Business Decision Making: Investment Appraisal Techniques

This document discusses the importance of business decision making and the use of investment appraisal techniques. It focuses on the analysis of two projects using NPV and payback period.

BUSINESS DECISION
ASSESSMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Business decision making............................................................................................................3
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Decision making is considered as most essential part of firm that determines success of
entity (Varghese, 2017). This is the process of taking right action that may aid company in
accomplishing its goal and sustaining in market for longer duration. Financial team of firm takes
support of investment appraisal techniques to make accurate decision. Present study is based on
ABC Plc which is the computer software entity. Current assignment will use investment
appraisal technique to analyses viability of two projects.
TASK
Business decision making
Whenever firm plans to invest in any project then first it has to determine the suitability
and feasibility of that project so that entity can determine where it would be right decision or not.
NPV (Net present value)
This is considered as most common technique that evaluates future cash flow that can be
generated by business by investing in current project (Wijne and et.al., 2019). It calculates actual
difference between present and future value of cash flow and accordingly investment manager
makes decision of investment in particular project. This is appropriate method as it helps in
determining value of investment and also considered time value of money. ABC Plc has two
options of investment in the first option value of NPV is found 17831 whereas in second project
NPV is 24430. That reflects that investment in project 2 would be best option for ABC company.
As return on investment is high in this project. As in project 1 cash inflow for 1st year is 8000 an
for 2nd year is 12000, 3rd year it is 16000 and for next two years it is 20000 and 30000.
Discounted rate is 12% and initial investment in this project is 40000. After calculating NPV it is
found that value of NPV is 17831. On other hand cash in project 2 for next 5 years are 10000,
20000, 25000, 30000, 40000. Initial investment in project2 is 60000 hence value of NPV in this
project 2 is 24430 (Chaysin, Daengdej and Tangjitprom, 2016). Hence this reflects that future
value of cash flow would be high in project 2 hence ABC strategic managers has to make
investment in this project in order to get more return.
Project 1
Net Present Value

Year Cash inflows
PV factor
@ 12%
Discounted cash
inflows
1 8000 0.893 7142.8571
2 12000 0.797 9566
3 16000 0.712 11388
4 20000 0.636 12710
5 30000 0.567 17023
Total discounted cash inflow 57831
Initial investment 40000
NPV (Total discounted cash inflows -
initial investment) 17831
Project 2
Net Present Value
Year Cash inflows
PV factor
@ 12%
Discounted cash
inflows
1 10000 0.893 8928.5714
2 20000 0.797 15944
3 25000 0.712 17795
4 30000 0.636 19066
5 40000 0.567 22697
Total discounted cash inflow 84430
Initial investment 60000
NPV (Total discounted cash inflows -
initial investment) 24430
Payback period
This is another most popular investment appraisal technique which is also known as
capital budgeting tool, that helps in determining actual feasibility of project (Fokkema, Buijs and
Vis, 20170. Many time investors prefer to invest in project in which cost can be recovered soon.
Hence this method calculate the period in which actual investment can be recovered soon. As in

the project 1 cost can be recovered in 3 year 7 months and in project 2 it can be recovered within
3 year 5 months. Though there is not much difference between project but still investment in
project 2 would be better as entity will easily recover all the investment cost with 3 year and 5
months (Types of Financial Decisions in Financial Management, 2020).
Project1
Payback period
Year Cash inflows Cumulative cash inflows
1 8000 8000
2 12000 20000
3 16000 36000
4 20000 56000
5 30000 86000
Initial investment 150000
Payback period 2
1.7
Payback period 3 year and 7 months
Project 2
Payback period
Year Cash inflows Cumulative cash inflows
1 10000 10000
2 20000 30000
3 25000 55000
4 30000 85000
5 40000 125000
Initial investment 150000
Payback period 2
1.5
Payback period 3 year and 5 months
There is need to take care of financial and non-financial factors that may help business in
making correct decision for the growth of organisation. It is essential for ABC that to risk

involved in investments and type of ownership otherwise it will not be able to generate profit
from investments. Opportunity cost must be taken care by company while planning for decision
making as if entity wants to invest some amount for the further development then it has to ensure
that it control over the opportunity cost otherwise owner may face difficulty. Cash flow positon
of business is another financial factor that needs to be taken care, if financial positon of
organisation is not good then it will not be able to get profit. On other hand ABC Plc needs to
ensure taking care of non-financial factor as well such as management team, skills of employees,
brand image of organisation (Types of Financial Decisions in Financial Management, 2020).
This would be better for the firm in gaining success in market and getting more return over its
investments. Preferences of shareholder is another most important element that can influence
business success, whenever company plan to make investment then company has to ensure that it
becomes able to meet needs of all the stakeholders such as employees, investors etc. For
example, employees and other stakeholders like to get dividend hence entity will have to take
decision in such manner so that it can be in positon of providing adequate dividend to all the
stakeholders successfully.
CONCLUSION
From the above study it can be concluded that business decisions are most essential part of
organisation hence manager of company needs to take care pf financial and non-financial factors
while making any judgement for the welfare of organisation. This may help enterprise in gaining
success. Payback period and NPV help the strategic manager in analysing viability of project and
investing h=amount in the right project so that more profit can be generated.

REFERENCES
Books and Journals
Chaysin, P., Daengdej, J. and Tangjitprom, N., 2016. Survey on available methods to evaluate IT
investment. Electronic Journal Information Systems Evaluation Volume. 19(1).
Fokkema, J. E., Buijs, P. and Vis, I. F., 2017. An investment appraisal method to compare LNG-
fueled and conventional vessels. Transportation Research Part D: Transport and
Environment. 56. pp.229-240.
Varghese, N., 2017. Unit-2 Project Appraisal. IGNOU.
Wijnen, B. F. and et.al., 2019. Implementing interventions to reduce work-related stress among
health-care workers: an investment appraisal from the employer’s
perspective. International archives of occupational and environmental health. pp.1-10.
Online
Types of Financial Decisions in Financial Management. 2020. [Online]. Available through <
http://www.economicsdiscussion.net/financial-management/types-of-financial-decisions-
in-financial-management/31652 >

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