Calculation of NPV and Payback Period

Harvard

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK ..............................................................................................................................................3
Calculation of NPV and Payback Period....................................................................................3
Payback Period.............................................................................................................................4
Net Present Value (NPV).............................................................................................................5
Financial factors...........................................................................................................................5
Non- financial factors..................................................................................................................6
CONCLUSION................................................................................................................................6
REFERENCES ...............................................................................................................................7

INTRODUCTION
Decision making process in an organization is very essential because it influence entire
process of the business. Investment related decisions are very important, so management will
take with the help of analysing their proposals (Fan and Xia, 2018). Investment appraisal
technique is the tool which help managers to identify which project is beneficial as well as
attractive for the business. Strategic managers of ABC plc wants to invest in new business and
they find two suitable project. Managers will make final decisions after evaluation results of
payback period or NPV. In addition, identify financial or non financial factors which affect those
project.
MAIN BODY
TASK
Calculation of NPV and Payback Period
Year Project A PV @ 12% DCF Project B PV @ 12% DCF
0 -£ 40,000 1 -£ 40,000 -£ 60000 1 -£ 60000
1 £ 8,000 0.893 £ 7,143 £ 10,000 0.893 £ 8,929
2 £ 12,000 0.797 £ 9,566 £ 20,000 0.797 £ 15,944
3 £ 16,000 0.712 £ 11,388 £ 25,000 0.712 £ 17,795
4 £ 20,000 0.636 £ 12,710 £ 30,000 0.636 £ 19,066
5 £ 30,000 0.567 £ 17,023 £ 40,000 0.567 £ 22,697
NPV £ 17,831 NPV £ 24,430
According to above calculation, it has been observed that NPV of project A is £ 17,831
and project B will provide £ 24,430. Strategic manager of ABC Plc select the high NPV value
which means they select project B to invest for new business.
Year Project A (£) Cumulative cash flow (£) Project B (£) Cumulative cash flow (£)
0 40000 0 60000 0