Business Decision Making: Investment Appraisal and Techniques

BUSINESS DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
CONCLUSION..........................................................................................................................................6
REFERENCES..........................................................................................................................................7

INTRODUCTION
Business decision making in respect of the investment appraisal is a crucial long term
decision that needs to be undertaken through analyzing the proposal with various capital
budgeting techniques. The major techniques like net present value, internal rate of return,
payback period and profitability index are used to evaluate that whether an investment option
should be accepted or rejected or which project needs to be undertaken from the mutually
exclusive proposals. The current project of DDK plc shall be considering the evaluation of two
manufacturing projects of belts or trainers. Further two techniques one is net present value and
the other is payback period shall be applied to the investment proposals to find out which is the
better and more profitable venture for the business. Also the financial and non-financial factors
pertaining to the investment appraisal are being reflected in the report.
MAIN BODY
Project- A: Manufacturing of Belts
Initial investment- £170000
Useful life- 5 years
Project- B: Manufacturing of trainers
Initial investment- £190000
Useful life- 5 years
The discounting rate for both the projects is 14%.
The cash flows that shall be generated by both the projects over its life are:-
Years Project A Project B
1 £45000 £50000
2 £45000 £45000
3 £35000 £70000
4 £70000 £90000
5 £82000 £90000
Total £277000 £345000
Payback Period
Payback period is the technique in the capital budgeting that is used to evaluate the
proposals on the basis of time taken to recover the costs that are incurred in respect of the
project. It can also be referred as the breakeven point which is the minimum requirement of any
business to survive in the marketplace (Abor, 2017). The sooner the payback period is achieved
in any investment the better it is for the business and its profitability. It ensures covering all the
costs of the project and determining the future growth prospects.
Calculation of the payback period of project A:-