Case study presentation+notes Essay Example | Topics and Well Written Essays - 2000 words

Case study presentation+notes - Essay Example Time consideration is an essential factor in this regard. The non-discounting factors do not take into consideration time value of money and therefore are considered inferior to discounting cash flow techniques. With respect to the projects in this paper, both kinds of techniques have been considered, namely NPV and payback method (Bierman and Smidt, 2012). NPV is one of most preferred discounting techniques deployed in investment appraisal. In this method, future inflows are converted into present value by discounting them using a discount factor. The main benefit of discounting inflows is that it helps understand the actual worth of the inflows and reflects the impact of inflation and potential risks on the investment. Generally, cost of capital is considered as an appropriate discounting measure because it is developed using the existing market risk factor. There are two criteria for accepting a project: first, NPV should be positive and second, a project with the highest NPV should be selected. Negative NPV bearing projects are rejected because they would generate negative return in the long run (Sangster, 1993; Savvides, 1994). It was observed that none of the projects of Jones & Simpson Ltd generate a positive NPV. Project A generated a negative value while Project B was observed to break even. Breakeven stands for a no-profit / no-loss situation. If the company has no other choices besides project A and B, Project B is recommended because project A involves more investment and will generate negative return in the long run. Payback period is one of the non-discounting techniques used by managers for evaluating projects. However, this technique is used along with other discounting techniques so that the time factor is not neglected. Generally, managers analyse projects using NPV, IRR and payback period together. One of the key benefits of payback period is that it focuses on cash flow instead of accounting profit. The determination process is also