Comparative Analysis of Investment Appraisal Techniques for Business

This report provides a comprehensive analysis of investment appraisal techniques applied to two potential projects for XYZ plc. The report calculates the payback period and Net Present Value (NPV) for both projects, comparing their financial viability. It includes a detailed examination of financial factors such as profit and interest rates, alongside non-financial factors like political and technological influences. The analysis concludes with a recommendation for Project B, supported by the positive outcomes from both appraisal methods. The report also offers a discussion on the advantages and disadvantages of each technique, providing a well-rounded perspective on investment decision-making. The report is a valuable resource for students studying finance and business management, and is available on Desklib, a platform offering past papers and solved assignments.

BUSINESS DECISION
MAKING

Contents
INTRODUCTION.......................................................................................................................................4
MAIN BODY..............................................................................................................................................4
1. Calculation of payback period in project A & B:.................................................................................4
2. Calculation of NPV:............................................................................................................................5
CONCLUSION...........................................................................................................................................9
REFERENCES..........................................................................................................................................10

INTRODUCTION
Organizations need to make important purchasing decisions in order to create better
earnings. A deliberate overview is provided by different methods of evaluating financial
alternatives. There are a variety of techniques like net present value, internal return rates and
many more (Koporčić, Tolušić and Rešetar, 2017). This report is based on the XYZ plc in the
UK. They have multiple tasks, according to the given situation, and companies must choose one
of them. Two investment appraisal methods have been used for this reason. Also included is the
report on 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

The calculation is indicating that cost of this 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
The above done calculation is showing that cost of project B will be covered in 3.12 years.
In accordance of calculation of payback period of both project A and B this can be stated that
company should go with project A as it will take less amount of time to recover cost of project.
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
The above done calculation is showing that project A has net present value of 59181 pounds.
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 calculated value of project B is showing that project B has net present value of 65040
pounds.

In comparative manner, this can be stated that company should go with project B as it is seeming
better in both method of investment appraisal technique.
3. Analysis:
Payback period- A technique for an investment assessment can be defined where the expected
time can occur when project costs are recovered (Vidal, Vidal-García and Barros, 2016).
In the above XYZ plc factor, this investment appraisal methodology has been used to measure
the expected period to recover the sum invested. The benefits and disadvantages of this
technique are provided below:
Advantages:
• This is a simple way to approximate project performance with a significant gain in comparison
to other calculation methods.
• Another benefit of this approach is that the business can be dependent on a more consistent
process for evaluating efficiency of projects.
Disadvantages:
• Not all system performance requirements are in line with this method, because there are
actually no sufficient cash inflow gains. The performance of their systems is thus forbidden for
businesses.
• The key drawback of this program is that the cash flow benefit is not taken into consideration
before initial funding is obtained.
Net present value- This can be described by discriminating between discount and original
investment cash to assess project current value (Amuna, Al Shobaki and Naser, 2017).
According to this approach, it is necessary to note that while the existing project values are
higher, importance is taken into account. This method is used to evaluate programs efficiently
when comparing two projects A and B above. The advantages and disadvantages of NPV are
defined as follows:

Advantages:
• This approach has the greatest advantage of taking into account the coherence of the system
comparison. The current project values will be examined in order to do that.
• The time value of the cash element is often taken into account in this process. This is due to
higher price expansion, because budget’s value can differ.
Disadvantages:
• This method focuses on several hypotheses which make the results more complex and less
trustworthy.
• The main drawback to this approach is, besides that, that it is hard to estimate cost of capital.
Financial and non-financial factors:
Financial factor-
Profit- The distinction in revenue-cost is defined as profit. This is a crucial financial
consideration and the overall goal of all businesses. Each company's common goal is to generate
increased profit. If businesses fail, they will be unable to exist in a competitive environment.
Interest rate- This is a rate that financially benefits companies. It plays a critical role in
purchasing corporate properties. If the rate is higher, businesses can consider it difficult to accept
bank loans at higher expense.
Non-financial factor:
Political factor- It relates with the regulations, reform proposals and much more to the political
state of the country. It should be known by companies. Any shift in policy rules may impact
enterprises as they could affect company performance positively and negatively.

Technological factor- This factor is linked with new and advanced technology which needs to be
adopted by companies in their operations and processes. In a competitive environment,
businesses need to succeed. This is because consumers often favor modern and innovative
technological companies when opposed to other businesses who utilize conventional business
methods (Blanco-Mesa, Merigó and Gil-Lafuente, 2017). For example, if a company includes
new payment acceptance technology, a wide range of customers can be attracted easier.
CONCLUSION
In accordance with the above report, it can be inferred that after a thorough review, financial
corporations should opt for any investment alternative. Two projects were evaluated during
the analysis: A and B under the payback process and NPV strategies. On the basis of this
assessment, XYZ Limited will invest in Project B. This tends to happen because the results
for Project B compared to Project A are positive for both investment assessment techniques.

REFERENCES
Books and journal:
Koporčić, N., Tolušić, Z. and Rešetar, Z., 2017. The importance of corporate brands for decision
making in the business-to-business context. Ekonomski vjesnik/Econviews-Review of
Contemporary Business, Entrepreneurship and Economic Issues, 30(2), pp.429-440.
Vidal, M., Vidal-García, J. and Barros, R.H., 2016. Big Data and business decision making.
In Effective Big Data Management and Opportunities for Implementation (pp. 140-157).
IGI Global.
Amuna, Y.M.A., Al Shobaki, M.J. and Naser, S.S.A., 2017. The Role of Knowledge-Based
Computerized Management Information Systems in the Administrative Decision-Making
Process.
Blanco-Mesa, F., Merigó, J.M. and Gil-Lafuente, A.M., 2017. Fuzzy decision making: A
bibliometric-based review. Journal of Intelligent & Fuzzy Systems, 32(3), pp.2033-2050.