing a discount factor. This is a major improvement and makes this technique more useful. But then again, the results of IRR are a percentage making it difficult to compare services that differ substantially in size and outcome. The Net Present Value (NPV) technique calculates the present value of the investment's money flows, using a discount rate. In contrast to IRR, different rates can be used to reflect the risk-levels of mutual exclusive investments. Therefore I consider the NPV model as a suitable approach for appraising ICT

2.5 Advantages of having a common financial appraisal technique to the organisation.

According to Ajitayadav (2010) In any project analysis, the cost and benefits of that project that received in future period are discounted or deflated by some factor in order to reflect their lower value to the individual or society than the current available income. The factor used to discount future cost and benefit is what is known as the discounted rate and its usually expressed as a percentage.

3.0 Methodology

As research methodology is a plan and structures an aim or a problem on which research is relaying, so those different methods are applied to get answers of desired questions. Methodology is seen as the theory of how your research should be undertaken, including the theoretical and philosophical assumptions upon which the research is based on and the implications of these method or methods adopted.(Saunder et al 2007) Research methodology is the overall process guiding an entire project. The main aim of this research is to investigate the various financial appraisal methods used in the UK.I will therefore compare and contrast the various financial appraisal used in the UK.I will find out the advantages and disadvantages of this financial appraisal methods used and will find out the advantages of having a common approach to organisations.

3.1 Research Process

The research process that will be applied in this research will be the research onion in order to ensure that I get all the needed data necessary to accomplish my objectives. This is because in conducting a research is like peeling the back of onion layers, in order to come to the core issue of how to collect the necessary data needed to answer your research question and objective, important layers should be first peeled away. With this said process, I will be able to create an outline on what measures are the most appropriate to be applied in my study. The diagram below is an adaptable from Saunders et al (2007) of the research process onion, which carefully introduces the theories of every step of methodology. There are 5 steps in the research onion namely the philosophies, approaches, strategies, choices and the time horizon.

My research process will be conducted according to these stages. The first layers raises questions of the research philosophies to adopt, the second considers the subject of research approach that flows from the research philosophy, the third layer examines the research strategy applicable for the reserach, the fourth layer is the data collection methods to be used and the fifth layer is the time horizon the researcher applies to his research.

3.2 Research philosophies

All researches are based on assumptions about how the world is perceived and how we can best come to understand it and these assumptions are established on research philosophies. These assumptions will support the research strategy and the methods choosen as a part of that strategy. According to Saunders,et al(2007), research philosophy is "overarching term relating to the development of knowledge and the nature of that knowledge in relation to research" For the purpose of my research the research philosophy adopted will be interpretivism

3.2.1 Interpretivism

This is an epistemology that supports that it is necessary for the researcher to understand the differences between humans in our role as social actors. This emphasises the difference between conducting research among people rather than objects such as machines. The term 'social actor' is different here in the sense that, here we interpret our roles in accordance with the meaning we give to these roles. In addition we interpret the social roles in accordance with our own set of meanings. The heritage of this strand of interpretivism comes from two intellectual traditions namely phenomenology and symbolic interaction. Phenomenology refers to the way in which we as humans beings make sense of the world where as the symbolic interactionism is seen as are a continual process of interpreting the social world around us, as a result of also interpreting the actions of others with whom we interact and with this interpretation leading to adjustment of our own meaning and actions. (Saunders Et al, 2007).

3.3 Research approach

A research approach refers to the approach or the methodology that has been adopted to conduct the research. It basically involves the selection of research questions, the conceptual framework that has to be adopted, the selection of appropriate research method such as primary research, secondary research etc. (Blurtit.com) .Research can be distinguished as belonging one or two models,such as a deductive approach or an inductive approach. Deductive approach is one in which the theory and hypothesis (or hypotheses) are formulated, and then a research strategy is planned to test these hypothesis. With The inductive approach, data is gathered and then the theory is developed as an outcome of the analysis (Saunders et al 2007) My research will be carried out through the inductive approach in which I will collect data from various resources (review literature) and then develop a theory as a result of the data analysis because to induce something I believe is to draw a conclusion from one or more particular or pieces of evidence.

3.4 Research Design

3.4.1 Purpose of the research

For the purpose of this research an exploratory study would be carried out as a valuable means of finding out the various financial appraisal methods used in the UK, its advantages and disadvantages and find out the importance of having a common approach to organisations. The main advantages of this of this approach is its flexibility and adaptability to changes, that is when using exploratory research, I will be able to change direction as and when a new data comes in or any insight that may occur to me, Adams and Schvaneveldt (1991) reinforce this point by arguing that the flexibility characteristic of the exploratory research does not mean absence of direction to the enquiry. What it does mean is that the focus is initially broad and becomes progressively narrower as the research progresses

3.4.2 Research strategy

Archival research makes use of administrative records and documents as the principal source of data. Archival research strategy allows the research allows research questions to be answered, be it exploratory, descriptive or explanatory. Using archival research strategy therefore necessitates that you establish what data are available and designing your research to make the most out of it.

3.4.3 Research Choice (Method)

The way in which a researcher chooses to combine the qualitative and quantitative techniques and procedures for a research can be said to be a research choice. Research choice is categoried into two types namely mono and multiple method.Mono type method is that type in which we use a single data collection technique and corresponding analysis procedure, whereas multiple method is that method in which more than one type of data collection technique and procedure are used. In business research, mostly multiple methods are used for the combination of quantitative and qualitative techniques and procedures as well as for primary and secondary data.Saunders et al (2007) For the purpose of my research qualitative method will be used, as my data is qualitative so will I analysis it by using qualitative procedure.

3.4.4 Time horizon

There are generally two time horizons for the research strategy. We have the cross sectional, in which the study of a particular phenomenon (or phenomena) is conducted at a particular period. And the other is longitudinal studies which is, as stated by Saunders et al (2009), a series of snap shots and also said to be a 'diary' that involves repeated observation of the same item over a long period of time often many decades. For the purpose of my research project and in accordance to specific time period, I will consider cross sectional studies in which I will take a snapshot of investigating the financial appraisal methods used in the UK

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