Analysis of NPV and Payback Period for Investment Decision Making

This report analyzes the Net Present Value (NPV) and payback period for investment decision making in the context of A&B plc restaurant. It calculates the payback period and NPV for two projects and discusses the advantages and disadvantages of these methods. It also considers the financial and non-financial factors that impact business decisions. Based on the analysis, it provides recommendations for selecting the appropriate project for A&B Plc.

Essay

Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
1. Calculate payback period.....................................................................................................................3
2. Calculation of Net Present Value (NPV).............................................................................................4
3. Analysis...............................................................................................................................................5
CONCLUSION...............................................................................................................................................7
REFERENCES................................................................................................................................................8

INTRODUCTION
Decisions taking by individual executives strive to accomplish corporate goals in a way that
meets company needs and aspirations. Decision making is a vital component of online company.
Decision-making process measures to better make informed decisions which are more efficient.
If a systematic decision-making process is put into effect, it would be stronger likely to dodge
foolish decision-making and make informed choices (d’Amato and Kauko, 2017). This report
based on the A&B plc restaurant that provides food services in UK and other countries. The
company wants to invest in two projects and for this apply the NPV and payback method to
analysis the result and take right decision.
MAIN BODY
1. Calculate payback period
Project A – Dishwashing Project
Year Net cash flow Cumulative Cash Flow
1 30000 30000
2 35000 65000
3 40000 105000
4 60000 165000
5 90000 255000
Payback period = 3 + (15000 / 60000 * 12)
= 3 + 3 month
Project B –Software Project
Year Net cash flow Cumulative Cash Flow

1 40000 40000
2 45000 85000
3 50000 135000
4 75000 210000
5 80000 290000
Payback period = 3 + (15000 / 75000 * 12)
= 3 + 2.4 month
2. Calculation of Net Present Value (NPV)
Year
Project
A PV Factor DCF
0
-
12000
0 1
-
12000
0
1 30000
0.8771929
8 26310
2 35000
0.7694675
3 26915
3 40000
0.6749715
2 27000
4 60000
0.5920802
8 35520
5 90000
0.5193686
6 46710
42455

Year
Project
B PV Factor DCF
0
-
15000
0 1
-
15000
0
1 40000
0.8771929
8 35080
2 45000
0.7694675
3 34605
3 50000
0.6749715
2 33750
4 75000
0.5920802
8 44400
5 80000
0.5193686
6 41520
39355
3. Analysis
Advantages and Disadvantages of NPV and Pay Back period
Payback period: The method of payback needs minimal components, and is time and
improving to quantify than some other forms of capital financial planning. The estimation only
includes an assessment of the total working capital and their initial expense of expenditure.
Certain strategies are using these sources, but require substantial requirements which are harder
to gauge.
Merit: This highlighted the significance of taking uncertainty into consideration when
assessing business decisions (Ewe and et.al, 2018).
It gives the lowest solution to the measurement of capital outlays.

It is crucial for businesses particularly those with available budgets to decide increasing
programs will produce immediate results.
Demerit: The approach lacks the interest of money in time. Capital expenditure to a
project could be sporadic. Investment opportunities are typically long-term and keep producing
profits until years since their initial start-up funding has been repaid in full. Yet if a campaign
has a lengthy period of payback it gets missed.
Net Present value: The Net Present Value (NPV) approach can be a very useful tool to
evaluate the feasibility of a consumer spending, or a specific campaign within this organization.
Yet like other investing strategies, it's not the start-all, be-all approach, it holds a few specific
advantages and limitations that would not make it attractive for certain spending decisions.
Merit: The important attribute of the net present-value approach is that it needs to consider the
simple concept that presently a future dollar is cost somewhere around one dollar. The
management fees are compounded again by cycle of cost of borrowing for each year (Lederer
and et.al, 2020).
Demerit: The main downside of the net present value approach is that it needs some speculation
about either the operational cost of the business. Thinking an overly low cost of capital would
result in poor quality growth. Making sure too relatively low a financing costs will eventually
lead in several risky investments being forgotten.
Financial and non financial factor:
Financial factors
Financial factors that impact business also include major economic developments that
can support or impede the organization in achieving its objectives. Consumption patterns, job
factors, inflation rates and lending and unemployment and aggregate leading forecasts are raising
external factors that determine companies.
Interest rate: Interest rates may surface in a number of different locations, levied by a variety of
different individuals. Obviously, the present system for lending rates is of great concern to

commercial banks, but it may also impact businesses that policies depend on large loans being
taken out (Nilashi and et.al, 2020).
Exchange rate: Exchange rates are a complex issue, but evidently they must extend to those
who come to terms with exports or imports. Variable exchange rates will influence how often a
business required spending its foreign distributor to accommodate them that can impact
profitability and also require a lot of time to keep ahead.
Working capital: Working Capital represents businesses' leverage rates for handling week as
well-to-day expenditures and encompasses required stocks, assets, payable accounts, account
receivables, and short-term debt. Working capital is generated from many activities of businesses
including such liability and asset management, customer payment, and fund administration.
Non financial factor:
Leadership behaviors, variability and upside potential are the three leading nonfinancial
considerations that can have a drastic effect on overall beliefs. Such considerations will allow the
customer to see the greater picture beyond the percentages and get an understanding of the
genuinely drives the value of the business.
Management team: This is all about the participants, truly! Very often in transactions
concentrate on the financing and the plan overlooking that maintaining the current workers is a
real advantage of setting up a business. Businesses with seasoned top managers would be
considered better than those with novice executives (Orimoloye and et.al, 2019).
Facility & equipment: The facilities and facilities performance also impacts the valuation of
your company. Once again, view this from the viewpoint of another consumer. In making a
transaction an investor should evaluate not just the amount that they are prepared to spend.
Workforce team: For many businesses, and particularly auto repair, a major reason for
acquisitions is the consolidation of the employees for service at the firm's strategy. In reality, one
of the driving factors of reputation in a transaction is the current management structure and
working population in location (Srivastava and et.al, 2019).
Recommendations

As per the application of capital budgeting method of net present value and payback
period method get different results from both projects. After the analysis it is recommended that
select because Project B is so much more appropriate for A&B Plc but it has a positive Return
and was preferable for most capital investment.
CONCLUSION
As per the above discussion it has been concluded to business decision making process is
relevant the organization successes / targets are to be addressed within that certain schedule and
budget. This explores for the appropriate answer, effectively uses the money and rewards the
corporate colleagues. NPV and payback periods are applied to achieve successful outcomes with
respect from both programs. This enables make the correct decision as far as business is
concerned. In addition to recognizing both financial and non - financial considerations to
promote business decision making.

REFERENCES
Books and Journals
d’Amato, M. and Kauko, T., 2017. Advances in automated valuation modeling. Springer
International Publishing AG, doi. 10. pp.978-3.
Ewe, S. Y. and et.al, 2018. The role of regulatory focus and information in investment choice:
some evidence using visual cues to frame regulatory focus. Journal of Behavioral
Finance. 19(1). pp.89-100.
Lederer, M. and et.al, 2020. One size fits all? An analytical approach how to make use of process
modelling techniques for different fundamental supply chain types. International Journal
of Supply Chain and Operations Resilience. 4(1). pp.1-20.
Nilashi, M. and et.al, 2020. Decision to Adopt Neuromarketing Techniques for Sustainable
Product Marketing: A Fuzzy Decision-Making Approach. Symmetry. 12(2). p.305.
Orimoloye, I. R. and et.al, 2019. Wetland shift monitoring using remote sensing and GIS
techniques: landscape dynamics and its implications on Isimangaliso Wetland Park,
South Africa. Earth Science Informatics. 12(4). pp.553-563.
Srivastava, M. and et.al, 2019. A review on recent progress in solid state friction based metal
additive manufacturing: friction stir additive techniques. Critical Reviews in Solid State
and Materials Sciences. 44(5). pp.345-377.