Calculation of Payback Period and Net Present Value for S&P Plc Projects

This report calculates the payback period and net present value (NPV) of two projects for S&P Plc to help make an informed decision. The report recommends investing in Project A due to its higher NPV.

INDIVIDUAL
ASSIGNMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Calculation of payback period.....................................................................................................3
Calculation of net present value (NPV).......................................................................................4
Analysis and discussions..............................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
This report specifically states information regarding the two projects in which the
company S&P plc is not able to decide to invest in. the report basically calculates the payback
period of both of the projects according to the information that is given and also the net present
value (NPV) of either of the projects.
MAIN BODY
Calculation of payback period
Payback period basically refers to the time within which the primary of the initial outlay
of any investment is specifically expected to be recovered by enhancing the cash inflows that are
generated through the investment that is made in the project in particular (Gorshkov. Murgul.
and Oliynyk., 2016).
Payback period calculation of synthetic leather bags- Project A
Year Annual cash flow Cumulative cash flow
0 (185, 000) (185, 000)
1 60, 000 (125, 000)
2 68, 000 (57, 000)
3 82, 000 25, 000
4 109, 000 134, 000
5 155, 000 289, 000
Payback period = 2 + 57, 000/ 82, 000
Payback period = 2 + 0.69 = 2.7 years
Payback period calculation of clothes bags- Project B
Year Annual cash flow Cumulative cash flow
0 (182, 000) (182, 000)
1 65, 000 (117, 000)
2 69, 000 (48, 000)
3 77, 000 29, 000

4 105, 000 134, 000
5 145, 000 279, 000
Payback period = 2 + 48, 000/ 77, 000
Payback period = 2 + 0.62 = 2.6 years
Calculation of net present value (NPV)
Net present value basically refers to the difference amount between the present cash
inflow value of the company and the present cash outflow value of the company over a particular
period (Hopkinson., 2017). It is used for the purpose of evaluating the profitability that a
projected investment is eligible to earn.
Net present value (NPV) of Project A
Year Annual cash inflow
(a)
Discounting @ 11 %
(b)
Present value of cash inflow
(a × b)
1 60, 000 0.90 54, 000
2 68, 000 0.81 55, 080
3 82, 000 0.73 59, 860
4 109, 000 0.65 70, 850
5 155, 000 0.59 91, 450
331, 240
Net present value (NPV) = present value of cash inflow – present value cash outflow.
Net present value (NPV) = 331, 240 – 185, 000
Net present value (NPV) = 146, 240
Net present value (NPV) of Project B
Year Annual cash inflow
(a)
Discounting @ 11 %
(b)
Present value of cash inflow
(a × b)

1 65, 000 0.90 58, 500
2 69, 000 0.81 55, 890
3 77, 000 0.73 56, 210
4 105, 000 0.65 68, 250
5 145, 000 0.59 85, 550
324, 400
Net present value (NPV) = present value of cash inflow – present value cash outflow.
Net present value (NPV) = 324, 400 – 182, 000
Net present value (NPV) = 142, 400
Analysis and discussions
As per the calculations that are particularly made in the above paragraphs through
calculating the payback period as well as the net present value of the project A and also the
project B in particular. The company basically it should opt for project A, instead of opting for
project B in particular (Hopkinson., 2017). The major reason for doing so is that the payback
period of the project B is 2.6 years which is less than that of the payback period of project A
which is 2.7 years. Which would make project B sound good. But when it comes to the net
present value which is a more important factor for the purpose of decision- making in particular
the net present value in project A is more than that of the net present value in project B in
particular. Hence, the better option which the company should particularly opt for is project A as
it has a net present value of £146, 240 in particular (Putra., 2019). The net present value supports
the company's decisions in a long run, therefore, the major decisions should be made in
accordance of that. Hence, according to the calculations that are done above in the report, the
company should particularly invest in the synthetic leather bags rather than the clothes bag to
enhance the levels of profitability in the long run and in the present situations as well.
There are many major factors that help in the process of decision- making in such
situations and other key decisions made in the company in particular. The major two categories
or factors through which these decisions can be taken are the financial factors as well as the non-
financial factors within a company that affect or impact the working of the company in particular
(Van der Zwan. and et.al., 2016). Financial factors basically consist of liquidity, firm size, firm

value, fixed asset intensity and leverage as well. The non- financial factors of the company that
impact the working of the company are majorly factors or aspects such as, government
ownership, independent board of the commissioners and the managerial ownership as well.
Through better quality financial factors and strong as well supports the company in particular to
make informed as well as better choices in regard to decisions like these and also help the people
to weigh the options that are particularly or specifically available in particular. There are also
non- financial factors that particularly affect or impact the decision-making procedure in a
company. These factors also play a very relevant as well as crucial role. Financial factors such as
the evaluations of the aspects such as the cash inflows and the overall cash flows happening in a
company in either of the projects that the company has a choice to invest in. hence, analysis and
evaluation of all the factors is necessary for the process of decision-making.
CONCLUSION
This report in particular helps the company to evaluate and analyse the cash flows of both
of the projects. In accordance to the data that is provided in particular and then further
recommend the most suitable and appropriate decision for the company. As per the information
from the calculation of payback period and NPV as well.

REFERENCES
Books and Journals
Gorshkov, A., Murgul, V. and Oliynyk, O., 2016. Forecasted payback period in the case of
energy-efficient activities. In MATEC Web of Conferences (Vol. 53, p. 01045). EDP
Sciences.
Hopkinson, M., 2017. Net present value and risk modelling for projects. Routledge.
Hopkinson, M., 2017. The case for project net present value (NPV) and NPV risk models. In The
Evolution of Project Management Practice (pp. 61-68). Routledge.
Putra, Y.M., 2019. Analysis of factors affecting the interests of SMEs using accounting
applications. Journal of Economics and Business. 2(3).
Van der Zwan, P. and et.al., 2016. Factors influencing the entrepreneurial engagement of
opportunity and necessity entrepreneurs. Eurasian Business Review. 6(3). pp.273-295.