Financial Decision Making: Project Appraisal Using NPV & Payback

This report provides a comprehensive analysis of project appraisal techniques, specifically focusing on discounting and non-discounting methods such as Net Present Value (NPV) and payback period. It evaluates two projects, A and B, using these methods to determine the most effective investment ...Read More

Business decision
making

INTRODUCTION
The process of decision making for business is a step wise procedure that enables an
expert to solve a problem by weighing information, considering alternatives, and selecting a
course of action from there. At the end of the process, this defined process also render a chance
to check if the decision was correct. This report analyses the appraisal of two projects by
utilising discounting and non discounting methods such as net present value method and payback
period. Further the report includes selecting the best technique between the two projects A and
B. The report in the end illustrates the financial or non financial factors and their impacts on
investment decision.
TASK
Calculation of payback period of two projects (payback period technique)
The payback period is described as the total number of years in which the initial cash inflow is
recovered. The period during which a machine, plant, or other investment has generated
sufficient required net income to cover its costs of investment. It is computed by dividing the
sum of money for an investment by the yearly cash flow. Payback period is easy to calculate as
there is no difficulty and helps in evaluating the reliability and accuracy of the project (Baker and
Pandey, 2020).
To compute payback period following formula should be used :
Payback period = Initial investment / yearly cash flows
(Averaging method)
Payback period = last year cash flow + (cash flows at the end of year / cash flow after that year )
Payback period for project A

Payback period for project B
Computation of NPV of Projects A and B (npv technique)
NPV is the value discounted to date, of all future cash flows over the life of an
investment. This method is a form of valuation in nature and is widely used in finance and
accounting to assess the value of anything related to business, investing security, new business,
capital projects, cost reduction programs, and cash flow used (Agbloyor and Fiador, 2021).

Project A Net present value
Project B Net present value

Analysis and evaluation of the techniques in project A and B
S&P Plc is a bag manufacturing organization whose business includes whether it supplies
leather-based luggage or fabric luggage. For this selection, her strategy manager wants to
evaluate using the net present value (NPV) and payback period (PBP) of each task. These
techniques can determine the long-term price of sustainability and risk. NPV is an economic
method that uses the time value of money, which is considered a fashionable approach to
comparing companies. PBP methodology, on the other hand, is used to find companies to
acquire. It identifies a period of years and months that indicates the approximate payback period
for loans made (Holmgren, 2018). The NPV approach eliminates the concept of objects when
balancing the desire for a task, whereas the repayment method focuses on the time required for
funds to be repaid. In addition, the PBP method does not consider probabilities, so it specializes
in the optimal funding period. By analysing its benefits, the PBP methodology is simple, making
it easier to determine the components of small, recurring funding, taxes and depreciation rates.
Conversely, NPV is a particularly relevant and reliable tool as it no longer uses coin flow as a
return and effect in determining funding options. For S&P Plc to make very good economic
decisions, the much more accurate and environmentally friendly NPV method should be used

instead of the payback method. By using NPV, you can easily select companies with high NPV.
Venture A is £147,320 and Venture B is £143,450. Therefore, S&P Plc can dare to adopt A for
synthetic leather luggage (Miciuła and Stępień, 2020).
Financial and non financial factors on investment decisions
Investment valuation is not just an economic factor. There are non-financial factors that play an
important role in choosing important funds. In fact, most of these non-financial elements act as
the backbone, allowing them to both raise and deny funding.
Below are some of the factors that influence investment decisions.
Interest risk: Investors are hassled by the interest rate risk, which is seen as fluctuating interest
value over the period of horizon of investment. The uncertainties around the capital investor is
probable to access at the investment horizon end are mostly to blame. If the interest rate changes,
the debt instrument cost will change.
Inflation risk: As a consequence of rising inflation, the risk of losing purchasing power is the
good manner to explain risks caused by inflation. Investors are generally exposed to the impacts
of this risk when the return rate falls short of rising inflation rate.
Income tax: It is part of government revenue primary sources. The tax is imposed y government
on some portion of incomes of individual. The income tax obtained is generally directed towards
many government schemes like education, military, health, etc.
Climate problem. More recently, government agencies have recognized their commitment to
the environment by not investing in assets that expose the environment as unresponsive and
irresponsible. employee motivation. Before further developing investment techniques, the impact
of investments on employee motivation should be considered.
Investing is a conscious choice and some factors that explain that choice are: The motivation
behind each investment determines short-term or long-term capital allocation. This is the starting
line of selection technology. Business owners prioritize profit and seek to turn limited funds into
valuable assets and shelters. Providing regular returns and funding is essential. Financial
management is primarily based on techniques related to financial factors. Traders choose from
investments that generate monthly, quarterly, semi-annual, or annual returns (Muruganantham
and Gandhi, 2020).

CONCLUSION
From the above report, it is concluded how the capital techniques are used to measure the
efficiency and practicability of the two projects which are taken into consideration by S&P plc.
Strategic manager. The report further includes the analysis for best of the two techniques among
the net present value and payback period for both projects A & B. This report has further
illustrated the financial and non financial factors and its consequences on investment judgement
making.

REFERENCES
Books and Journals
Agbloyor, E.K. and Fiador, V., 2021. Investment appraisal: Akwaaba university hostel
projectInvestment appraisal: Akwaaba university hostel project. Emerald Emerging
Markets Case Studies.
Baker, H.K. and Pandey, N., 2020. A bibliometric analysis of managerial finance: a
retrospective. Managerial Finance.
Holmgren, J., 2018. Using Cost–Benefit Analysis to Evaluate City Logistics Initiatives: An
Application to Freight Consolidation in Small‐and Mid‐Sized Urban Areas. City
Logistics 2: Modeling and Planning Initiatives. pp.271-290.
Miciuła, I. and Stępień, P., 2020. Modern methods of Business Valuation—case study and new
concepts. Sustainability, 12(7). p.2699.
Muruganantham, A. and Gandhi, G.M., 2020. Framework for social media analytics based on
multi-criteria decision making (MCDM) model. Multimedia Tools and
Applications, 79(5). pp.3913-3927.