TABLE OF CONTENTS Evaluating the feasibility of investment proposals for XYZ plc............................................3 Different factor consider at the time of making financial decision........................................6 REFERENCES...........................................................................................................................8
The decision-making process is an essential part of every business organization as the decision making is the key function of every business without which business cannot be run smoothly. These decisions help in enhancing the performance of the business or for the furtherbusinessexpansion.Thisessayprovidesanin-depthanalysisofthevarious investment evaluation techniques which can be used by XYZ plc for taking its decision. Evaluating the feasibility of investment proposals for XYZ plc The company is using two types of techniques which are, NPV method and the payback period method for the purpose of evaluating the feasibility of the projects. Net present value It is the one of the capital budgeting technique which is used by the organizations for the purpose of determining the profitability and the feasibility of the project (Rostarova and Rentkova, 2016). It is calculated by subtracting total present value of cash outflow from the present value of cash inflow. If the outcome is positive, then the organization should proceed with the plan and if it is negative then it should drop the idea to invest in its as it is not profitable. Project A Computation of NPV YearCash inflows PV factor @ 11% Discounted cash inflows 1280000.90125225.2 2320000.81225972 3350000.73125592 4550000.65936230 5780000.59346289 Total discounted cash inflow159308 Initial investment100000 NPV (Total discounted cash inflows - initial investment)59308
Project B Computation of NPV Year Cash inflows PV factor @ 11% Discounted cash inflows 1310000.90127927.9 2380000.81230842 3430000.73131441 4640000.65942159 5890000.59352817 Total discounted cash inflow185187 Initial investment120000 NPV (Total discounted cash inflows - initial investment)65187 On analysing the NPV of both the projects, it can be said that XYZ plc can invest any of the two as both are having positive NPV, but since the company is required to choose between the two then it should go for project B as the NPV of project B is higher, that is, £65187 in comparison to project A which is £59308. This technique is very useful and acceptablebecauseofitsvariousbenefits(HäckerandErnst,2017).Ittakesinto consideration the time factor while evaluating the future cash inflows. Along with that the discounting factor can also be adjusted with respect the risk prevailing in the market. This is not based on the assumption that the cash inflows will be reinvested at the IRR unlike IRR. Despite of these benefits, it has certain disadvantages as well. For the projects having the longer time frame, there are chances of getting the inaccurate estimation of the future cash inflows which may affect the decision of the management (Benamraoui and et.al, 2017). Also, in case there is any error in determining the discounting rate then it may lead to inaccurate estimation of cash inflows making the decision wrong. Payback period
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Payback analysis, it is the analysis which used to help the company in getting the knowledge about what period of time will be taken by the investment to return back the investment which has been made. Project A Computation of Payback period Year Total cash flow Cumulative cash flow 12800028000 23200060000 33500095000 455000150000 578000228000 Payback period 3 + 0.1 = 3.1 years Project B Computation of Payback period Year Total cash flow Cumulative cash flow 13100031000 23800069000 343000112000 464000176000 589000265000 Payback period 3+ 8000/64000 = 3.12years After going through the analysis it has been analysed that both the project will able to give the return back in 3.1 years. So it can be said that procuring any of the project on the basis of payback period will not be bringing any of the changes in the organization. As both the project will be giving the return in the same period of the time for the organization.
Different factor consider at the time of making financial decision There are many different factors which are generally considered by the manager in the organization to make the variety of the decision in the organization. Some of the financial and non financial factors are as follows: Financial factor, first element which is generally consider by the organization is cost related to making different decision in the organization, as all the manager always look to have the resources which is low in the cost, so all the manager generally see’s the cost factor (Bangmaand et.al., 2019). Profitability, it is the another factor which is generally consider by the manager as all the manager generally looks to maximize the profit for the business as result all the manager generally used to consider the profitability of the different project and on the basis of the same the project with highest profitability used to get selected. Payback period is another important factor which is generally consider by the manager in the organization at the time of making different decision. As all manager generally used to look for the project in the organization who is able to give the good return for the organization in shorter period of the time. For the same reason manager generally used to consider payback period of different project and on the basis of the same used to select the best project. Non-financial factor: These are another factor which are also consider by different manager at the time of making different decision in the organization. Technology presence is the first non-financial factor which is generally consider by the organization at the time of making different decision in the organization(Consigli, Kuhnand Brandimarte, 2017). Generally, manager used to see the current technology presence of the company and the benefit which will be brought by the new technology before making any sort of the decision in the organization. Another non-financial factor which is generally consider by all the organization is the presence of Human resources in the organization, all the organization used to look at the current presence of Human resource and used to compare the same with the amount of the Human resource which will be require in the organization to carry out operation of new technology. On the basis of the same manager generally used to make the decision about the technology which can be procure in organization.
REFERENCES Books and Journals Bangma,D.F.andet.al.,2019.Financialdecision-makinginadultswith ADHD.Neuropsychology. Benamraoui, A. and et.al, 2017. Net Present Value Analysis and the Wealth Creation Process: A Case Illustration.The Accounting Educators' Journal.26. Consigli, G., Kuhn, D. and Brandimarte, P., 2017. Optimal financial decision making under uncertainty. InOptimal Financial Decision Making under Uncertainty(pp. 255-290). Springer, Cham. Häcker, J. and Ernst, D., 2017. Investment Appraisal. InFinancial Modeling(pp. 343-384). Palgrave Macmillan, London. Rostarova,M.andRentkova,K., 2016.Investmentcriteriaof thesuccessfulstart-up accelerators.Economic and Social Development: Book of Proceedings. p.109.