Investment Analysis of Blackrock American Investment Trust Plc Case Study

Financial Feasibility Study for Blackrock American Investment Trust Plc

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Introduction: Investment Analysis of Blackrock American Investment Trust Plc

The selected company is considered to be Blackrock American Investment Trust Plc which is deemed to be a major player in the retail banking and investment sector. The business credibility and background of Blackrock American Investment Trust Plc can be assessed based on determining its assets valuation in 2021, which numerically accounts to $ 213,111 (blackrock.com, 2022).

Purpose of Report

The main purpose of this report is mainly associated with determination of financial management for Blackrock where a new investment prospect shall be discovered. The minute aspects of the investment shall be considered based on motivation and by usage of quantitative techniques for determining overall feasibility. Adherence to non-financial attributes or qualitative information shall also be contemplated to determine key factors needed to be considered before selecting the proposed investment.

Conclusion

This report has mainly produced financial attributes that could be considered for contemplating investment in a new project where net present value is considered to portray negative financial values. Hence the project needs to be rejected based on negative net present values, while sensitivity analysis asserts that the relationship of cost of capital and NPV is indirect. Non-financial factors mainly consider strict government regulations and lack of ample opportunities to innovate and bring onboard technological influence.

Recommendations

The main recommendation that is offered to the management of Blackrock is considered to be associated with identifying a different project and an investment proposal which carries better cash flows. Lower discounting factor identification is also a recommendation that is offered to the management of Blackrock as it maximises chances of reaping better project returns.

Motivation of Proposed Investment

Purpose

Real Problems

The real problem that is being identified for the company concerned Blackrock American Investment Trust Plc is related with lack of ample revenue generation and profit maximisation. Paiva et al. (2019), viewed that lack of revenues and profitability is considered to be an intriguing factor as establishment of strong business dominance and credibility is perhaps jeopardised.

Importance of seeking resolution

The resolution of the problem identified as lack of revenues and profitability is needed to be contemplated as it could essentially wipe away organisational existence for Blackrock American Investment Trust Plc in the retail banking industry. Kou et al. (2021), expressed that finding prompt resolutions and courses of actions are also necessary to determine how finances could be multiplied in future and what tactical adjustments are needed to be facilitated.

Process

Causes of Problem

The fundamental causes of problems are considered to be associated with ascertaining and incurring higher monetary losses being obtained through holding of investments at fair values. The rising costs and expenses from operations is also considered as an important and intriguing factor which has led to lack of revenues and losses for Blackrock American Investment Trust Plc.

Casual Drivers Role

To ascertain the role of casual drivers, a pertinent change in strategy is needed to be made by the company where higher asset acquisition needs to be facilitated. Therefore, an investment in new machinery or equipment is considered a valuable process where acquiring a new machine or equipment would speed up productivity and efficiency, which would be beneficial to drive higher business attributes.

Proposition

Capabilities enabling necessary changes in drivers

The capability of the new machinery and equipment would determine a better rate of record-keeping of investment activities for Blackrock American Investment Trust Plc.

Investment Appraisal Using Quantitative and Qualitative Information

Quantitative Information

Calculation of Payback Period

Calculation of Payback Period
Years	Cash Flows	Cumulative Cash Flows
0	£-5,26,000.00	£ -5,26,000.00
1	£ 1,23,800.00	£ -4,02,200.00
2	£ 1,71,100.00	£ -2,31,100.00
3	£ 1,51,900.00	£ -79,200.00
4	£ 1,80,700.00	£ 1,01,500.00
5	£ 1,29,000.00	£ 2,30,500.00
Payback Period (Years)	3.56

Table 1: Calculation of Payback Period

As per the above table of payback period calculations, it can be administered that the new investment or the project requires 3.56 years or 3 years and 7 months approximately to recover its initial investment costs. In order to calculate payback period, necessary weightage has been offered for calculating cumulative cash flows and aligning them with project duration.

Calculation of Accounting Rate of Return

Calculation of Accounting Rate of Return
Years	Cash Flows
0	£ -5,26,000.00
1	£ 1,23,800.00
2	£ 1,71,100.00
3	£ 1,51,900.00
4	£ 1,80,700.00
5	£ 1,29,000.00
Accounting Rate of Return	28.76%

Table 2: Calculation of Accounting Rate of Return

As per above table of accounting rate of return calculations, it can be determined that the project accounting rate of return has been calculated as 28.76%. The calculation of project and investment accounting rate of return is considered to be measured on the basis of finding proportion between average cash inflows corresponding to the cash outlaws or the investment cost of the project.

Calculation of Net Present Value

Calculation of Net Present Value
Years	Cash Flows	Discounting Factor @ 16%	Discounted Cash Flows
0	£ -5,26,000.00	1.00	£ -5,26,000.00
1	£ 1,23,800.00	0.86	£ 1,06,724.14
2	£ 1,71,100.00	0.74	£ 1,27,155.17
3	£ 1,51,900.00	0.64	£ 97,315.90
4	£ 1,80,700.00	0.55	£ 99,799.00
5	£ 1,29,000.00	0.48	£ 61,418.58
Net Present Value	£ -33,587.21

Table 3: Calculation of Net Present Value

As per the above table of net present value calculations, it can be precisely observed that the projected net present value for this investment is considered to be calculated as £-33, 587.21. The net present value is deemed to be a reliable method as future expected returns could be ascertained by integrating cash flows and cost of capital (Lusardi, 2019).

Commentary on Project Selection

On the basis of contemplating project selection, it can be precisely administered that the project should ideally be rejected. The fundamental reason offered for rejection of the project is considered to be weighed on the basis of negative net present value figures. The negative net present value figures are perhaps considered to be harmful investment traits that could potentially lead to lower monetary and financial significance. The resulting accounting rate of return is also considered to be the second major reason that has also substantiated project rejection. Ideally, a project containing a minimum of 30% as the accounting rate of return is likely considered to be a feasible project that could be selected and appraised by an organisation (Abrams et al. 2020). Hence, the 28.76% accounting rate of return achieved for this investment purpose is marginally lower as compared to standards.

Third important reason that has been offered and provided for justifying non-selection of this project is considered to be associated with a considerably higher payback period. In case of a project, the ideal payback period is mainly considered to be the half duration of the total lifespan of a project (Gomes et al. 2021). Hence, the recovery of investment costs appears significantly after the half lifespan of the project is completed and hands should be rejected by the company.

Qualitative Information

Eight Factors needed to be considered

Factors	Description
Political	Political Factors associated with the new investment are mainly considered to be related to financial restrictions. Financial restrictions imposed by political powers is deemed to be a challenge as it reduces business reliability (Ouyang et al. 2020).
Economical	Economic Factors mainly include chances of financial volatility and increasing investment risks in the markets. Both these factors could essentially dilute the healthy outcomes projected with the new investment.
Social	Social factors mainly comprise lack of general awareness for communities and societies. The lack of general awareness is also deemed to be a crucial factor as it could lead to lower harmony from external stakeholders (Mohsin et al. 2021).
Technological	Technological Factors mainly comprise lack of adherence to implement innovation and social media influence for maximising project prospects in future. The lack of technological adherence for the new investment could essentially minimise business strongholds associated with the new investment.
Legal	Legal factors mainly consist of a higher timeframe needed for contemplating legislative approvals and documentation processes.
Environmental	Obligation to continuously cope with green banking is considered to be a potential environmental challenge for this new investment.

Table 4: PESTLE Analysis

Critical Discussion of Risk and Reward

Sensitivity Analysis

NPV		NPV		NPV	NPV
Assumed Base Case Change	Cash Inflows	-33587.21	Discounting Factor	-33587.209	Initial Investment	-33587.20867	Salvage Value	-33587.21
-30.00%	90300	-52012.78237	11.20%	28218.1072	-368200	-23511.04607	73640.00	-23511.04607
-15.00%	109650	-42799.99552	13.60%	-4131.1952	-447100	-28549.12737	89420.00	-28549.12737
0%	129000	-33587.20867	16.00%	-33587.209	-526000	-33587.20867	105200.00	-33587.20867
15.00%	148350	-24374.42182	18.40%	-60478.587	-604900	-38625.28997	120980.00	-38625.28997
30.00%	167700	-15161.63497	20.80%	-85089.794	-683800	-43663.37127	136760.00	-43663.37127

Table 5: Sensitivity Analysis

The above sensitivity analysis demonstrates various scenarios and cases where changes in certain variables would ideally lead to an increase or decrease in the NPV figures achieved. However, on the contrary of the sensitivity analysis, it can be administered that cash inflows as well as discounting rates possess effects or changes in the sensitivity analysis. The scenario in which cash inflows increase mainly attribute to an increase in the NPV Value, whereas in the scenario where discounting rate is lower the sensitive NPV is considered to be on the higher side. Hence, the increasing values of cash inflows are considered to possess a direct relationship with changes in NPV, while an increase in investment value is considered to possess an indirect relationship. As per statements and illustrations of Sachan et al. (2021), this mainly occurs due to the fact that increasing values of investment are mostly likely to incur lower NPV prospects for an organisation. Hence, the sensitivity analysis is considered to be a beneficial method for ascertaining all possible scenarios where investment could be capitalised and determined fruitfully in order to make reliable investment decisions by the concerned management of an organisation.

Risk and Return and Potential Impacts of Company’s Financial Performance

The potential risks are mainly considered to be associated with vindictive financial parameters involved in the money and capital markets that could potentially minimise investment influence for Blackrock American Investment Trust Plc. A vindictive market performance and a higher volatility is also considered as an adverse situation as it could essentially lead to lower business significance (Rai et al. 2019). The potential rewards available for Blackrock American Investment Trust Plc when the new investment is successful is considered to be related with welcoming a higher abundance of investors and fund flows. Potential impacts of the company's financial performance based on assessment of risks and rewards can be related with determination of better or adverse corporate stability and positioning in the investment market of the USA.

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References

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blackrock.com, 2022, Total Assets [online], Available at: https://www.blackrock.com/uk/literature/annual-report/blackrock-latin-american-investment-trust-plc-annual-report-and-financial-statements.pdf [Accessed on: 28.04.2023]

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