Business Decision Making

This assignment discusses the strategic decision-making process for choosing between Project A (Washing Powder) and Project B (Software development) based on financial and non-financial factors. It includes analysis of payback period and net present value (NPV) to support the decision-making process.

Business Decision
Making

Introduction
The given assignment is based on strategic decision for whether to choose Project A (Washing
Powder) or Project B (Software development). For taking decision financial and non financial
factors have been considered. Calculation of payback period and NPV will support in making
decision.
Payback Period
Payback period:
The payback period refers to the amount of time it takes to recover the cost of an investment.
Simply put, the payback period is the length of time an investment reaches a break-even point.
The desirability of an investment is directly related to its payback period. Shorter paybacks
mean more attractive investments (Zativita, and Chumaidiyah, 2019). The decision criteria for
payback period are minimum year initial investment get back better for the business is.
Payback period of Project A
Year Project A Cumulative
cash inflows
0 -£120,000 -£120,000
1 £30,000 -£90,000
2 £35,000 -£55,000
3 £40,000 -£15,000
4 £60,000 £45,000
5 £90,000 £135,000
Payback
period = 3.25
Payback period of Project B
Year Project B
Cumulative
cash inflows
0 -£150,000 -£150,000
1 £40,000 -£110,000
2 £45,000 -£65,000
3 £50,000 -£15,000
4 £75,000 £60,000
5 £80,000 £140,000

Payback period = 3.20
Net present value (NPV)
NPV: Net present value (NPV) is the difference between the current estimate of cash inflows and
the current estimate of cash costs over time. NPV is used in capital and business planning that
seeks to eliminate the benefit of an estimate or expected action (Hopkinson, 2017).
The net present positive value indicates that the expected profit made by a share or by a
company - in current dollars - exceeds the costs incurred potential, as well as in current dollars.
Profit with a positive NPV is assumed to be profitable and a firm with a negative NPV will result
in a total deficit. This idea is the reason for the Absolute Value Rule, which directs that
individual initiatives with the positive effects of NPV should be considered.
NPV of Project A
Yea
r Project A Discount
(14%)
Discounted
cash flow
Cumulative
cash flow
0
-
£120,000 -£120,000
1 £30,000 1.14 £26,316 -£93,684
2 £35,000 1.2996 £26,931 -£66,753
3 £40,000 1.481544 £26,999 -£39,754
4 £60,000
1.688960
2 £35,525 -£4,229
5 £90,000
1.925414
6 £46,743 £42,514
NPV = £42,514
NPV of Project B
Yea
r Project B
Discount
@ 14%
Discounted
cash flow
Cumulative
cash inflows
0
-
£150,000 -£150,000
1 £40,000 1.14 £35,088 -£114,912
2 £45,000 1.2996 £34,626 -£80,286
3 £50,000 1.481544 £33,749 -£46,538
4 £75,000
1.688960
2 £44,406 -£2,132
5 £80,000 1.925414 £41,549 £39,418

6
NPV = £39,418
Analysis
Financial factors: These factors are related to financial motive of choosing or rejecting a project.
Some of the financial factors are:
1. Payback period: After analysis of both the projects; it was found that Project B is coverable in
short period of time compare to Project A. But this difference is not huge, it’s just fraction of
month. Hence, based on payback period rule; Project B will be preferred over Project A
(Tulasombat, 2017).
2. NPV: Net present value of both the projects is positive; but after comparison it was found that
Project A has more positive value than Project B and as per rule Project A should be accepted
(Dhochak, and Sharma, 2016).
3. Growth rate: Under this criteria of financial factors; growth of cash inflows over the period
analysis to reach at conclusion. Hence, the comparison shows that growth of Project A with less
initial investment is more than that of Project B. Thus based on growth rate factor; Project A
should be considered (Kamuti, and Omwenga, 2017).
Non-financial factors: These factors affect business decision based on the criteria other than
monetary benefits. These non financial factors have been discussed below:
1. Consistency in growth rate: The growth rate of Project A is inconsistent; for instance it is
continuously growing but at fluctuating pace and has quick growth. Hence, it is risky investment
and also shows that it will reach to maturity soon; while on the other hand, the growth of Project
B is consistent each year, which shows it has cash flows for long duration (Kusumaningrum,
Isbanah, and Paramita, 2019).
2. Future scope for the business: In this fast changing world; manufacturing washing powder has
limited scope; while software development has huge opportunity to grow in future (Turner and
Coote, 2018).

3. Government regulations: This factor has severed impacts on Project chosen. For instance; any
project which cross the line of government regulations could loss its money in paying fine and
may result in shutdown of the project (Dobrovic and et.al., 2018).
Final selection:
Project A will be chosen; the main reason to choose this Project is positive NPV which shows
accurate result about which project is more profitable. The other reason is its fast growth over the
period and Project A has higher return as compared to Project B.
Conclusion
After analyses of financial and non-financial factors it can be concluded that; both project has
different advantages; for instance Project A is good for short term investment while; Project B is
good for long term goals.

References
Hopkinson, M., 2017. Net Present value and risk modelling for projects. Routledge.
Tulasombat, S., 2017. Financial Factors Affecting on Investment Decision of Organic
Agribusiness SMEs in Chiang Mai Province, Thailand. Journal of Modern Management
Science, 10(2), pp.132-141.
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.
Kamuti, J.M. and Omwenga, J., 2017. Factors influencing investment decisions in Nairobi
Securities Exchange: A case of Dyer & Blair Investment Bank Limited. International
Academic Journal of Economics and Finance, 2(3), pp.1-15.
Kusumaningrum, T.M., Isbanah, Y. and Paramita, R.S., 2019. Factors Affecting Investment
Decisions: Studies on Young Investors. International Journal of Academic Research in
Accounting, Finance and Management Sciences, 9(3), pp.10-16.
Turner, M.J. and Coote, L.V., 2018. Incentives and monitoring: impact on the financial and non-
financial orientation of capital budgeting. Meditari Accountancy Research.
Dobrovic, J., Lambovska, M., Gallo, P. and Timkova, V., 2018. Non-financial indicators and
their importance in small and medium-sized enterprises. Journal of Competitiveness, 10(2),
p.41.
Zativita, F.I. and Chumaidiyah, E., 2019, May. Feasibility analysis of Rumah Tempe Zanada
establishment in Bandung using net present value, internal rate of return, and payback
period. In IOP Conference Series: Materials Science and Engineering (Vol. 505, No. 1, p.
012007). IOP Publishing.