Investment Appraisal Techniques: Payback Period and NPV

Essay

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Calculation of Payback Period.................................................................................................3
2. Calculation of Net Present Value (NPV).................................................................................4
3. Analysis....................................................................................................................................4
4. Practical implications...............................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES ...............................................................................................................................7

INTRODUCTION
In an organization, decision making process is very essential which helps the managers to
take effective actions which helps in contributing to maximise operational productivity as well as
profitability (Cheng, Hackett and Lee-Chin, 2018). Before making any strategic decision,
management should identify the need of business and perform accordingly. ABC Plc is computer
software organization where strategic managers looking to invest into new business and they
found two new opportunities to invest which are Motor software project or Hardware project.
This essay covers payback period and NPV method which helps in identifying which project is
most suitable as well as beneficial for the company.
MAIN BODY
1. Calculation of Payback Period
Year
Motor Software
Project A ( £ ) CCF ( £ )
Hardware
Project B ( £ ) CCF ( £ )
0 40,000 0 60,000 0
1 8,000 8,000 10,000 10,000
2 12,000 20,000 20,000 30,000
3 16,000 36,000 25,000 55,000
4 20,000 56,000 30,000 85,000
5 30,000 86,000 40,000 125,000
Formula:
Payback Period = Year before full recovery + Unrecoverable cost at the beginning of year / cash
flow during the year
Motor Software (A) = 3 + £4000 / £20000
= 3 + 0.2
= 3.2 years
Hardware (B) = 3 + £5000 / £30000
= 3 + 0.16