Business Decision Making: Payback Period and Net Present Value

This report focuses on business decision-making using payback period and net present value. It discusses the calculation of payback period and net present value for two project choices of DDK plc, a garment manufacturer. It also explores the financial and non-financial factors that should be considered in decision-making. The report concludes that project B should be selected based on a shorter payback period and higher net present value.

Business decision
Making

Table of Contents
Introduction-...............................................................................................................................................3
Calculation of Payback Period-....................................................................................................................3
Calculation of Net Present Value-................................................................................................................4
Financial and Non-financial Factors-............................................................................................................6
Financial Factors-.....................................................................................................................................6
Non-financial Factors-..............................................................................................................................7
Conclusion-..................................................................................................................................................7
REFERENCES............................................................................................................................................9

Introduction-
The focus of this report is on business decision-making. Making a decision is described
as selecting one choice from a set of alternatives (Ahmed, Qin and Aduamoah, 2018). Capital
budgeting approaches such as net present value and payback period can be used to make
financial decisions. These approaches provide information on a project's profitability. In order
for a company to expand, it must make decisions. DDK plc is a garment manufacturer. It
provides services in the United Kingdom as well as areas of Europe. The organisation has two
project choices to choose from, and it must determine which is the best. Capital budgeting
methods may be used to do this. Non-financial considerations such as goodwill, company
practises, and relationships with suppliers should also be considered.
Calculation of Payback Period-
Payback period of Project A
Years Cash Flow(in £)
Cumulative Cash
Flow
1 45,000 45,000
2 45,000 90,000
3 35,000 125,000
4 70,000 195,000
5 82,000 277,000
Payback Period 3.77 Years
Payback period of Project B
Years Cash Flow(in £)
Cumulative Cash
Flow
1 50,000 50,000
2 45,000 95,000
3 70,000 165,000
4 90,000 255,000
5 90,000 345,000
Payback Period 3.33 Years

Calculation steps-
Step 1- Take all the cash flows from year 0 to 5 which includes initial investment too.
Step 2- Calculate cumulative cash flow of all the given cash flows. It can be calculated by
cumulative cash flow of first year + second year and so on.
Step 3- For calculating payback period of project A-
= 3 years + (170000-125000/70000) * 12 months
= 3 Years and 7.7 months
Payback period of project B –
= 3 Years + (190000-165000/90000)*12 Months
= 3 Years and 3.3 months.
According to the calculations, project A has a payback period of 3.7 years and project B has a
payback period of 3.3 years. The payback period for Project B is shorter. It means that project B
will recoup its investment costs faster than project A. Project B should be selected if an
organisation compares projects based on payback time (Ananthram and Chan, 2016).
Calculation of Net Present Value-
Discount Rate=
14% Net Present Value of Project A
Years Cash Flow(in £) PV Factor CF*PV
1 45,000 0.877 39465
2 45,000 0.769 34605
3 35,000 0.675 23625
4 70,000 0.592 41440
5 82,000 0.519 42558
Total Present
Value 181693

Discount Rate=
14% Net Present Value of Project B
Years Cash Flow(in £) PV Factor CF*PV
1 50,000 0.877 43850
2 45,000 0.769 34605
3 70,000 0.675 47250
4 90,000 0.592 53280
5 90,000 0.519 46710
Total Present
Value 225695
Calculation Steps-
Step 1- Take all the cash flows.
Step 2- Discount rate is given 14%. So calculate write the PV factors according to discount rate.
Step 3- Multiply the cash flows with PV factor.
Step 4- Calculate the sum of all the multiplied cash flows with PV factor.
Step 5- For calculating net present value of project A-
Net present Value = Present Value – Initial Investment
= 181693 – 170000
= 11693
Net Present value of project B is –
Net present Value = Present Value – Initial Investment
=225695– 190000
= 35695

The present value of potential cash flows at the project's required rate of return is known
as net present value. Positive net present value is regarded as commendable. If the NPV is zero,
all cash inflows equal cash outflows, and a negative net present value indicates that the investor
does not invest in the project.
According to the table above, all projects have a positive net present value. Projects A
and B have net present values of 11693 and 35695, respectively. So, though investing in both
projects is a good idea, project B has a higher net present value. Since project B yields a higher
return than project A, the company should select it (Dahl, 2017).
Financial and Non-financial Factors-
Financial Factors-
 Financial Ratios- It assists in decision-making. Financial ratios examine a company's
success over time. A company may also equate itself to other businesses. It provides
information on the company's liquidity, solvency, profitability, and performance.
Investors can make decisions based on financial reports. Financial statements created by
management are used to create financial reports. As a result, financial ratios can be said
to be the most effective decision-making tool.
 Return on investment- As the name implies, it assesses the viability of a company's
investment. Net return/investment cost*100 is a formula for calculating return on
investment. The ideal ROI ratio is 5:1. It is thought to be beneficial to the majority of
companies.
 Cost of capital- That is the company's cost of funds. It is the required rate of return on a
project that a company needs from its investment, according to investors. Using this
approach, a company may make major decisions such as buying a new machine or
constructing a new factory.
Non-financial Factors-
 Government regulations- Before making investment decisions, a company must
comply with government regulations. A company's political stability is important. If
the government alters the rules and regulations, the business will lose money.

 Social factors- Changes in market demand may also have an effect on business
decisions. Consumer tastes and desires evolve over time. Predicting the future is
difficult.
 Technological factors- Technology advances at a breakneck rate. It is difficult for an
organisation to choose technologies from a variety of options.
 Environmental factors- Company is influenced by the environment. It may be
internal or external in nature. Internal causes such as employee strikes or labour
disputes. Pandemics, natural disasters, and political laws and regulations are
examples of external influences.
The company's decision-making is influenced by a variety of non-financial factors. Non-
financial considerations include the company's goodwill, brand credibility, policies, goals, and
community. If project B is affecting the company's goodwill or reputation in the industry, it can
be rejected. Management should determine if the investment opportunity is consistent with the
company's policies, priorities, and culture.
The company must ensure that the investment decision is legal, economically, and
ethically sound. The company should assess the effect of this decision on the relationship
between shareholders. Both factors should be considered by the company. If a corporation
invests in a project that is financially beneficial but negatively impacts its goodwill, the
company's market value is diminished. The company should make informed decisions based on
both financial and non-financial considerations (Ferreira, Jalali and Ferreira, 2018).
Conclusion-
The NPV and payback period are the best methods for financial decision making,
according to the above article. Project B should be a priority for DDK Textile. The payback
period for Project B is shorter than for Project A. It means that project B can recover its costs
faster than project A. Similarly, financial decisions are made using Net Present Value. Both
ventures have a positive net present value. Project B has a higher NPV than project B, so the
company can accept it. A higher net present value indicates a higher rate of return on investment.

REFERENCES
Books and journals
Ahmed, F., Qin, Y. and Aduamoah, M., 2018, March. Employee readiness for acceptance of
decision support systems as a new technology in E-business environments; A proposed
research agenda. In 2018 7th International Conference on Industrial Technology and
Management (ICITM) (pp. 209-212). IEEE.
Ananthram, S. and Chan, C., 2016. Religiosity, spirituality and ethical decision-making:
Perspectives from executives in Indian multinational enterprises. Asia Pacific Journal of
Management, 33(3), pp.843-880.
Dahl, R.A., 2017. Decision-making in a democracy: The Supreme Court as a national policy-
maker (pp. 137-154). Routledge.
Ferreira, J.J., Jalali, M.S. and Ferreira, F.A., 2018. Enhancing the decision-making virtuous cycle
of ethical banking practices using the Choquet integral. Journal of Business Research,
88, pp.492-497.