Financial Management and Decision Making: Calculation of Payback Period and Net Present Value

BSC (Hons) BUSINESS MANAGEMENT
SEMESTER 1, EXAMINATION 2021/22
FINANCIAL MANAGEMENT AND DECISION
MAKING
MODULE NO: BMP5006
ANSWER BOOKLET
All the pages of the answer booklet should be submitted including blank ones.
Please type your answers in the spaces provided.
Insert additional pages where required.
Student Name
ID Number
Answer to the Question no. 1 (a)
Calculation of Payback Period for each project:

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Project A Project B Project C
£ £ £
Year 1 4000 5000 4000
Year 2 6000 5000 5000
Year 3 5000 4000 3000
Year 4 3600 5000
Year 5 1400
Payback Period (years and
months) 2.83 3.9 4.28
Calculation of Net Present Value for each project:
Discount
Factors
Project A Project B P
r
o
j
e
c
t
C
CF DCF CF DCF CF DCF
8.00% £ £ £ £ £ £
Year 1 0.95 4000 3703.6 5000 4629.5 4000 3703
Year 2 0.85 6000 5143.8 5000 4286.5 5000 4286
Year 3 0.79 5000 3969 4000 3175.2 3000 2381
Year 4 0.74 3600 2646 5000 3675
Year 5 0.68 1400 952.84
Residual value 2000 2000 2000
Total DCF
Initial
investment 15000 15000 15000
Net present
value -183.6 1737.2 1999.34
Answer to the Question no. 1 (b)
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Project A- It gives the amount invested in 3 years but the outcome is negative. Therefore project is not
good for investment
Project B- Its out some is positive far much better than project A hence it is a good investment project.
With higher and faster return
Project C- its is highest NPV project among the three but the period of pay back is higher than Project
Answer to the Question no. 1 (c)
NPV is the method of knowing the outcome of the investment ort a project. It is a feasibility calculation method of a
project
Project A shows a negative NPV at the end of the recovering year therefore it is not a competent
investment. Project B has NPV which is positive and is better than the Project A. Project C gives the
highest return 1999.34. But the year taken for recovery is more.
Hence project C is the most competent investment of the three.
Answer to the Question no. 1 (d)
Basic Payback period Net present value
Uses To calculate investment return by
investors and analysts
Used for calculating the
profitability of the project
Merit It requires less time, cost and
resources
Incorporates high investment and
values for calculation
Limitation Ignores the short term liquidity of
business entity
Dependency on quality of input
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