Comparing the NPV and IRR Approach Following up with Atrill and McLaney, (2014) NPV offers a better approach to appraising investment opportunities because it fully takes account of the time value of money, it includes all of the relevant cash flows as they are treated differently according to their date of occurrence, but they are all taken into account.
This will have a valuable decision on a company. Positive NPV increases the wealth of a company while negative ones decrease it. Despite the fact, IRR does not directly relate to the main proposal for investment appraisal purposes. It can, therefore, lead to the wrong decision being made. This is because the IRR approach will always rank a project with, for example, an IRR of 26% above that of a project with an IRR of 21%.
Accepting the project with the higher percentage return often generate more wealth, this may not always be the case. This is because IRR completely ignores the scale of investment. A further problem with the IRR method is that it has difficulty handling projects with unconventional cash flows. A project may have both positive and negative cash flows at future points in its life which can result in there being more than one IRR or even no IRR at all. This would make the IRR method difficult to use, however, this is not a problem for NPV. In other hands, IRR may be popular for managers because it expresses its outcomes in percentage terms rather than in total value.
Monetary vs. Non-Monetary Aspects Kohn (1993) argues that monetary incentives encourage compliance rather than risk-taking because most rewards are based only on performance. As a result, employees are discouraged from being creative in the workplace.
Also, monetary incentives may be used to escape problems in the workplace. For example, incentives to boost sales can be used to compensate for poor management. In other words, employees are driven to do things just for the monetary reward rather than doing something because it is the right thing to do. This can disrupt or terminate good relationships between employees because they are transformed from co-workers to competitors, which can quickly disrupt the workplace environment (Kohn 1993). The reasons why tangible non-monetary incentives may accomplish a firm’s objectives better than cash benefits of equal market value are as follows. Economic efficiency of non-monetary incentives:An incentive that the employee could not purchase at any price.
For example, a firm could offer hospitality tents at golf tournaments, which are controlled by corporations and out of reach from employees. The fact that these are unobtainable except through the firm makes them more valuable than the cash it would cost the firm to provide them. Evaluability:Firms often use hedonic goods or services as non-cash benefits, items that are associated with pleasurable experience rather than more instrumental or functional items (Dhar & Wertenbroch, 2000). Even though the thought of a cash bonus may be emotionally charged as well, the economic value of money is more easily calculated. This makes a cash award less prone to the biases which inflate the perceived utility of a hedonic nonmonetary award. Justifiability:One feature of many tangible non-monetary incentives is that there are things that employees could not normally justify buying for themselves, even if they had sufficient funds.
If an item is something that an employee values highly but would never purchase on his or her own, but the opportunity to earn it as a benefit for hard work provides a way to obtain the desired object without violating one’s standards of justification (Christopher and Hsee, 1996). Social reinforcement:According to Alport (1954), one of the most important rewards for a job well done is the acknowledgment of your performance by peers, supervisors, family, and friends. For example, while it may be seen as a normal procedure in earning a cash reward, there is no such proscription regarding the discussion of a tangible non-monetary incentive. In most situations, employees would not feel contented to talk about the cash they benefited but would feel free to talk about the vacation they received from the firm. This enhances the social utility available through the earning of a tangible non-monetary incentive.
Pricing Approach Activity-based costing (ABC):ABC is considered as the modern alternative to absorption costing, allowing managers to understand product and customer net profitability. This provides the business with better information to make value-based and therefore more effective decisions (Bruns and Kaplan, n.d.). Although many businesses now adopt a system of ABC, its downfall is that ABC can be time-consuming and costly. The cost of setting up an ABC system, as well as costs of running and updating it, must be incurred.
These costs can be very high, particularly where the business’s operations are complex and involve a large number of activities and cost drivers. Additionally, they are entirely inward looking i.e they ignore the impact which price has on demand (Bamber and Parry, n.d.).
Customers are not concerned with how much it costs to make a product, rather they are interested in the value the product provides them and they will be reluctant to a price which does not offer good value. Premium pricing:The benefit of premium pricing is that it helps companies back off their competitors in the marketplace. By investing in advertising premium-brand goods, companies can make it difficult for new businesses to enter the same marketplace with investing equal capital in marketing.
As customers talk more about your product, brand awareness and general interest tend to grow as well. However, businesses should be aware of the fact that prestige pricing tends to require a greater investment in marketing. Additionally, premium pricing can be effective for businesses that don’t have to worry about saving money by mass producing goods. The pricing approach that we will recommend Amaryllo Ltd is the Premium pricing because it is easier to stay profitable by setting their price per unit high enough to cover the additional marketing expenditure and expanding their customers to sell sufficient amount.
Conclusion: Meanwhile, the HD iCam project has a positive NPV the investment of this machine is worth it. The hurdle rate was not given but if the hurdle rate is higher than the IRR the project will not be accepted. Comparing the NPV and IRR they are termed in money value and in percentage form. Considering monetary costs and non-monetary costs a quote from David Ridell, “We think companies should use cash sparingly because it can be confused with compensation” (Incentive, 2000).