Business Decision Making

This essay discusses the application of investment appraisal techniques, factors to be considered for undertaking decisions, and provides a recommendation for a business organization. It also includes calculations of net present value (NPV) and payback period for two investment projects.

Business Decision
Making

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
Application of investment appraisal techniques....................................................................3
Factors to be considered for undertaking decisions...............................................................5
CONCLUSION..........................................................................................................................6
REFERENCES...........................................................................................................................7

INTRODUCTION
An important function for any business undertaking or for implementing any activity
is taking decisions which provides assistance to the management in effectively handling the
business operation resulting into achieving the desired objectives. This essay revolves
implementing various types of capital budgeting technique for the purpose of evaluating the
feasibility of the investment proposal provided by Genesis & Dreams Ltd. It also covers the
various aspects which the business organization should take care about while taking the
decision.
MAIN BODY
Application of investment appraisal techniques
Investment decision making is considered as the most crucial function for any
business as it involves huge amount of capital investment and if it is not involved into the
right place then it might result into incurring losses for the company. Therefore, NPV and
payback period analysis is used for the purpose of evaluation of the projects.
Net present value
The NPV technique is utilized by the business organization with the sole objective
of identifying the present worth of the future cash inflow that will be generated through the
current investment proposal (Kengatharan and Clamenthu, 2017). It is desirable to have
higher and positive NPV.
Calculation of NPV of Project A
Year Cash
inflows
PV
factor
@
14%
Discounted
cash inflows
1 18000 0.877 15789.47
2 16000 0.769 12311.48
3 19000 0.675 12824.46
4 22000 0.592 13025.77
5 37000 0.519 19216.64
Total discounted cash
inflow 73167.82
Initial investment 70000

NPV (Total discounted
cash inflows - initial
investment)
3167.82
Calculation of NPV of Project B
Year
Cash
inflows
PV
factor
@
14%
Discounted
cash inflows
1 21000 0.877 18421.05
2 27000 0.769 20775.62
3 30000 0.675 20249.15
4 32000 0.592 18946.57
5 32000 0.519 16619.80
Total discounted cash
inflow 95012.19
Initial investment 84000
NPV (Total discounted
cash inflows - initial
investment)
11012.19
Analysis and interpretation:
The NPV derived under both the projects states that both are positive and can be
used for the purpose of investment but the organization is willing to invest only in one
project. Therefore, its favorable to make an investment into Project B which is having NPV
of £11012.19 as against the NPV of Project A which is £3167.82.
Payback period
The payback period accounts for the time period within which the organization
would be able to recover the money it has invested in the project (Adebimpe and Bashir,
2018). The organization expects early and shorter PBP so that it can reinvest the amount into
the other plan.
Calculation of Payback period of Project A
Year
Total
cash
flow
Cumulative cash flow
0 -70000 -70000

1 18000 -52000
2 16000 -36000
3 19000 -17000
4 22000 5000
5 37000 42000
Payback
period
3 years + 17000/22000 = 3.77
years
Calculation of Payback period of Project B
Year
Total
cash
flow
Cumulative cash flow
0 -84000 -84000
1 21000 -63000
2 27000 -36000
3 30000 -6000
4 32000 26000
5 32000 58000
Payback
period
3 years + 6000/32000 = 3.19
years
Analysis and interpretation:
It can be evaluated from the above that the PBP of Project B is shorter than that of
Project A, therefore, it feasible for the company to consider Project B as it will help in
reducing the risk.
Therefore, based on the application of both the investment appraisal technique, it is
recommended that the company should go for Project B as it is having higher NPV along
with shorter PBP.
Factors to be considered for undertaking decisions
There are two forms of factors having an impact over the decision making which are
classified and elaborated below.
Financial factors
Financial position of the company: The current profitability and liquidity position
of the company is a crucial factor in ensuring success of the company (Dor and Elovici,
2016). This will help in determining the capability of the company in repaying its debts on
time.

Procurement of funds: There are various of funds but analyzing the right source is
a challenge. Along with that, it important to identifying how much it will cost to the company
as might result into increasing financial burden on the company.
Risk involved: The most crucial aspect which cannot be ignored is the risk involved
while selecting the investment project along with the various sources of financing.
Non-financial factors
Future market growth: The business entity requires to completely analyze the
market place in which it is willing to invest into (Dhochak and Sharma, 2016). This helps in
determining the future growth ability in the existing and how it will be beneficial for the
company in gaining profits, market share and growth. Thus, this is an important factor in
ensuring success.
Legal standards and regulations: There are certain legal laws and regulation
which the organization is required to comply with in order to ensure that everything works
out smoothly without any legal issue or problem. This form an important of decision making
which cannot be ignored, otherwise, it might result into incurring negative impact over the
organization, its business operation along with the profitability.
Competency of the employees: By making use of the new machinery, technology
or software results into increase in the requirement of the highly qualified personnel who is
having required to ability to work on the new system (Nguyen, Gallery and Newton, 2016).
Thus, the existing skills and competency of the employees is also an important factor which
can influence the business decision making.
Therefore, these are the some of the financial and non-financial factors that are
having a huge impact over the business decision making and the level of influence of these
factors over the decision of an organization.
CONCLUSION
It can be inferred from the above that it is very important for the business entity for
effectively analyse the situation and its implication over the business so that decision taken
can add value to the business resulting into profitable situation. There are various factors
which plays an important role in decision making which are risk element, cost, legal
regulation, employees of the organization and so forth. Along with it is better for the Genesis
& Dreams Ltd, to invest its funds in the Project B which will be beneficial for it.

REFERENCES
Books and Journals
Adebimpe, O. A. and Bashir, O., 2018. Modern Approach to Property Development
Appraisal. Covenant Journal of Research in the Built Environment.
Dhochak, M. and Sharma, A. K., 2016. Identification and prioritization of factors affecting
venture capitalists’ investment decision-making process. Journal of Small Business
and Enterprise Development.
Dor, D. and Elovici, Y., 2016. A model of the information security investment decision-
making process. Computers & security, 63, pp.1-13.
Kengatharan, L. and Clamenthu, D. P., 2017. Use of capital investment appraisal practices
and effectiveness of investment decisions: a study on listed manufacturing
companies in Sri Lanka. University of Jaffna.
Nguyen, L., Gallery, G. and Newton, C., 2016. The influence of financial risk tolerance on
investment decision-making in a financial advice context. Australasian Accounting,
Business and Finance Journal. 10(3). pp.3-22.