Assessing suitable project for investment purpose using capital budgeting tools and techniques

This report discusses the process of assessing suitable projects for investment purpose using capital budgeting tools and techniques. It explores the significance of investment appraisal tools such as payback period, net present value, average and internal rate of return in analyzing the viability of projects. The report also highlights the financial and non-financial factors that aid in business decision making. The case scenario of XYZ Plc, a hospitality services company, is used as an example throughout the report.

Business Decision Making

TABLE OF CONTENTS
Assessing suitable project for investment purpose using capital budgeting tools and techniques
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REFERENCES................................................................................................................................8

Assessing suitable project for investment purpose using capital budgeting tools and techniques
In the business organization, managers have accountability to select best investment
project that contributes in organizational success and profitability. The current report is based on
the case scenario of XYZ plc which offers hospitality services to the customers. With the motive
to attain goals company is planning to invest funds in the new business proposals. In this, report
will shed light on the manner in which investment appraisal techniques aid in decision making.
Given case scenario presents that XYZ Plc has two projects for investment purpose such
as software and launderette. Now, manager is focusing on doing assessment of these two projects
so that optimum use of finance can be facilitated. In this context, investment appraisal tools and
techniques are highly significant which helps in appraising projects effectually. Capital
budgeting tools mainly include payback period, net present value, average and internal rate of
return which assists in analyzing the viability of project in monetary terms.
Payback method entails the length of time for which company has to wait for recovering
the amount invested at initial level (Britzelmaier, Pöpplow and Andraschko, 2020). Thus, by
using this tool manager of XYZ plc can assess the time period after which firm would become
able to recover initial investment. However, this method is to be critically evaluated because it
does not provide deeper insight about the profitability associated with project.
In addition to this, net present value method exhibits project earnings associated with the
concerned proposal. This tool of investment appraisal is highly effectual as it offers solution or
framework for decision making by taking into account time value of money concept (Gaspars-
Wieloch, 2019).
Hence, by applying these tools and techniques manager of hotel chain can decide the
project which proves to be more beneficial for the firm. Referring such aspects, evaluation of
projects has been done the by the manager of XYZ Plc in the following manner:
Calculation of NPV

Year Project A –
Software Project
(in £)
Discounting factor @
11%
Present value
of cash flows
(in £)
1 28000 0.901 25225
2 32000 0.812 25972
3 35000 0.731 25592
4 55000 0.659 36230
5 78000 0.593 46289
Sum of present value 159308
Less: initial investment 100000
NPV 59308
Year Project B – Laundrette
Project (in £)
PV factor @
11%
Present value of
cash flows (in £)
1 31000 0.901 27928
2 38000 0.812 30842
3 43000 0.731 31441
4 64000 0.659 42159
5 89000 0.593 52817
Sum of present value 185187

Less: initial investment 120000
NPV 65187
Payback period
Year Project A – Software
Project (in £)
Cumulative figures (in £)
1 28000 28000
2 32000 60000
3 35000 95000
4 55000 150000
5 78000 228000
3.1 years
Payback period 0.1
Year Project B – Laundrette
Project
Cumulative cash flows
1 31000 31000
2 38000 69000
3 43000 112000
4 64000 176000
5 89000 265000
3.1 years
Payback period 0.1

The above depicted evaluation shows that XYZ plc should go with launderette project.
Moreover, as per the selection criteria project b is good for the hotel chain which helps firm in
gaining competitive edge. Moreover, according to payback method firm should select the project
with lower time period. On the other hand, as per NPV, firm should give priority to the project
having higher value (Patro, 2019). Thus, by doing assessment it has found that value of payback
is same in both the projects such as 3 years and 1 month. Accordingly, firm will attain the
situation of no profit no loss within 3.1 years. However, NPV of project A and B implies for
£59308 & £65187 respectively. In accordance with this, project B will be fruitful for hotel chain.
Moreover, NPV associated with project B is positive and higher as compared to project A. On
the basis of evaluation, earnings that will be generated from launderette project exceed
anticipated cost to the significant level. Referring all such aspects it can be stated that company
can attain desired level of outcome by investing money in project B.
Financial and non-financial factors that aid in business decision making are
enumerated below:
Monetary factors
The main motive of the firm is to reduce cost and maximize profitability so that
competitive advantage can be attained at marketplace. Thus, at the time of analyzing or
appraising project manage should consider cost associated with specific project. Moreover, high
cost has direct impact on company’s day to day operations. In addition to this, business should
keep in mind profit that will be attained from concerned project. By keeping in mind these
aspects, manager can identify and select appropriate project.
Non-monetary factor
 Customer satisfaction:
 Availability of manpower:
 Government rules and regulations:

 Technical superiority:
 Easy maintenance (Non-Financial Factors in Capital Investment Decisions, 2020)
With regards to business organization, customer satisfaction is the key aspect for the
growth purpose. Thus, manager should assess whether proposed investment will aid in
customer satisfaction or not. Further, manager is required to consider maintenance that need
to be paid for concerned investment. Along with this, government rules and regulation
associated with project also needs to be evaluated. By this, manager of XYZ plc can assess
complexities associated with the project. When, business unit works on new project that it
requires more competent personnel. Thus, at the time of project evaluation firm should assess
it has enough workforce or not for the smooth functioning of operational aspects. In this way,
there are several financial and non-financial factors which influence project selection as well
as decision making. Hence, while making project assessment manager of hotel chain should
consider for cost, profit, trend etc for taking prominent decisions.
By summing up this report, it has been articulated that investment appraisal tools helps in
making selection of best project out of several alternatives available. It can be seen in the project
that project B is good from investment purpose for XYZ Plc over software option. Further, it can
be inferred that manager of XYZ hotel chain should consider both monetary and non-monetary
factors while evaluating investment options.

REFERENCES
Books and Journals
Britzelmaier, B., Pöpplow, U. and Andraschko, L., 2020. Capital budgeting practices of SME in
Baden-Württemberg: findings of an emperical study. International Journal of Business and
Globalisation, 24(1), pp.78-93.
Gaspars-Wieloch, H., 2019. Project net present value estimation under uncertainty. Central
European Journal of Operations Research, 27(1), pp.179-197.
Patro, C. S., 2019. Performance Appraisal. In Advanced Methodologies and Technologies in
Business Operations and Management (pp. 867-878). IGI Global.
Online
Non-Financial Factors in Capital Investment Decisions. 2020. Online. Available through
<https://www.accountingnotes.net/financial-management/capital-budgeting/non-financial-
factors-in-capital-investment-decisions/10949>.