Table of Contents

Introduction.........................................................................................................................3

Calculation & Discussion..................................................................................................3

Calculation...........................................................................................................................................3
Project A: Stainless Steel Pots....................................................................................................3
Project B: Energy-Saving Clay Pots..........................................................................................4
Discussion............................................................................................................................................4
Recommendations for P&I PLC........................................................................................5

Payback Period VS Net Present Value............................................................................5

Financial & Non-Financial Factors that Affect Decision Making.................................5

Financial Factors................................................................................................................................5
Non-Financial Factors.......................................................................................................................6
Conclusion...........................................................................................................................6

References...........................................................................................................................6
Introduction
The sheer significance of using the various investment appraisal techniques is too great
because there lie many variable factors which affect any investment project undertaken.
For this, a financial manager needs to be quite prudent in choosing one project over the
other as the business organisation needs to be able to make healthy profits with which it
can sustain its operations. This report will be made on P&I plc to compare between the
two available projects under the given circumstances. For this, payback period and net
present value methods will be used and compared for their differing characteristics.
Moreover, the company will be suggested the best possible alternative according to its
needs. Again, the financial and non-financial factors that might affect a decision made
will be described, as well, accompanied by a conclusive remark on the report.

Calculation & Discussion

Calculation
Project A: Stainless Steel Pots
Payback Period

Year Net Cash Flows (£) Accumulated Net Cash Flows (£)
1 35,000 35,000
2 45,000 80,000
3 68,000 148,000
4 79,000 227,000
5 105,000 332,000

NCO−C 90,000−8 0 ,000

PBP = A + =2+ = 2.15 Years
D 68 ,000

Net Present Value

CF1 = £35,000
CF2= £45,000
CF3 = £68,000
CF4 = £79,000
CF5 = £105,000
NCO = £90,000
k = 14%
 CF 1 CF 2 CF 3 CF 4 CF 5
NPV = [ + + + + ] – NCO
(1+k )1 (1+k )2 (1+k )3 (1+k )4 (1+k )5
35,000 45,000 68,000 79,000 105,000
=[ + + + + ] – 90,000
(1+.14)1 (1+.14)2 (1+.14)3 (1+.14)4 (1+.14)5

= £122,534
Project B: Energy-Saving Clay Pots
Payback Period

Year Net Cash Flows (£) Accumulated Net Cash Flows (£)
1 28,000 28,000
2 44,000 72,000
3 72,000 144,000
4 98,000 242,000
5 110,000 352,000

NCO−C 95 , 000−72 , 000

PBP = A + =2+ = 2.32 Years
D 72 , 000

Net Present Value

CF1 = £28,000
CF2= £44,000
CF3 = £72,000
CF4 = £98,000
CF5 = £110,000
NCO = £95,000
k = 14%
CF 1 CF 2 CF 3 CF 4 CF 5
NPV = [ + + + + ] – NCO
(1+k )1 (1+k )2 (1+k )3 (1+k )4 (1+k )5
28,000 44,000 72,000 98,000 110,000
=[ + + + + ] – 95,000
(1+.14)1 (1+.14)2 (1+.14)3 (1+.14)4 (1+.14)5

= £127,170

Discussion
From the calculation, the obtained results for Project A are 2.15 years for the payback
period and £122,534 for the net present value. On the other hand, the obtained results
for Project B are 2.32 years for the payback period and £127,170 for the net present
value.
Here, the first project has an advantage in terms of payback period. However, the
second project has an advantage in terms of net present value.

Recommendations for P&I PLC

Now, as for the recommendations for P&I plc, if the company is to prioritise its time of
recouping the initial investment, it should opt for Project A. However, if it is to prioritise
its profitability more from the current investment, it should opt for Project B.
Overall, it should rather opt for Project B because of the higher profitability as the time
difference in recouping Project A and Project B’s payback period is quite low.

Payback Period VS Net Present Value

Payback Period: It is a method of finding out how much time a project needs to pay its
initial investment back.
Net Present Value: It is a method of finding out how much profits a project is capable of
generating in its entirety of lifetime.
The differences between the two investment appraisal techniques are illustrated below.

 Payback period is a traditional approach towards appraising investment projects

which doesn’t discount the cash flows to be generated (Lefley, 1996) whereas
net present value method is a discounted method which discounts all the cash
flows to be generated (Bora, 2015).
 As for the payback period method, it doesn’t consider all the cash flows that a
project is to generate. It only keeps in consideration of the cash flows that are
generated till the payback period whereas the net present value method
considers all the cash flows that a project is expected to generate (Karajović,
2021).
 Most underpinning aspect that differentiates the two appraisal method is the
consideration of time value of money concept. Payback period doesn’t consider it
(Awomewe and Ogundele, 2008) but, net present value does so. As a result, the
end result derived from net present value is more representative of the reality
than payback period.
Financial & Non-Financial Factors that Affect Decision
Making
Financial Factors
The major financial factors to affect a decision made are firm’s size, value, assets’
intensity, financial markets, government policies etc. These all have their own
implications on the decision made.
Firstly, if a firm is small in size but bears high value, its decisions are going to be more
effective due to high efficiency arising from less complications due to its size (Pervan
and Višić, 2012). Moreover, financial markets being in a stable position will always help
a decision to generate positive results whereas negative results are to be derived if
financial markets are unstable. Then comes government policies which need to be
favourable for getting the most out of a decision made.

Non-Financial Factors
The major non-financial factors to consider while making a decision are the interests of
both internal and external stakeholders alongside the different auditing bodies as well
as the industry practices (Esch et al., 2019). These all culminate such an effect on the
decision made that if the effect is not of positivity, the end result will never meet
expectations in a positive way, either. But, the antithesis is to take if the effect is to be
positive on the decision taken.

Conclusion
While making a decision, there remains a lot of financial as well as non-financial factors
which affect the feasibility of the decision undertaken. That’s why, in order to extract the
best possible results out of a decision, it must be accompanied by proper research and
analysis of the factors. This report has found out that, for P&I plc, project B is the most
suitable as net present value is the superior method when compared to payback period.
Moreover, this report has explored the differences between payback period and net
present value. Lastly, the report has also incorporated the differing financial and non-
financial factors that can affect decision making.

References
1. Awomewe, A.F. and Ogundele, O.O., 2008. The importance of the Payback
method in Capital budgeting decision.
2. Bora, B., 2015. Comparison between net present value and internal rate of
return. International journal of research in finance and marketing, 5(12), pp.61-
71.
3. Esch, M., Schulze, M. and Wald, A., 2019. The dynamics of financial information
and non-financial environmental, social and governance information in the
 strategic decision-making process. Journal of Strategy and Management, 12(3),
pp.314-329.
4. Karajović, M., 2021. Conflict between Net Present Value and Internal Rate of
Return Methods. International Journal of Economics & Law, 11(33), pp.187-195.
5. Lefley, F., 1996. The payback method of investment appraisal: A review and
synthesis. International Journal of Production Economics, 44(3), pp.207-224.
6. Pervan, M. and Višić, J., 2012. Influence of firm size on its business
success. Croatian Operational Research Review, 3(1), pp.213-223.