Explain two (2) non-financial

  1. Explain two (2) non-financial factors a company needs toconsider before deciding to approve an investment with positive NetPresent Value (NPV)? (4 points)
  1. Evaluate the proposed projects below. Based on the informationgiven, which project would you choose to take on? Clearly explainyour reasons. (3 points)

Accounting rate of return

Payback period

Net present value

Project 1


2.25 years


Project 2


5 years



1 a) Two non –financial factors

Impact on the employeemorale: A firm should ensure the new capitalinvestment has a positive impact on the morale and motivation ofthe employees. If there is an adverse impact on employees’motivation it can lead to productivity issues as well as labor lawissues. Hence a firm should ensure these factors are taken intoconsideration

Safetyfactors: Firms should ensure new investments aresafe to employees and public. The safety feature is top prioritysince firms have responsibility towards employees for safe workingcondition and ensuring no safety concerns to public. The impact ofnew project on environment should be carefully evaluated beforecapex investment. All environmental and pollution laws should becomplied with to ensure no ambiguity later.

1 b) An investment in capitalbudgeting should be committed after evaluation of the same withdifferent methods. ARR is calculated based on net income divided byinitial or average investment. Payback period is calculated basedon initial investment and its recovery through annual cash inflows.Net present value calculates the returns based on time value ofmoney.

Project 1 is having higheraccounting rate of return compared to Project 2 and Project 1 ishaving lower payback period which means its investment is recoveredearly compared to Project 2. The Net present value of Project 2 ishigher. A firm should choose Project 1 because absolute value ofNPV is not a criterion to decide which project to be taken. A firmshould ensure it recovers its investment in capex as soon aspossible. Project 1 is having lower payback period and higher netincome compared to Project 2 which is positive for the firm. HenceProject 1 should be selected. Project 2 is having higher absoluteNPV because it can have higher cash inflows and outflows comparedto Project 1

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