Comparative Analysis of Investment Projects: Payback & NPV for XYZ plc

This report analyzes two investment projects, A and B, for XYZ plc using the payback period and Net Present Value (NPV) methods. The report calculates the payback period for both projects, determining the time required to recover the initial investment. It also calculates the NPV for each project, considering discounted cash flows to assess their profitability. The analysis includes a comparison of the financial outcomes of both projects, with project B emerging as the more favorable investment based on both appraisal techniques. The report also discusses financial factors such as profit and interest rates, and non-financial factors like political and technological factors influencing investment decisions. The conclusion recommends that XYZ plc invest in project B based on the positive outcomes from the investment appraisal techniques.

BUSINESS DECISION
MAKING

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
1. Calculation of payback period in project A & B:.................................................................................3
2. Calculation of NPV:............................................................................................................................4
3. Analysis:..............................................................................................................................................6
CONCLUSION...........................................................................................................................................9
REFERENCES..........................................................................................................................................10

INTRODUCTION
In order to generate better incomes, organizations must make critical spending decisions.
Various methods of evaluating financial alternatives systematically provide an overview. There
are range of techniques such as net present value, internal rate of return technique and many
more (Wang and Byrd, 2017).
The report is based on XYZ plc that is located in United Kingdom. As per the given scenario,
they have two projects and company has to choose one out of them. For this purpose two
investment appraisal techniques have been applied. As well as report covers information about
financial and non financial factors.
MAIN BODY
1. Calculation of payback period in project A & B:
For project A:
Initial investment= 100000
Years Cash flow Cumulative cash flow
1 28000 28000
2 32000 60000
3 35000 95000
4 55000 150000
5 78000 228000
Payback period= Year before recovery + amount to be recover / next year cash flow
= 3 + 5000/55000
= 3+0.9 years

It is showing that cost of 100000 pounds of project A will be recovered in 3.09 years.
For project B:
Initial investment= 120000
Years 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+0.125
It is showing that cost of 120000 pounds of project b will be recovered in 3.12 years.
The above mentioned tables indicate that XYZ plc should consider project A. The reason of
doing so is that project A’s cost will be recovered in less time period as compared to project B.
2. Calculation of NPV:
Project A:

NPV= Discounted cash flow – initial investment
Year
Cash
flow
PV
factor
Discounted cash
flow
1 28000 0.9 25200
2 32000 0.811 25952
3 35000 0.731 25585
4 55000 0.658 36190
5 78000 0.593 46254
159181
NPV= 159181-100000
= 59181
Project B:
Year
Cash
flow
PV
factor
Discounted cash
flow
1 31000 0.9 27900
2 38000 0.811 30818
3 43000 0.731 31433
4 64000 0.658 42112
5 89000 0.593 52777
185040
NPV= 185040-120000
= 65040
The above mentioned tables indicate that XYZ plc should consider project B. The reason of
doing so is that project B has more net present value as compared to project A.

3. Analysis:
Payback period- It can be defined as a method of investment appraisal where the expected time is
projected that may occur in recovering cost of project (Schwartz, 2016). In the aspect of above
XYZ plc, they have applied this technique of investment appraisal so that estimated time can be
calculated to recover invested amount. This technique has below mentioned advantages and
disadvantages:
Advantages-
 It is a very easy way to assess project efficiency against certain forms of measurement
with a significant benefit.
 Another advantage of this approach is that the company can depend on a more coherent
process.
Disadvantages:
 Not all the criteria of system computing efficiency obey this protocol, because the gain of
cash inflows is inappropriate for the time being. This prohibits businesses from
estimating the success of their programs.
 This system's main drawback is that it does not consider cash flow value until receiving
initial funding.
Net present value- This can be defined as a way to analyze the present value of projects by
distinguishing between discount rate cash and initial investment (Čančer, 2016). It is important,
according to this method, to understand that priority is taken into account when the present value
of the projects is higher. With comparison of two projects A and B above, this approach is used
to evaluate programs efficiently. The advantages and drawbacks of the NPV approach are thus
described:
Pros-

 The biggest advantage of this approach is that the consistency of system comparison is
taken into account. This should be necessary to review the current project values.
 This method also takes into consideration the time value of the cash factor. That is
because the value of money can vary due to higher monetary inflation.
Cons-
 This method concentrates on many hypotheses that make the results more complex and
less reliable.
 Furthermore, the biggest downside to this approach is that under it estimation of cost of
capital is difficult.
Financial and non-financial factors:
Financial factor-
Profit- The earnings-cost difference is defined as profit. This is the overall goal of all companies
and is a major financial element. Each company's common goal is to generate increased profit. If
companies fail to so then they cannot exist in competitive environment.
Interest rate- This is a rate which helps finance companies financially. In acquisition of corporate
assets, it plays a key function. If the interest rate is higher, it may be tough for businesses to get
bank loans on account of higher expenditure.
Non-financial factor:
Political factor- It is related to the country's political state with regulation, reform proposals and
much more. Companies must recognize this aspect. Any shift in policy regulations may impact
businesses, because they may have positive and negative impact on companies’ performance.
Technological factor- For businesses that follow modern and emerging technologies, they can
deal with competitive environment (Groesser and Jovy, 2016). It is important for companies to
succeed in a competitive world. The reason for this is that customers only prefer new and

advanced technology companies as compared to those companies which apply traditional method
of business. For instance if a company include new technology for accepting payment then it will
be easier for them to attract a range of customers.

CONCLUSION
It can be concluded, in keeping with the above report, that financial corporations should
chose after detailed review. Throughout the analysis, two projects: A and B was evaluated
under the payback process and NPV strategies. XYZ Limited is expected to invest in project
B on the basis of this appraisal. It is so because both methods of investment appraisal
techniques are providing a positive outcome for project B as compared to project A.

REFERENCES
Books and journal:
Wang, Y. and Byrd, T.A., 2017. Business analytics-enabled decision-making effectiveness
through knowledge absorptive capacity in health care. Journal of Knowledge
Management.
Schwartz, M.S., 2016. Ethical decision-making theory: An integrated approach. Journal of
Business Ethics, 139(4), pp.755-776.
Čančer, V., 2016. The multicriteria method for environmentally oriented business decision-
making. Yugoslav journal of operations research, 14(1).
Groesser, S.N. and Jovy, N., 2016. Business model analysis using computational modeling: A
strategy tool for exploration and decision-making. Journal of Management
Control, 27(1), pp.61-88.