Development and Execution of Effective Marketing Strategies

1. COMPUTATION OF PAYBACK PERIOD

2. CALCULATION OF NET PRESENT VALUE (NPV)

3. ANALYSIS

Payback period

The payback period is referred to as the length of time that in turn is required for the investment in order to recover the initial investment in terms of savings or profits (Gorshkov and et.al., 2018). Payback periods are considered to be one of the most useful tools in capital budgeting and financial decision-making. The payback period is measured by the sum of money invested divided by the annual amount of cash flows. The payback period is considered to be very useful because it is considered to be useful for the initial screening process. It is considered to be the most reliable technique because it helps in determining the length of time required in order to recover the initial cash outlay or investment within the project.

Benefits of the payback period

The key advantage of the payback period is that it is one of the quickest and simplest appraisal techniques. It helps in determining the time required for investors in order to hit the break-even point. A longer payback period tends to indicate that the capital of the company is tied up. An early payback period helps in enhancing the liquidity of the company (Bell, 2017).

Also Read:- Estimation Before Launching Event

Drawback of the payback period

One of the major drawbacks associated with the payback period is that it tends to ignore the time value of money i.e., TVM. Another major disadvantage of the payback period is that cash flows which have been received over the early years of the project tend to get higher weightage than the cash flows which has been received over the later years (What Is Payback Period? (With Advantages & Disadvantages), 2020). This capital budgeting tool tends to put more emphasis on liquidity instead of profitability.

Project 1 i.e., the technological project is considered to be the better project when compared with Project B because Project A tends to take 2 years 2 months to recover the money invested in the project. On the other hand, Project B takes around 2 years and 3 months to recover the initial money invested in the project.

Net Present Value

Net Present Value (NPV) is referred to as the difference between the present value of the cash inflows and cash outflows over a specified period (Wijesuriya and et.al., 2017). NPV is considered to be an effective investment planning tool which in turn helps in analysing the profitability of the specific project.

Benefits of Net Present Value

The major advantage of the NPV is that it tends to consider the time value of money where it tends to help management of the company in effective and strategic decision-making.

Drawback of Net Present Value

The key disadvantage of the NPV is that it does not consider any hidden cost and is not considered to be useful in comparing projects which tend to have different sizes (Almaktar, Abdul Rahman and Hassan, 2016).

It has been evaluated that, the net present value of Project A is estimated to be 26588, but on the other hand, the NPV of Project B is estimated to be 29644. A positive NPV will indicate that the projected earnings which in turn have been generated by the particular projects tend to exceed the anticipated cost. On the other hand, the negative NPV of the company will result in net loss. The NPV of Project B is higher than the NPV of Project A. Hence, Project B will be selected in order to gain higher profits.

Financial and Non-financial factors

Non-financial factors like improving relationships with customers and suppliers, improving staff morale, meeting future legislations and matching standards of the industry are considered to be of crucial non-financial factors which help in decision-making (Heydt, 2017). The cost associated with the production of the particular product which mainly includes equipment, salary, facilities and all the indirect costs related to management and training costs, ongoing maintenance, etc. are considered to be the financial factors which help in making buying decision.

4. PRACTICAL IMPLICATION

In order to implement Project A, the management of the company will have to make an initial investment of 20000 which can be recovered over the period of 2 years and 2 months.

In the case of NPV, where the management of the company tends to invest in Project B because it is considered to be a more profitable unit (Zativita and Chumaidiyah, 2019, May).

CONCLUSION

It has been concluded that the decision-making process is considered to be one of the indispensable and continuous components in order to manage various activities of the organization. The payback period of Project A is better and the NPV of Project B is better.

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