Business Decision Making: Payback Period, Net Present Value, and Factors Affecting Decisions

This report covers the results of two projects of DD plc, a vegetarian food manufacturing company in the UK, using payback period and net present value. It also discusses financial and non-financial factors affecting business decisions.

Business decision
making

Contents
INTRODUCTION...........................................................................................................................2
MAIN BODY...................................................................................................................................2
1. Computation of payback period of DD plc........................................................................2
2. Calculating net present value of project A and B...............................................................3
3. Explaining financial and non-financial factors affecting business decisions.....................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6
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INTRODUCTION
Business decision-making is a process in which every organisation must make a number
of decisions concerning the operation and financial management of their business (Fioriti, Pintus,
Lutzemberger, and Poli, 2020). This report provides the results of two distinct projects of DD
plc, a vegetarian food manufacturing company based in the United Kingdom, using various
investment assessment approaches such as payback time and net present value. This paper covers
a variety of financial and non-financial decisions that have an influence on the decision-making
process.
MAIN BODY
1. Computation of payback period of DD plc.
Payback period - Different methods for evaluating projects are used in capital budgeting
choices. The time worth of money is not taken into account in the old technique. This tool is used
to determine the length of time it takes for an investment's cost to be returned (Kumar, 2018).
When reviewing projects, the shorter the payback time, the better, whereas initiatives with a
longer payback period are not deemed lucrative. The original investment and average yearly
inflows are used to compute it.
Project A (smoothies) Project B (non diary )
Year Cash flow Cumulative cash
flows
Cash flow Cumulative cash flow
0 -158000 -158000 -155000 -155000
1 72000 86000 71,000 -84000
2 78000 -8000 73,000 -11000
3 82000 74000 97,000 86000
4 110000 184000 118,000 32000
5 125000 309000 121,000 153000
Payback period (project A) = 2 year + 8000 / 82000
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= 2 year + 0.097
= 2.09 years.
Payback period (project B) = 2 years + ( 155000 - 144000 ) / 97000
= 2 Years + 11000 / 97000
= 2.11 years
According to DD plc's calculations, project A has a payback period of 2.09 years while
project B has a payback period of 2.11 years. As a result, it may be stated that project A receives
its return on investment in a shorter period of time than project B. As a result, project A is more
lucrative for a business.
2. Calculating net present value of project A and B
Net present value - Other investment assessment methodologies take into account the
time value of money and use a discounting factor to convert time values to present values. It
comes in handy while deciding between initiatives that are mutually incompatible (Apriliyanti,
and Randøy, 2019). The difference between the total present value of cash inflows and cash
withdrawals is used to compute it. When its value is compared to zero, it is considered negative.
The project will be chosen if the value is larger than zero.
Year Project A - Smoothies Project B – Non- Diary Products
Cash flow Discount factor
@15%
Present
value
Cash flow Discount
factor
@15%
Present value
1 72000 0.87 62568 71,000 0.87 61699
2 78000 0.756 58968 73,000 0.76 55188
3 82000 0.66 53874 97,000 0.66 63729
4 110000 0.57 62810 118,000 0.57 67378
5 125000 0.5 62125 121,000 0.5 60137
300345 308131
Project A = Net present value of cash inflow – Net present value of cash outflow
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= 300345 – 158000
= 142345
Project B = Net present value of cash inflow – Net present value of cash outflow
= 308131 – 155000
= 153131
Project A has a net present value of 142345, whereas project B has a net present value of
153131. The NPV of Project B is greater than that of Project A. As a result, project B will be
chosen from the two projects listed above.
3. Explaining financial and non-financial factors affecting business decisions
A business decision-making process is one in which a corporation is needed to make
decisions in order to achieve its goals. Every organisation establishes standards, which are then
compared to the real standards (Dang, 2018). Deviations in performance can be identified by
performance monitoring, and top-level managers can rewrite the plan to fix them. There are
several financial and non-financial issues that may be discussed as follows:
 Financial factors - Liquidity, leverage, and the firm's organisational structure are
all elements that have a direct impact on the organization's actions. The
percentage of debt and equity used to finance the organisation is determined by
capital structure decisions. Increasing debt in a business helps to cut the cost of
capital and raise the firm's worth. As a result, assessing the firm's cost and value
aids in a variety of financing options. Liquidity is essential for running the
operations of the business smoothly. Liquid assets are those which are easily
converted into cash. Maintaining optimum level of liquidity is a key challenge for
the organisation.
Inflation is defined as a widespread increase in the value of a currency. The
public's purchasing power is impacted by a general increase in commodity prices
on the market. It has an impact on customers' purchasing power (James, 2018).
 Non financial factors - The following are the elements that have an indirect
influence on the decision-making process: Every country abides by the rules and
regulations enacted by the government of that country (Carvalho, Viana, and
Mine, 2020). Changes in government policy have an influence on business
management. Increases in tariff rates, for example, limit trading operations and, as
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a result, lower the business's operational profitability. An organization's strategies
should be flexible enough so changing circumstances do not have an influence on
the company's profitability. Improving customer interactions helps to improve
public relations and promote consumer trust (Houhamdi, Athamena, and El Refae,
2020). Aside from profitability, a company's attention should also be on
establishing a positive connection with its consumers.
CONCLUSION
It can be inferred from the preceding research that capital budgeting tools assist in making
judgments about the profitability of various projects. It denotes the amount of dividend paid to
stockholders. Although the influence of financial and non-financial elements is uncontrolled,
there are numerous steps that may be done to reduce the impact of external factors and improve
decision-making.
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REFERENCES
Books and Journals
Fioriti, D., Pintus, S., Lutzemberger, G. and Poli, D., 2020. Economic multi-objective approach
to design off-grid microgrids: A support for business decision making. Renewable
Energy, 159, pp.693-704.
Kumar, A., 2018. The Impact of Erp Systems on Business Decision-Making in Pharmaceutical
Company. ZENITH International Journal of Business Economics & Management
Research, 8(4), pp.58-63.
Apriliyanti, I.D. and Randøy, T., 2019. Between politics and business: Boardroom decision
making in state‐owned Indonesian enterprises. Corporate governance: an international
review, 27(3), pp.166-185.
Dang, M.N., 2018. A new decision making model based on the made in Vietnam lean
management philosophy. Economics and Sociology, 11(1), pp.44-66.
James, L., 2018. Making cyber-security a strategic business priority. Network Security, 2018(5),
pp.6-8.
Carvalho, L., Viana, A.B.N. and Mine, M., 2020. What factors influence the decision of
entrepreneurs in choosing a business incubator?. International Journal of Innovation
and Regional Development, 9(2), pp.137-157.
Houhamdi, Z., Athamena, B. and El Refae, G., 2020. Managing asymmetric information effects
in decision-making productivity-based model. International Journal of Knowledge and
Systems Science (IJKSS), 11(2), pp.86-107.
Srinivasan, S. and Kamalakannan, T.J.C.E., 2018. Multi criteria decision making in financial risk
management with a multi-objective genetic algorithm. Computational
Economics, 52(2), pp.443-457.
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