AK LTD 1

AK LIMITED FINANCIAL AND NON-FINANCIAL ANALYSIS

by (Name)

Course

Student ID Number
 AK LTD 2

To make an investment decision, it is crucial to thoroughly analyze the key financial and

non-financial factors to ensure the best outcome for the business. AK Ltd is considering two

projects - Project A, which involves the production of solar-powered lights, and Project B, which

focuses on LED lights. To aid the decision-making process, an examination of the payback

period and net present value (NPV) of these two projects, as well as an analysis of relevant

financial and non-financial factors, will be valuable.

Payback Period

The payback period is the amount of time it takes to recover the initial investment. It is

the length of time a business takes to reach a break-even point (Lefley, 2020, pp.207-224).

For Project A (solar-powered lights);

The payback period can be calculated as follows;

(£120,000 / £32,000) = 3.75 years (three years and 9 months)

Where Cost of Investment= £120,000

Average annual Cash Flow =£32,000

For Project B (LED lights),

(£113,000 / £37,000) = 3.05 years

Where Cost of Investment= £113,000

Average annual Cash Flow = £37,000

From the above calculations, Project B has a shorter payback period, from a liquidity

perspective it is the more attractive option.

 AK LTD 3

Net Present Value (NPV)

The NPV calculation considers the time value of money and provides a more

comprehensive evaluation of the projects' profitability (Bora, 2015, pp.61-71).

Rt
NPV =∑ ( 1+ i ) t −C 0 ¿
¿

Where:

Rt =the net cash flow at time t,

i =the discount rate,

t =the time,

C0 = the initial investment.

Given the 16% discount rate, the discounted cash flows;

Year 1: 17,000 / (1 + 0.16) ^1 = £14,655

Year 2: 29,000 / (1 + 0.16) ^2 = £21,551

Year 3: 32,000 / (1 + 0.16) ^3 = £20,501

Year 4: 53,000 / (1 + 0.16) ^4 = £29,271

Year 5: 92,000 / (1 + 0.16) ^5 = £43,802

Sum of Discounted Cash Flows = 14,655 + 21,551+ 20,501+29,271+ 43,802

= £129,780

NPV = (129,780 - 120,000) = 9,780

 AK LTD 4

The NPV for Project A is £9,780.

Year 1: 19,000 / (1 + 0.16) ^1 = £16,379

Year 2: 27,000 / (1 + 0.16) ^2 = £20,065

Year 3: 42,000 / (1 + 0.16) ^3 = £26,907

Year 4: 46,000 / (1 + 0.16) ^4 = £25,405

Year 5: 69,000 / (1 + 0.16) ^5 = £32,851

Sum of Discounted Cash Flows = 16,379 + 20,065+ 26,907+ 25,405+ 32,851= 121,607

NPV = 121607 - 113,000 = 8607

The NPV for Project B is £8,607.

Project A has a higher NPV suggesting it is the more profitable investment option.

Financial Factors

Project A requires an initial investment of £120,000, compared to £113,000 for Project B.

The £7000 may be a significant difference in AK Limited’s financial resources and capital

allocation. Additionally, the net cash flows for Project B are consistently higher than those for

Project A, indicating a potentially more stable and predictable revenue stream (Cook, 2021, pp.

133-205). The higher net cash flows for Project B could offer AK Limited more financial

flexibility and liquidity.

The payback period of Project B has a shorter payback period of 3.05 years compared to

Project A’s 3.75 years. The shorter payback period of Project B means that AK Limited may
 AK LTD 5

recover its initial investment faster (Lefley, 1996, pp.207-224), which may be the preferred

option for the management.

Project A has a higher NPV of £9,780 compared to Project B’s NPV of £8,607. In the

long run, Project A may offer more profitable returns compared to Project B due to its higher

NPV (Bora, 2015, pp.61-71).

Non-Financial Factors

While the financial analysis is crucial, non-financial factors can also play a significant

role in the decision-making process. The company should consider how each project aligns with

the overall business strategy, mission, vision, and long-term objectives the company wants to

adopt. The management has to make a decision considering the project that better supports the

company’s strategic direction (Patanakul and Shenhar, 2022). For instance, AK Ltd.’s strategic

objectives and long-term business goals may favor one project over the other. Either, the

company's existing expertise and market positioning in LED or solar-powered lights could

influence the company’s ability to successfully execute and implement each project. The

management should leverage existing competencies to gain an advantage.

Changes in customer preference, technological advancements, or regulatory

environments may have an impact on the viability and sustainability of each project. To

anticipate potential challenges and opportunities, AK Ltd can analyze industry trends and market

conditions (Slater and Olson, 2022). AK Ltd must also take into account how the choice of

product affects the ESG elements, which will in turn affect the existing supplier and consumer

relationship. Depending on the market position of the company, launching a new product might
 AK LTD 6

have an impact on how the customers view you. The brand’s ethos, both the financial and

environmental goals must be reflected in the choice of the product the company chooses.

The product chosen must aim not only to adhere to the legal requirements but also to the

industry standards to maintain the position of AK Ltd as a market leader. The new product line

must either preserve the market position of AK Ltd or raise the existing standards (Covin, Slevin,

and Schultz, 2021). Investing in different product lines (LED and solar-powered lights) may aid

AK Ltd in diversifying its portfolio and mitigating overall business risks. The company should

consider how each product contributes to its risk management strategy.

Based on the analysis of the payback period and NPV, the decision-making process for

AK Ltd is not straightforward. Project B (LED lights) has a shorter payback period, indicating a

faster recovery of the initial investment, while Project A (solar-powered lights) has a higher

NPV, suggesting greater long-term profitability. The company should carefully evaluate both the

quantitative and qualitative factors to determine which project best aligns with its overall

business strategy and long-term objectives. By considering the financial and non-financial

implications of each project, AK Ltd can make an informed decision that maximizes the

potential for success and growth.

 AK LTD 7

Reference List
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.
Cook, M., 2021. Project cash flow. In Developments in Petroleum Science (Vol. 71, pp. 133-
205). Elsevier.
Covin, J.G., Slevin, D.P. and Schultz, R.L., 2021. Implementing strategic missions: Effective
strategic, structural and tactical choices. Journal of management Studies, 31(4), pp.481-
506.
Lefley, F., 2020. The payback method of investment appraisal: A review and synthesis.
International Journal of Production Economics, 44(3), pp.207-224.
Patanakul, P. and Shenhar, A.J., 2022. What project strategy really is: The fundamental building
block in strategic project management. Project Management Journal, 43(1), pp.4-20.
Slater, S.F. and Olson, E.M., 2022. A fresh look at industry and market analysis. Business
Horizons, 45(1), pp.15-22.