Many companies choose cost benefit to help with the breakdown of the financial cost and the overall project. How and what the cost benefit will produce for the company and gives a forecast of what that particular project will bring to the company as far as revenue, risk and gives a comparison of positives and negatives on all potential project from start to finish. In looking into both cost benefits we can distinguish the different and what might be the best solution for the company at that moment. The cost benefit functions such as net present value and payback period are both functions that can help with the organization deciding factor. Taking a look into both we can see the pro and cons on both ends.
Net present Value (NPV) is the analysis and an evaluation of a forecasted outcome to determine whether a certain investment is positive or negative to a firm. It presents the company with the ability to avoid risk and insure that a certain investment is aligned with cash flow and project deliver. NPV reflects the income and it will determine what return if any holds value to the firm interms of present value. As stated by Akers (2014) “The NVP calculation reveals the dollar amount that the project will produce. A five-year project with an NVP of $100,000 will increase profits by $100,000. Projects with a negative NPV will decrease a firm’s profitability. The NPV reflects the amount of income that the project will produce at a predetermined rate of return.” This can conclude the long-term investment the company should make or prevent without the added risk. NPV gives the company the estimated analysis of cash flow, positive and negative of revenue and cost there is a different cost-benefit analysis unlike NPV forecast estimated cost of total project.
The payback period gives a different approach to the cost of total project. Payback analysis takes and evaluates the cost of total cost of project start and the projected revenue that will be earned when the project is implemented. This cost benefit will also consist of the forecast and length of time it will take the project to break even. As stated by Merritt (2014) “Companies using the payback period method typically choose a time horizon—for example, 2, 5 or 10 years. If a project can “pay back” the startup cost within that time horizon, it’s worth doing; if it can’t, the project will be rejected.” Paycheck is a quick way for a company to get a fast and quick estimate on the payback of the initial deal. As both cost benefits fit to provide a different scenarios of the project there are pros and cons on both ends.
The payback and NPV are both different methods on their own. Payback does not take account inflation and cash flow. While NPV relies on assumption and the correct money account will not be valued until the project begins. All though both cost benefits generate different methods they both analysis and evaluate the...