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Table of Contents
Table of Contents...................................................................................................1
Requirement: 1 .....................................................................................................2
Calculate the Payback: Proposal: One to Five....................................................2
Calculation of payback-proposal 1.........................................................................2
Proposal -2..........................................................................................................3
Proposal -3..........................................................................................................3
Proposal -4..........................................................................................................4
Proposal -5..........................................................................................................4
Comments:......................................................................................................... 5
If independent project, all positive NPV is selected...............................................5
If mutually exclusive, the highest NPV is the best.................................................5
Calculate the IRR of proposal one to five:...........................................................6
Comments:............................................................................................................ 8
For individual project IRR> (cost of capital)...........................................................8
For mutually exclusive the highest IRR is acceptable............................................8
Requirement: 2....................................................................................................10
Calculate the Profitability Index (PI):................................................................10
Requirement: 3....................................................................................................12
Discuss Other Factors:......................................................................................12
Requirement: 4 ..................................................................................................13
IRR is more effective then NPV.........................................................................13
Superiority of net present value: ........................................................................14

1
Requirement: 1

Calculate the Payback: Proposal: One to Five

Payback Period:
Given
P-1: initial investment £ 100000
Cash inflow £ 73000(no benefit are expected in the first two year)
P-2: initial investment £180000
Cash inflow £66000
p-3: initial investment £200000
cash inflow £145000 (no benefit are expected in the last three year)
P-4: initial investment £40000
Cash inflow £16000
P-5: initial investment £70000
Cash inflow £70000
 Number of years =5

Calculation of payback-proposal 1
year Cash inflow Cumulative cash
flow

0 (100000) (100000)

1 0 (100000)

2 0 (100000)

3 73000 (27000)

4 73000 46000

5 73000 119000

 Payback period: = 3.36 years.

2
Proposal -2
 Payback period:

= 2.72 years.

Proposal -3
year Cash inflow Cumulative
cash flow

0 (200000) (200000)  Payback period:

1 145000 (55000)

2 145000 90000 =1.37

years

3
Proposal -4
 Payback period:

=2.5 years

Proposal -5
Payback period:

=1 year.

Comments: here the lowest payback period is the best then other.P-5 is acceptable.

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Calculation of NPV of one to five

Discount factor @ 10%

Proposal -1 (73000× 2.055)- 100000

=150015-100000

=£50015

Proposal -2:( 66000×3.79) – initial investment

=250140-180000

=£70140

Proposal -3:(145000×1.735) –initial investment

=251575-200000

=£51575

Proposal -4: (16000×3.79) -initial investment

=60640-40000

=£20640

Proposal -5:( 70000× 3.79)- initial investment

=265300- 70000

=£ 195300

Comments:

If independent project, all positive NPV is selected.

If mutually exclusive, the highest NPV is the best.

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Calculate the IRR of proposal one to five:

P-1: at 20% or .20

 (73000× 1.463)-initial investment

= 106799 -100000

=£6799

At 25% or .25

 (73000×1.248)-initial investment

=91104-100000

=£-8896

Now

 20%+

=22.17%

P-2: at 20% or .20

 (66000× 2.988)-initial investment

=197208-180000

=£17208

At 25% or .25

 (66000×2.688)-initial investment

=177448-180000

=£-2552

Now

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P-3: At 25% or .25

 (145000×1.44)-initial investment

 208800-200000

 £8800

At 30%

 (145000×1.36)-initial investment

=£-2800

Now

P-4: at 25%

 (16000×2.68)-initial investment

 43008-40000

At 30%

 (16000×2.433)-initial investment

 -40000

= 1072

Now

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 

P-5: At 95% or .95

 (70000×1.012)-initial investment

=£840

At 100% or 1

 (70000×0.968)-initial investment

 -70000

Now

=96.36%

Comments:

For individual project IRR> (cost of capital)

For mutually exclusive the highest IRR is acceptable.

Summary of the payback, net present value and internal rate of return

Proposal-1 Proposal-2 Proposal-3 Proposal-4 Proposal -5

payback 3.36 years 2.72 years 1.37 years 2.5 years 1 years
Net present £50015 £70140 £51575 £20640 £195300

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value

Internal 22.17% 24.35% 28.79% 28.7% 96.36%

rate of
return

9
Requirement: 2

Calculate the Profitability Index (PI):

To rank the proposal we have to calculate the profitability index (PI)

 PI=

We follow:

 P-1:

=0.50

 P-2:

=0.39

 P-3:

=0.25

 P-4:

=0.51

 P-5:

= 2.79

 As we have limited capital budget £300000 by considering this factor we have to

compare PI and Cost to select the project.

Through PI we can rank all the proposal in following ways:

Proposal Profitability index Initial cost

5 2.79 £70000
4 0.51 £40000
1 0.50 £100000
2 0.39 £180000
3 0.25 £200000

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AVAIABLE FUND PROJECT NPV

£ 300000 p-5 £195300

£ (70000)

£230000 p-4 £20640

£(40000)

£190000 p-1 £50015

£(100000)

£90000 £90000/£180000=50 £70140

£(90000) %

P-2

nil - -

So with the limited capital we can select; P-5, P-4, P-1, P-

2(50%).

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 Requirement: 3

Discuss Other Factors:

Now we have to discuss about the other factor which may consider before coming the final
conclusion. Qualitative factor is one of the factors that inform a business decision but
cannot be explain numerically. The manager can get any kinds of help before taking final
decision. Qualitative factor will have an impact on the project, but which are sometimes hard
to assess accurately in monitory terms.

OTHE
R
FACT
OR

ENVIRONMENT EMPLOYE POLITCAL METERIAL AND

AL CUSTOMER
ES TECHNOLOGY

Impact on employees moral, schedule and internal elements.

 The environmental effect on the project

 Positive and negative political impact on project

 Relationship and commitment with supplier

 Consumption of raw material use

 Relationship with labour union

 Legal difficulties to the use of patents, copyright, trade or brand

 Firm image impact on the project

 Future and present customer effect

 Technological impact on project is the main point to impact of project.

12
 above the list are effect the value of the firm. The firm can do this issue
during project analysis .By means that conversation and discussion with
the various parties. This process is not preferable. Their outcome is often
irregular.

Requirement: 4

IRR is more effective then NPV

NPV and IRR is a usually used decisive factor for project by project assortment decision. IRR
is favourite then the costs of capital are recommended for funding of all project.

 IRR is more effective then NPV when we use as a ranking matrix. It does not depend
on the size or scale of the project. At best IRR is only an estimated logic for
prioritizing project .It creates expected and important basis in project ranking and can
be recognize project that creates maximum value.

 It compares project based on the well-known concept of rate of return (A matrix

analogue to interest rate exciting on capital market)

 IRR is one of the easiest project assessment method to recognize.

 Given two investment alternatives of evaluate cost, the investment with the higher
IRR is acceptable.

 IRR and NPV recommended the same projects when used as a selection rules for
project by project decision making.

 The IRR has advantages over NPV and other methods that enumerate project values
in pound in that in downplays dependence on what may show to overly exact pound
values.

 IRR reject the non financial elements of project value, like other financial matrices.

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Superiority of net present value:
• Net present value considered to increase the firm value.

• It is also considered cash flow.

• Npv offered correct investment value

• Npv can accommodate change in the discount rate

• Npv has sensible re- investment assumption

• Npv can accommodate non conventional cash flow

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References:

1.Arnold, G.(2005), Handbook of Corporate Finance , Prentice Hall, Britain.

2.Dyson, J. (2007), Accounting for Non Accounts students, (7th edn.), Pearson
Education Ltd, London.
3. At rill, P and McLane, E (2002) Management Accounting for Non-Specialists (3rth
Edition) Prentice hall Financial Times.

4. Charles, T et la (2009) Cost Accounting (13th Edition) by Pearson Education LTD,

London.

5. Financial management (f9) , ACCA, Kaplan publication (2008)

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