Part 1 Calculation
1. ARR= ;1941915.92/10；/ 2500000= 7.7%
2. Payback= 2500000—2041368= 458632
= 6+ (458632/50928)*12= 6 year and 11months.
3. NPV= --250196.8
4. IRR= 9.99%
1. ARR= ;901320.26/8；/ 1000000= 11.27%
2. Payback= 5 years.
3. NPV= 112246.94
4. IRR= 14.78%
Part 2 Project choice
ARR is one of the most widely used financial ratios, over one half of
companies are using it in capital budgeting.(Arnold, 2007) It calculates the rate of return using a straight line approach and gives a quick and simple evaluation of a project. Compared with project relax and project excite, it is obviously that project excite is more attractive because the return of project excite is 11.27% and it’s much higher than 7.77% of project relax. However,
the shortcomings of this method are ARR doesn’t take the time value of money
into calculation. Also subjective opinion plays an important role in profit calculation which means it may leads to any inaccuracies.
Payback period refers to the time taken for the net cash income equal to the original investment. It can be very useful when carefully to evaluation similar projects, as a result, it applied for many investment areas because of its ease of use and understands. The method of PBP reveals how long investors will get back their investments in a project. It means a shorter payback period is better than the longer one. In the case study, we can easily find that project relax takes 6 years and 11 months and project excite only takes 5 years so that the latter one is more preferable for investors. The disadvantages of Payback period are:
1 when the payback point is reached there will be no more accounts. 2 it doesn’t take accounts for the risk, time value of money and other significant financial criteria.
3 it doesn’t consider the seasonal change of cash flow rate in reality.
People commonly don’t use this tool separately in practice despite the time value can be adjusted by applying a weighted average cost of capital discount. Furthermore, people prefer NPV or IRR as its alternative methods.
Net present value is defined as the sum of PVs of cash flows within an organization. It is used to analysis the profitability of a project comparing the
value of the money today to the value of the same amount of money in the future as well as taking returns into account. In the process of decision making, net present value indicates how much values will the projects adds to the company. If NPV is positive, it means the project will add value than it needs to be accepted. If NPV is negative, the project should be rejected. In addition, if there are several projects, it is necessary to choose the project with the highest NPV. According to the calculation, the project excite earns a NPV of 112246.94 and it’s higher than project relax which means the former one will be accept.
The weakness of this financial method is that NPV cannot be used in small projects because any cash flow within 12 months will not be discounted for NPV purpose. (Khan, 1993) Also NPV assumes an impossible situation that costs of capital during the whole project are stable. Moreover, NPV supposes the cash flows for the year occur all on the last day of the year which is also unlikely to happen.
In order to compare and measure the profitability of investments, people usually use internal rate of return in capital budgeting. In more specific terms, if the discount rate of net present value of costs equals to the net present value of benefits in a project, IRR numerically equal to the discount rate. When people using IRR in estimation of a project, the first thing they need to do is find out the standard rate of return. If the IRR of a project is equal to, or higher than the standard rate and other projects, it needs to be accepted. After calculating both of projects in the case study, the IRR of project relax is 9.99% while project excite owns 14.78% at the same time. It clearly shows project excite is better than the project relax. Nevertheless, there’re several problems with the usage of IRR. Firstly, it’s incapable for mutually exclusive projects, but only to determine whether project is worth to invest because IRR is a relative measure. Secondly, if the direction of cash flow changes more than once, there will be multiple IRRs. Sometimes people will introduce MIRR to resolve
this problem. (CFO.com) In fact, surveys reveals that companies prefer IRR over NPV. Managers consider that it’s easier to compare investments of
different sizes using IRR because it shows the result in terms of percentage, which gives a better insight than NPV, although NPV is more accurate.( Pogue, 2004)
To sum up, after using these four financial methods, apparently project excite demonstrates a better benefit from the aspect of accounting factors that the vice chancellor should choose this project. However, during the process of decision making, it is significant to make a critical evaluation on non-accounting factors, which will be discussed as follows.
Part 3 Evaluation of non-financial factors
The financial factors are important parts of decision-making. However, non-financial factors are significant as well. Both of non-financial factors and financial factors are interactional. Therefore, a positive discussion on how the non-financial factors impact corporate finance will be very useful in the process of financial analysis and evaluations.
Non-financial factors include project factors, national policies, and economic environment and so on. We analyze non-financial factors through three factors (China west products 2011).
1. The direction of non-financial factors:
Non-financial factors have dual impacts on corporate finance, they may be positive as well as negative. For example, staff’s positive attitude can promote passion on the work, the negative attitude may result in work cannot complete on time.
2. The timing of non-financial factors:
Some of non-financial factors are practical. Usually it will be very difficult to find
what kind of problems in such factors unless through a long time period of observation and analysis.
3. Differences in non-financial factors:
Some factors for some enterprises or specific financial, the impact is significant and decisive, but other companies or specific financial, it may be negligible. Such as different culture, different culture backgrounds accept the different cultural products.
The project of Relax and Excite both are aimed at providing a platform for staff and students to work and study. We need to consider which non-financial factor should be pay attention when we appraising projects.
The location of project excite should be choose between school and city center which not only enable them to arrive leisure place quickly, but also convenient for their shopping and go home.
2. The motivation and Quality of staff
Staffs’ pressures directly affect their teaching quality. A comfortable work
environment and cosy leisure activities can effective to mitigation their work pressures. Using of swimming pool and fitness equipment can help staffs improve their health and feel relax and regulate in psychological. Make staffs have a sense of belonging. Enhance staff’s satisfaction of their school, it will indirect improve their enthusiasm; make them more energetically to face the work. (Business link 2011)
Different cultures lead to the different habits of staffs. Their age, education, professional and stability should be considered too. Strengthen the staffs’ communication and cultivate the team cooperation, it can help school complete the goal.
3. The Government policy
The policies of government allow that all the equipment use before the relevant
department check and approve. The sanitation of school dining-room is very important for staff and students which also control under government’s policies. A good diet health can also make staff feel cheerful. On the other hand, the 2012 Olympic Game has made the government need more land expansion. The school may not get the support by government because of not enough land to build leisure center.
1. Students’ satisfaction
The busy study life gives students a lot of pressure. The goal of school construction excite is gives a platform for students relax and develop themselves after class. Through these entertainment equipments, students can make more friends and take exercise their body. This is not only enriched their extracurricular life, also relieve their pressure effectively. (Investment and business accountants, 2011)
Excite project provides student activities, student can organize and arrange the activities here. For example, Chinese students can hold a Chinese New Year party to attract school students to participate in, which not only promote to culture expansion, but also enrich their study life.
3. Uniqueness and competitiveness:
In Coventry there are a lot of gymnasiums, they become the school's major competitors. For the students, their prices are relatively high with a few of activities. On the other hand, the school aimed at only university students, low prices is a way of school to attract students, where students can communicate with the same background of students. Sound equipment provide students with the most comprehensive experiences, students who like singing can in karaoke zone enjoy the joy of music with friends; students who like playing game can find the passion in game in the gaming zone. However, students would like stay at home because it's so cold outside in the winter, this may also
influence the income of swimming pool and other facilities.
It’s necessary for people to consider both financial factors and non-financial factors when choosing the project whilst Non-financial factors are becoming more and more important in decision-making and performance evaluation.
1. Arnold, G. (2007). Essentials of corporate financial management. London:
Pearson Education, Ltd.
2. Khan, M.Y. (1993). Theory & Problems in Financial Management. Boston:
McGraw Hill Higher Education.
3. CFO.com. Internal Rate of Return: A Cautionary Tale [online] available
4. Pogue, M. (2004). Investment Appraisal: A New Approach. Managerial
Auditing Journal. Vol. 19 No. 4, 2004. 565-570
5. Business link (2011) investment appraisal techniques [online] available
pe=RESOURCES> [15th Jan 2012]
6. China west products (2011) the non-financial factors [online] available from
< http://chinawestproducts.com/07/16/the-non-financial-factors/> [14th Jan
7. Investment and business accountants (2011) Investment Appraisal-8
non-financial factors that every accountants and managers should consider
[online] available from <
actors-that-every-accountants-and-managers-should-consider/ > [14th Jan