Financial Analysis and Investment Appraisal for XYZ PLC Projects

This report provides a comprehensive analysis of investment appraisal techniques applied to two potential projects (Software and Laundrette) for XYZ PLC. It delves into the Net Present Value (NPV) and payback period methods, offering detailed calculations and interpretations to evaluate the financial viability of each project. The NPV analysis reveals that both projects have positive values, but Project B presents a higher NPV (£65187) compared to Project A (£59308), making it the preferred investment option. The report also explores the payback period, which is approximately the same for both projects, highlighting the ease of calculation and understanding of this method. The report emphasizes the limitations of each technique, such as the potential for inaccurate cash flow estimates over longer periods and the disregard for cash inflows after the payback period. Furthermore, the report extends beyond financial factors, discussing crucial non-financial considerations like the availability of in-house resources, market trends, economic and environmental factors, and the skills of the staff. The report concludes that while NPV is the most preferred investment valuation technique, XYZ PLC should carefully consider both financial and non-financial aspects before making a final decision.

Businesses Decisions Making

TABLE OF CONTENTS
Evaluating the feasibility of the investment plan for XYZ plc..............................................3
Effect of financial and non-financial factors used in decision making..................................6
REFERENCES...........................................................................................................................7

The process of making decision is not an easy task. For taking the decision it is very
essential for the businesses to undertake proper evaluation of each and every aspect of the
business. This essay presents about the different types of investment appraisal techniques for
the purpose of evaluating the investment plan of the XYZ plc.
Evaluating the feasibility of the investment plan for XYZ plc
The XYZ plc is willing to invest in one of its two projects, which are, software project
and Laundrette project for which it will be using the following two techniques which are
stated below.
Net present value
The net present value is used for determining the present of the future cash inflows
based on which decisions is drawn whether to invest in the project or not. It takes into
consideration estimated income from the project (Nawaiseh and et.al, 2017). If the NPV is
positive it means that it is profitable to invest in the project and in the other case, it is not
feasible for the company to proceed with the project.
Project A
Computation of NPV
Year Cash inflows
PV factor
@ 11%
Discounted
cash
inflows
1 28000 0.901 25225.2
2 32000 0.812 25972
3 35000 0.731 25592
4 55000 0.659 36230
5 78000 0.593 46289
Total discounted cash
inflow 159308
Initial investment 100000
NPV (Total
discounted cash
inflows - initial
investment) 59308
Project B

Computation of NPV
Year
Cash
inflows
PV factor
@ 11%
Discounted
cash
inflows
1 31000 0.901 27927.9
2 38000 0.812 30842
3 43000 0.731 31441
4 64000 0.659 42159
5 89000 0.593 52817
Total discounted cash
inflow 185187
Initial investment 120000
NPV (Total discounted
cash inflows - initial
investment) 65187
Analysis and interpretation:
It can be evaluated from the above that the net present value (NPV) of both the project
is positive which means any project can be selected. But the company wants to invest in only
one project so based on the NPV derived, the company should invest in project B having
NPV of £65187 which is higher than NPV of project A which is £59308. This technique has
many advantages which are beneficial for the company (Namanda, 2017). It takes into
account the time value of money for calculating the present value of money inflow. Along
with that the discounting rate can also be adjusted in accordance with the prevailing market
risk and it considers cash flows till the end of the expected life of the project. This approach
is more logical, as it not based on the assumption that the cash inflow will be reinvested,
unlike internal rate of return.
Besides these benefits, there are some limitations as well. There are chances that
while evaluating the cash inflows for the longer time period, the cash flow estimates turned
out to be incorrect. Another disadvantage is that a minor change in the discounting rate will
cause final result and also the decision which was taken based on this and may cause losses to
the business.

Payback period
This is the amount of time the project will take to payback the amount invested in the
project initially (Schlegel, Frank and Britzelmaier, 2016). It is always acceptable to have
shorter duration which ensures that the amount can be recovered and reinvested in another
project.
Project A
Computation of Payback period
Year
Total cash
flow
Cumulative cash
flow
1 28000 28000
2 32000 60000
3 35000 95000
4 55000 150000
5 78000 228000
Payback
period
3 + 0.1
= 3.1 years
Project B
Computation of Payback period
Year
Total cash
flow
Cumulative cash
flow
1 31000 31000
2 38000 69000
3 43000 112000
4 64000 176000
5 89000 265000
Payback
period
3+ 8000/64000
= 3.12 years
Analysis and interpretation:

By analysing the above calculation, it can be said that the payback period of both the
project is approximately same. The payback period of project A is 3.1 years and that of
project B is 3.12 years. The XYZ plc can invest in any of the project as the payback is same
for both. The payback period helps the business organization in identifying the break even
point after which the business will start earning profit. This method is preferred because it is
easy to calculate and understand.
But it has many limitations. It ignores the time factor while evaluating the payback
period. Also, it does not consider the amount of cash inflow after the payback period and the
residual value of the asset at the end of the project.
After evaluating both the techniques, it can be said NPV is the most preferred
investment valuation technique, therefore, XYZ plc should invest in project B.
Effect of financial and non-financial factors used in decision making
The discussion done above covers all the relevant financial aspect of decision making
but there are certain non-financial aspects as well which XYZ plc should consider while
evaluating the investment proposals (Roy and Hota, 2017). The important non-financial
factors are described below.
 Whether the company is having enough funds to carry out the service in-house
efficiently without any problem.
 The changing marking conditions and the future trend with respect the service, I there
any chances of replacement of the service or the software that is being used.
 The economic and environmental factors attached to the plan should be reviewed so
that any changes that may come across can be effectively tackled.
 Does the staff of the organization is having relevant skills and knowledge to perform
the task or provide the service.
Thus, it can be concluded that decision making process is a very complicated process as it
requires take into consideration the various aspects including both financial and non-
financial. The net present value and payback period technique were used for evaluating the
project and according to which project B is more profitable than project A. certain important
non-financial factors were also considered with respect to the projects which the XYZ plc
needs to take into accounts.

REFERENCES
Books and Journals
Namanda, M., 2017. Capital Budgeting, Net Present Value and other Business Decision
Making Tools. GRIN Verlag.
Nawaiseh, M. E. and et.al, 2017, September. The Use of Capital Budgeting Techniques as a
Tool for Management Decisions: Evidence from Jordan. In International Conference
on Engineering, Project, and Product Management (pp. 301-309). Springer, Cham.
Roy, D. and Hota, D. C., 2017. Role of Non-Financial Factors in Industrial Investment
Decisions: Findings from Survey. Research Bulletin 43(3). pp.33-48.
Schlegel, D., Frank, F. and Britzelmaier, B., 2016. Investment decisions and capital
budgeting practices in German manufacturing companies. International Journal of
Business and Globalisation. 16(1). pp.66-78.