Financial Management & Control Essay (Unilever Plc)

Table of Contents

Executive Summary………………………………………………………………………….…3

Introduction……………………………………………………………………………………..3

Section 1A: Financial Report for Unilever Board of Directors……………………………..….6

Section 1B: Financial Calculations……………………………………………………………..6

The breakeven of sales in both unit and sales…………………………………………….……6

Contribution margin ratio.…………………………………………………………………..….7

Operating leverage………………………………………………………………………………7

Operating leverage……………………………………………………………………….……..7

The identified merits of breakeven analysis…………………………………………………….7

The impact of breakeven point on profitability ratio…………………………………………..8

Merits of contribution margin ratio.…………………………………………………………….8

Merits of operating leverage of firm………………………………………………………. …..8

Section 2A: Financial Calculations Using Investment Appraisal Techniques……………….…9

Section B: Benefits and Limitations of Investment Appraisal Techniques……………………11

(a)Payback Period (PB)……………………………………………………………………….11

(b) Discounted Payback (DPB)………………………………………………………………..11

(d) Net Present Value (NPV)…………………………………………………………………..12

(e) Internal Rate of Return (IRR)……………………………………………………………..12

Section 2C: Investment Analysis for Bluedrum Plc.………………………………………….12

Important Considerations for Buying or Making Drums………………………………………12

Section 2D: Considerations for Choosing Sources of Fund for Blue Drum Investment..…….13

Part C: Budgeting and Financial Plan………………………………………………………….14

The Budgeting Process and Link Between Budgets, Objectives, and Strategic Plans..….……14

Section 3B: Business Plan…………………………………………………………………….15

Section 3C: AI in Accounting………………………………………………………………….15

References……………………………………………………………………………………..16

Appendices.……………………………………………………………………………………17

EXECUTIVE SUMMARY

This paper has three intertwined parts. The first section (Part A) evaluates Unilever’s financial statement using relevant financial tools like gearing, liquidity, and profitability ratios on the cashflow statement as well as the financial statement—that is, profit and loss accounts—for the fiscal years 2021 and 2022. The second section (Part B) critically examines various investment decision criteria to identify the project(s) with high-level profit margins among the current portfolio of projects undertaken by Unilever. This part analyses the importance and process of calculating the following investment criteria in business: payback period, discounted payback period, accounting rate of return, net present value, and internal rate of return. The last section (Part C) discusses the significance of budgeting process on Unilever’s business activities, with focus on the causality between budgets, objectives, and strategic plan. It further analyses Unilever’s business plan to identify key elements in financial planning, and lastly, present a brief discourse on the contributions of Artificial Intelligence in accounting—particularly in long-term budgeting. The appendices contain detailed financial calculations of Unilever’s financial documents used to proffer strategic solutions to business challenges.

INTRODUCTION

Financial management is a core aspect of business administration that involves planning, directing, and control of an organization’s financial engagements (Messer, 2020). These financial activities are necessary to improve access to capital, ensure optimum and efficient use of funds, support investment in safe and profitable business projects, and enable creation of sustainable profits (Beckett-Camarata, 2020). Organizations should therefore conduct critical analyses of financial performance at regular intervals to increase competitiveness (Jans et al, 2023). To achieve both short-, medium-, and long-term financial objectives, accountants and financial analysts involved in financial management and control must have deep understanding of financial ratios (such as efficiency, liquidity, profitability, and market value) that determine an organization’s financial strength with a high level of accuracy (Priem & Gabellone, 2024). The author examines financial documents from Unilever Plc to identify its financial strength, net worth, and current business environment to mitigate risks and maximize opportunities in the business environment. The purpose of this financial essay is to hone the author’s cognitive and communication skills, broaden understanding of financial statements, and enhance practical use of theoretical concepts and models. In addition to testing the student’s ability to evaluate quantitative and qualitative datasets, this paper explores theoretical and practical considerations to show how business leaders can apply theories in real-world situations (Kureljusic & Karger, 2024).

PART A

SECTION 1A: FINANCIAL REPORT FOR UNILEVER BOARD OF DIRECTORS

From: The Financial Manager

To: The Management Board, Unilever Plc

Financial Performance as At Year Ended 2022.

This business report contains a critical assessment of Unilever’s financial statements from fiscal years 2021 and 2022. Results from the analysis show that:

Unilever’s operating capital is generating low profit margins thereby threatening long-term sustainability. The financial documents under review indicate Unilever’s capital investments in fiscal years 2021 and 2022 stood at 8 percent and 10 percent respectively, highlighting low capital efficiency. Regardless in the increment in sale revenue, the profit after tax deduction to sale ratio shows that business activities in both years (FY2021 and FY2022) also generated low profits with an insignificant margin—that is, 12 percent and 13 percent respectively. These business outcomes indicate that Unilever’s expenditure is above limit and will continuously reduce profits if the management fails to take adequate financial control measures. To increase profits and sustain competitive advantage, Unilever should cut down and keep expenses within safe limits. A feasible first step is to reduce Director’s salaries and company debt structure.

How Unilever’s management handles its working capital is crucial to creating and sustaining a strong liquidity position. Financial documents under review show the company is currently operating on a negative working capital and this is a threat to long-term profitability. The result of cash ratio analysis–that is, 0.18 times and 0.22 times in FY2021 and FY2022 respectively–indicates Unilever does not have a strong capital base and other financial securities to meet short-term demands from its creditors. Thus, Unilever is illiquid. Also, a glossary evaluation of the acid ratio outcomes (that is, 0.51 times and 0.52 times in 2021 and 2022 respectively) is an indication that the company has liquidity problems because current assets and cash securities do not meet safe liquidity standards. Therefore, Unilever is facing insolvency and should urgently reduce current liabilities as well as increase investment in current assets to improve liquidity position.

Results of the gearing ratio show that Unilever is operating at a loss because the company cannot sell or exchange its bond, stocks, and other assets for cash without losing substantial value. This financial position deters existing and potential creditors who have the potential to strengthen Unilever’s profits and competitive advantages. Unilever’s financial documents show the financial statements geared to the tune of 280% (2021) and 258% (2022). This implies the company relies on debt capital to finance a large part of its operations, a business approach which threatens long-term survival due to the exorbitant interest element linked to debt fund. This high cost of using debt capital has a direct negative impact on business profits. Furthermore, Unilever’s long-term to equity ratio stood at 154 percent and 141 percent in 2021 and 2022 respectively, highlighting that Unilever’s gearing level is extremely high in the capital mix. The management should therefore apply an optimum capital mix ratio of 60 percent equity and 40 percent debt as well as integrate debt-to-equity conversion strategy to fast-track growth. These business solutions will not only lower Unilever’s debt profile but can significantly expand profits accruing from both short- and long-term investments.

Evaluation results obtained from Unilever’s efficiency ratio show the company is not generating adequate sales due to unproductive investments in the procurement of fixed assets utilized in various activities that support sales generation. In 2021, the turnover ratio was 0.69 times whereas turnover ratio from 2022 stood at 0.77 times. These business outcomes show that Unilever management is underutilizing fixed assets that can improve workflow efficiency and sales performance. Thus, the company should urgently address assets management issues by changing dysfunctional assets and increasing the performance of inefficient assets to create more value.

Unilever’s financial trends in FY2021 and FY2022 as well as results obtained from applying different ratios on the two-year financial statements indicate business stagnation. For example, liquidity ratio and capital investment in FY2021 and FY2022 increased by 1.5 percent only whereas debt-to-equity ratio shows a 0.88 percent increase in debt profile. These indicators of stagnation point towards a solution: merger and acquisition. Unilever should therefore explore collaboration to tap into great opportunities from the external business environment–particularly investor capital, advanced technology, and government incentives.

Thank you all.

FIGURE 1: UNILEVER PLC PERFORMANCE FRAMEWORK

SECTION 1B: FINANCIAL CALCULATIONS

The breakeven of sales in both unit and sales is as follows:

Sales = Breakeven of sales in unit x sales revenue

€20m x €15m = €300m

Contribution margin ratio

(iii) Operating leverage

(iv) The identified advantages of breakeven analysis.

The breakeven point as used in business and finance domains refers to a production level revenue from production is equal to costs of production. In investment, it refers to that point where the original cost equals the market price. So, in clearer terms, breakeven point is the point where total cost and total revenue are at equilibrium, meaning there is no loss or gain from business operations within the time under review. Total cost means the sum of all variable and fixed costs. Thus, a breakeven analysis aims to identify when a company is neither making gains nor incurring losses. The financial analysis helps to determine the current financial position and competitiveness of companies (Jans et al, 2023). Businesses also apply the breakeven analysis to know if product prices are increasing sales and profitability or not. Business leaders therefore rely on results from breakeven analyses to make strategic investment decisions, set achievable objectives, and measure organizational performance with dependable key performance indices (Priem & Gabellone, 2024). In addition to its usefulness in price control, goal-setting, and strategic planning, breakeven analysis is a highly effective management tool for achieving time-specific business objectives because managers use it to identify and choose the best mix of funding from balance sheets (Kureljusic & Karger, 2024).

(v) The impact of breakeven points on profitability ratio.

Considering that the breakeven point highlights a scenario where total cost and sales revenue equal zero, indicating zero profitability, the correlation between breakeven point and profitability is the direct and direct link between total cost and sales revenue. A company generating high sales volume and low variable costs has potential for high profitability. Likewise, low sales volumes and high-cost structure have a negative impact on the profit potential of a company (Messer, 2020).

(vi) Merits of contribution margin ratio.

The Contribution Margin Ratio (CMR) of a company refers to the total earnings minus variable costs, divided by the revenue. It measures the marginal benefit accruing from the production of one more unit. CMR is useful for identifying the profitability of products. Thus, businesses use it to select highly profitable products and know which ones they should withdraw from the product line, especially where a company manufactures many items from same resources (e.g., production facility and raw materials). Additionally, firms use CMR to analyse the efficiency of workflows and business activities because a high CMR indicates increment in a firm’s productivity level (Jans et al, 2023).

(vii) Merits of operating leverage of firm.

Operating leverage is a cost-accounting tool for identifying the degree to which a specific project can increase working capital by boosting revenue. This implies that companies generating high sales volumes with high gross margins and low variable costs have potential for high operating leverage. Investors use operating leverage to assess risks and determine potential future profitability (Cai, 2023). The operating leverage also means the sensitivity analysis of cost structure (or the evaluation of fixed and variable costs), thus, companies with high operating leverage are more likely to have higher investment in fixed assets than variable cost. Business leaders can reduce risks by lowering expenditure on fixed assets, replacing dysfunctional or low-performing ones, and at the same time, increasing productive use of available assets to boost efficiency in business operations (Kureljusic & Karger, 2024; Priem & Gabellone, 2024).

PART B

SECTION 2A: FINANCIAL CALCULATIONS USING INVESTMENT APPRAISAL TECHNIQUES

From: The Finance Manager

To: The Board of Directors, Unilever Plc

Financial Report for Unilever’s Annual General Meeting (AGM) Highlighting the Economic Viability of Chosen Project ‘Personal Care.’

Innovative companies choose projects after weighing its feasibility based on certain decision criteria. Therefore, profitable and competitive businesses are those whose leaders conduct thorough financial evaluations before taking investment decisions. The appraisal involves financial tools like the accounting rate of return (ARR), payback period (PP), discounted payback period (DPP), internal rate of return (IRR), and net presence values (NPV). Based on results from these statistical calculations, Unilever should take the following steps to increase profitability and competitiveness:

Invest in Personal Care: Personal Care product line has a breakeven point of 2.25 years whereas Home Care has a breakeven point spanning across 4.22 years. This implies that Personal Care needs approximately two years to generate cashflows equal to the total expenditure on purchasing and installing machines. Thus, cashflows after two years convert to profits. Using the discounted payback technique to evaluate purported cashflow to both business segments–Personal Care and Home Care–the financial manager found that Personal Care is a more viable project.

Use the Accounting Rate of Return (ARR): The financial manager conducted a glossary appraisal of both business lines using the ARR method and found that Personal Care is more lucrative than Home Care notwithstanding that both projects will generate same 27.9 percent. This implies both projects have same useful life. However, research shows that ARR is not a suitable tool for taking investment decisions, as proven by an evaluation of the economic viability of this project, because ARR ignores (a) time value of money (b) increased risks from long-term projects, and (c) the high variability from delayed projects.

Invest in Projects with Positive Value: Business projects with a positive value refer to lucrative investments that guarantee higher returns when compared to previous or competing investments after factoring time value of money. Companies apply inflation adjustment methods to eliminate discrepancies in the value of cashflows accruing from specific projects. Results from the NPV analysis therefore indicate Personal Care project has a positive value of 310.68 compared to Home Care’s value of 228.6 which is significantly lower. Although the financial manager recommends investment in projects with positive value, the support for Personal Care project is based on insights from capital rationing.

Focus on High Return Investments: Results from the Interest Rate of Return (IRR) analyses and glossary evaluation of both Personal Care and Home Care projects show that the first project offers higher IRR. So, the financial manager recommends investment in Personal Care project.

After a critical review of statistical results from various budgeting appraisal methods, I suggest that Unilever Plc should invest in Personal Care as a more viable project when compared to Home Care.

Thank you all.

SECTION 2B

BENEFITS AND LIMITATIONS OF INVESTMENT APPRAISAL TECHNIQUES.

Payback Period (PB)

Business leaders apply payback period to identify the speed at which the cost of purchasing an asset is recouped. This major investment appraisal method is also used to measure the liquidity of companies (Cai, 2023). Although payback period does not rely on a very long periods which are more accurate when compared to various techniques used in daily activities, it is highly effective when a company does not have adequate cash to acquire necessary machines/assets for investment alternatives. But the effectiveness of the payback technique in measuring profitability may fail due to inherent flaws. So, it is not a reliable tool for ascertaining a firm’s profitability (Rikhardsson et al, 2021). Payback period measures the breakeven points of specific projects but lacks relevance in calculating the time value of money because the technique does not fully capture long-term viability of projects. In a nutshell, merits of the payback period method include its simplicity, usefulness as a planning tool, and effectiveness in managing liquidity and risk assessment. In addition to disregarding time value for money, shortfalls of the technique is its subjective nature and disregard for profitability beyond the payback period (Jans et al, 2023).

Discounted Payback (DPB)

In summary, discounted payback helps business managers to accept or reject projects based on profitability projections and consideration for the time value of money. For example, companies accept DPB if it is less than its useful life or any predetermined time. However, DPB ignores cashflows beyond the payback period and focuses only on the amount of cash inflows required to cover cash outflows (Messer, 2020).

The ARR technique simpler when compared to the rules of using other tools for making capital budget decisions because it requires only book values and net income data of the investment to measure profitability (Rikhardsson et al, 2021). Thus, the information required to apply ARR method is often accessible, making it easy for users to take decisions based on the annual percentage rate of return. It is also useful for comparing various projects for new products to identify competitiveness or return on investment (ROI). However, the technique ignores time value of money as well as cashflows and risks/uncertainties. Investment in multiple projects that last many years also make the technique a difficult tool for appraising projects (Alsharari & Abougamos, 2017).

(d) Net Present Value (NPV)

Business managers commonly use the NPV technique because it recognizes the purchasing value of money while measuring the value of investments. Thus, it is highly effective for maximizing shareholders’ wealth. However, many organizations ignore the NPV method because it requires known forecast of cashflows and cost of capital which are often hard to access due to irregularities in generating cashflows (Kureljusic & Karger, 2024).

(e) Internal Rate of Return (IRR)

Business leaders often use the IRR technique because it considers time value of money. The technique is more accurate and credible in calculating ROI. However, a major flaw from using this fiscal analysis tool despite its effectiveness in measuring the profitability of various possible investments is its disregard for the size, duration, and future costs of projects. In summary, the technique favours smaller projects that have higher IRR but may leave out bigger and more profitable projects (Jans et al, 2023).

SECTION 2C

INVESTMENT ANALYSIS FOR BLUEDRUM PLC.

Important Considerations for Buying or Making Drums.

Identify Reliable Sources of Fund: Every company needs adequate capital to cover operating costs, including expenditure on recruitment and training, product development, marketing, and infrastructure (Oyelakin & Abdullahi, 2022). Without sufficient funding, business mangers find it difficult to implement capital-intensive strategies and projects. Thus, Bluedrum Plc management should evaluate its capital base, reliability of sources of investment capital, and amount or type of financing required to manufacture or purchase blue drums. This evaluation and decision-making challenge requires a capital mix of debt and equity ratio to identify the more viable funding for each of the two investment decisions (Alsharari & Abougamos, 2017).

Ascertain Useful Life of The Drum: The useful life of an asset means an estimation of how long it will remain productive and/or depreciate in value. Cost-effective revenue generation of assets varies based on the age and frequency of use as well as the repair policy and condition of the business environment. However, in addition to these considerable factors, Bluedrum Plc should also establish robust risk management mechanisms for economic changes, technological improvements, and regulatory changes that may affect useful life of its investment decision (Kureljusic & Karger, 2024).

Cost of the drum: Bluedrum Plc should calculate the total cost of purchasing or making the drum. If the cost of buying the drum is too high, for example, the management may need to go through the rigours of raising more funds. Additionally, the cost of purchasing or making the drums should align with strategic objectives of the company (Jans et al, 2023).

Sources of raw materials: Should Bluedrum Plc choose to manufacture the drums, it should ascertain the availability and ease of accessing raw materials. Use of raw materials is not only cheaper than other alternative, but companies can maximize access to renewable raw materials by replenishing them over time (Kureljusic & Karger, 2024).

SECTION 2D

FACTORS THAT BLUEDRUM PLC SHOULD CONSIDER WHILE CHOOSING SOURCES OF FUND FOR ITS BLUE DRUM INVESTMENT.

Having examined the total expenditure on supplies from the unlisted supplier of plastic blue drums, the finance manager hereby suggests that Bluedrum Plc should consider the following factors:

Cost of financing the project: It is important that companies should calculate the cost of a project as well as the time and revenue expected to cover cost of the investment before it starts generating profits. Thus, Blue Drum Plc should calculate financial risks and focus on reducing cost of financing the transaction(s) which, if ignored, can negatively affect the average weighted cost of capital (WACC) and company value (Alsharari & Abougamos, 2017).

Size of the firm: The size of a company determines the success of business diversification goals (Oyelakin & Abdullahi, 2022). Large businesses also have more options of sourcing low-interest funds. Although business diversification like the blue drum investment is a capital-intensive project that can increase a firm’s ability to mitigate costs and boost financial performance, Bluedrum Plc management should understand that firm size is a key predictor of capital structure, profitability, and company value, so the large-scale company can explore its size to solicit cheap and easy funds from the capital market (Lehner et al, 2022).

Capital structure: The strength of a firm’s capital structure affects the cost of capital (Kihn, 2023). Considering that the percentage of debt and equity has direct impact on the weighted average cost of funds, and having a robust capital structure improves the financial flexibility of companies, Bluedrum Plc can undertake strategic investments and explore growth opportunities more effectively. Investors also examine firms’ capital structure to determine value of securities (that is, bonds and stocks) which helps them to determine the profitability of their investments. Therefore, Bluedrum Plc management should sustain an optimal capital structure to reduce potential risks from a low debt-to-equity ratio. The already geared company can leverage equity capital to fund purchase of blue drum (Kureljusic & Karger, 2024).

PART C: BUDGETING AND FINANCIAL PLAN

SECTION 3A: The Budgeting Process and Link Between Budgets, Objectives, and Strategic Plans

A budget refers to the spending plan of organizations based on their income and expenses (Kihn, 2023). Categorized into deficit, surplus, and balanced budgets, an organization’s budget defines future business operations for a certain period and must align with organizational objectives, revenue, and costs to maintain robustness. However, budgeting is a complex activity that involves various individuals and department saddling the responsibility of (a) calculating the organization’s net income (b) tracking spending (c) setting realistic goals (d) planning with income and expenditure (e) adjusting spending to stay within budgetary limit, and (f) conducting regular reviews of budget. A robust budgeting process involves clear, systematized approaches for setting short- and long-term financial plans (Lehner et al, 2022).

On this premise, a result-oriented budgeting process should combine key activities that influence implementation and actualization of organizational goals. The said budgetary process requires strategic planning initiatives to make future projections before expenditures (Oyelakin & Abdullahi, 2022). Thus, the correlation between budgets, objectives, and strategic plans varies among organizations. Yet the budgeting process generally starts with (a) communication within the executive management of the company; (b) establishing business objectives and performance targets; (c) developing a comprehensive budget; (d) compiling and reviewing the budget model; (e) presenting the budget for final review by an appropriate committee, and (f) getting budget approval (Kureljusic & Karger, 2024).

SECTION 3B: BUSINESS PLAN

Having a clear, comprehensive business plan is crucial for achieving sustainable growth because it does not only map out coordinated activities but establishes mechanisms for tracking performance as the company grows (Kihn, 2023). Whether short-, medium-, long-term in nature, the aim of business plans is to streamline activities and align all efforts to attain common goals. However, a major challenge of business plans is its focus on a single objective and achievement which limits maximization of vast opportunities ‘outside the box’ (Alsharari & Abougamos, 2017).

SECTION 3C: AI in Accounting

Artificial Intelligence (AI) in accounting highlights the advanced and highly productive roles of integrating AI-driven systems and/or software to automate and enhance the efficiency of various accounting processes (e.g., budgeting, data analysis, and financial reporting). Remarkably, AI helps companies to create high-quality contents that increase brand awareness, generate more accounting leads, and suggest result-oriented strategies to convert sales leads. In addition to saving time and reducing cost of financial services, AI also reduces human errors with computerized tasks thus increasing efficiency and productivity (Kureljusic & Karger, 2024; Lehner et al, 2022).

References

Alsharari, N.M. and Abougamos, H. (2017), “The processes of accounting changes as emerging from public and fiscal reforms: An interpretive study”, Asian Review of Accounting, Vol. 25 No. 1, pp. 2-33.

Beckett-Camarata, J. (2020), “Infrastructure Finance Policy, Capital Management and Budgeting Processes, and PPPs as an Infrastructure Financing Option”, Public-Private Partnerships, Capital Infrastructure Project Investments and Infrastructure Finance, Emerald Publishing Limited, Leeds, pp. 135-176.

Cai, C.W. (2023), “A real effect across time: disclosure quality, cost of capital and profitability”, Journal of Accounting Literature, Vol. 45 No. 1, pp. 154-189

Jans, M., Aysolmaz, B., Corten, M., Joshi, A. and van Peteghem, M. (2023), “Digitalization in accounting–Warmly embraced or coldly ignored?”, Accounting, Auditing & Accountability Journal, Vol. 36 No. 9, pp. 61-85.

Kihn, L.-A. (2023), “Budgeting changes and success: abandonment, reform or stability in Finnish manufacturing firms?”, Journal of Accounting & Organizational Change, Vol. 19 No. 6, pp. 91-111.

Kureljusic, M. and Karger, E. (2024), “Forecasting in financial accounting with artificial intelligence – A systematic literature review and future research agenda”, Journal of Applied Accounting Research, Vol. 25 No. 1, pp. 81-104.

Lehner, O.M., Ittonen, K., Silvola, H., Ström, E. and Wührleitner, A. (2022), “Artificial intelligence-based decision-making in accounting and auditing: ethical challenges and normative thinking”, Accounting, Auditing & Accountability Journal, Vol. 35 No. 9, pp. 109-135.

Messer, R. (2020), “Budget Management Decisions”, Financial Modelling for Decision Making: Using MS-Excel in Accounting and Finance, Emerald Publishing Limited, Leeds, pp. 241-257.

Oyelakin, O. and Abdullahi, A. (2022), “Assessing the efficacy of employee training and internal control system on financial management of small and medium scale enterprises in Nigeria”, African Journal of Economic and Management Studies, Vol. 13 No. 3, pp. 366-384.

Priem, R. and Gabellone, A. (2024), “The impact of a firm’s ESG score on its cost of capital: can a high ESG score serve as a substitute for a weaker legal environment”, Sustainability Accounting, Management and Policy Journal, Vol. ahead-of-print No. ahead-of-print.

Rikhardsson, P., Rohde, C., Christensen, L. and Batt, C.E. (2021), “Management controls and crisis: evidence from the banking sector”, Accounting, Auditing & Accountability Journal, Vol. 34 No. 4, pp. 757-785.

APPENDICES

TASK 1A: (1) RATIOS ANALYSIS FOR UNILEVER PLC AS AT 2022

TASK 2A: CALCULATION OF INVESTMENT APPRAISAL

Payback Period

Machine A {Personal Care}

(€M)
Years	Cashflow	Cumulative Cashflow
0	(600)
1	300	300
2	250	550
3	200	750
4	150	900
5	100	1,000
6	95	1,095

PBP = T +

Where:

PB = Payback Period in years

T = the last full year in which cumulative net cash inflows are less than the net investment.

b = the net investment.

c = the cumulative cash inflow during the last full year where it is less than the net investment.

d = the cumulative cash inflow in year (t + r)

PB = 2 +

PB = 2 + 0.25 = 2.25 years.

Machine B ({Home Care)

(€M)
Years	Cashflow	Cumulative Cashflow
0	(600)
1	95	95
2	100	100
3	150	345
4	200	545
5	250	795
6	300	1,095

PB = 4 +

PB = 4 + 0.22 = 4.22 Years

Discounted Payback Period (DPP)

Machine A (Personal Care)

Years	Cashflows	DF (7%)	Present Value	Cumulative CF
0	(600)	1	(600)
1	300	0.934	281.8	280.2
2	250	0.873	218.3	498.5
3	200	0.816	163.2	661.7
4	150	0.762	114.4	776.1
5	100	0.712	71.29	847.3
6	95	0.666	63.29	910.6

PB = 2 +

PB = 2 + 0.604 = 2.6 years

Machine B (Home Care)

Years	Cashflows	DF (7%)	Present Value	Cumulative CF
0	(600)	1	(600)
1	95	0.934	88.7	88.7
2	100	0.873	87.3	176.0
3	150	0.816	122.4	298.4
4	200	0.762	152.4	450.8
5	250	0.712	178	628.8
6	300	0.666	199.8	828.6