Business Decision Making

This report discusses the importance of business decision-making and explores the methods of calculating payback period and NPV. It also examines the benefits and drawbacks of these methods and the use of financial and non-financial factors in decision making.

BUSINESS DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Calculating Payback period for business proposals.....................................................................3
Calculating NPV of the proposals................................................................................................4
Benefits and drawbacks of the payback period and NPV............................................................6
Use of financial and non-financial factors...................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business decision-making is very important topic to be discussed. Without taking
appropriate decisions, no business can survive in market place. This report discusses decision-
making aspect of Genesis & Dreams Ltd. There are NPV and Payback methods, and use of
financial and non-financial factors also has been discussed in this report.
MAIN BODY
Calculating Payback period for business proposals
Payback period basically indicates that total time period which will be required so that the
investment which is made by the company can be recovered (Benamraoui and et.al., 2017).
Using the payback period, following calculation can be made for the Genesis & Dreams Ltd.
which wants to choose between two different business proposals.
For Project A: Payback Period:
Initial Investment: 70000
Year Net Cash Flow(£) Cumulative cash inflow (£)
1 18000 18000
2 16000 34000
3 19000 53000
4 22000
5 37000
Pay Back period as calculated for Project A = 70000- 53000 = 17000. Hence,
= 3 Years + (17000/22000) x 12 Months
= 3 years + 0.8 x 12 months
= 3 years + 9.6 months

For Project B: Payback Period:
Initial Investment = 84,000
Year Net Cash Flow(£) Cumulative cash inflow (£)
1 21000 21000
2 27000 48000
3 30000 78000
4 32000
5 32000
Pay Back period as identified for Project B = 84000 – 78000 = 6000. Therefore,
= 3 Years + (6000/32000) x 12 Months
= 3 years and 0.2 * 12 months
= 3 years and 2.4 months
The implementation of Payback period method on both the investment options helps in
clearly identifying that since time period is comparatively shorter for second project in
comparison to first one, Project B is selected.
Calculating NPV of the proposals
NPV method i.e. Net Present Value denotes the present value of the investment i.e. cash
flows and helps in better decision making (Pathirawasam, 2016). It is ascertained by obtaining
net difference between the present values of cash inflows and outflows. It can be denoted as:
Present Value of Cash Inflow – Initial Investment ( Present value of cash outflow)
To evaluate the present value for Project A, where the expected rate of return or
discounting rate is 14%, following calculation can be made:
Year Cash Out Flow Discounting Factor @ Amount = PV factor

14% * Cash Outflow
1 18000 0.877 15786
2 16000 0.769 12304
3 19000 0.674 12806
4 22000 0.592 13024
5 37000 0.519 19203
Total 73123
Hence, NPV for project A can be calculated as: 73123 – 70000 = £3123
For Project B, NPV can be identified as follows at the discounting factor of 14%:
Year Cash Out Flow Discounting Factor @
14%
Amount = PV factor
* Cash Outflow
1 21000 0.877 18417
2 27000 0.769 20763
3 30000 0.674 20220
4 32000 0.592 18944
5 32000 0.519 16608
Total 94952
Therefore, NPV for Project B can be identified as: 94952 – 84000 = £10952

Through the NPV method of evaluation, it can be clearly identified that the better option out
of the two business proposals for Genesis and Dreams Ltd. is option B as the NPV is much
greater than that of project A.
Since, both the methods that were used i.e. NPV and Payback period clearly present better
viability of Project B over project A, Genesis and Dreams Ltd. should go forward by investing in
second project i.e. Project B. This can also be attributed to the fact that the returns that can be
earned from Project B are more and comparatively for a larger time period as compared to the
Project A which is giving lower returns altogether.
Benefits and drawbacks of the payback period and NPV
The payback period and NPV (Net Present Value), both methods has their own
importance in an organisation. Currently many of companies are taking lots of benefits and
advantages from these both methods. However, payback and NPV methods has some drawbacks
as well with benefits (Vasconcelos, 2020). In this situation, upper management of Genesis &
Dreams Ltd. should always consider all benefits and drawbacks of these methods while taking
any decision on the basis of these methods. Some major benefits and drawbacks of payback and
NPV methods has been discussed below;
Payback Period
Benefits: This method’s first benefit is it simplicity, because this is very simple method to use. A
small-scale business also can simply adopt and use this method in its workplace. Payback
method provides a very easy way for comparing servant projects, and also to take a project
which has the shortest time of payback. However, this method is not enough to gain long terms
profit in market place.
Drawbacks: Payback method mainly ignore the time value, in which this is one of major
drawback of this method. After payback, it has neglected flows of cash in business environment
of an organisation. Many times, this method ignores the project’s profitability aspects as well,
and this attribute of method put very negative impact on the effectiveness of project.
NPV (Net Present Value)

Benefits: NPV method is very beneficial in accepting conventional flow pattern of cash. It is
very beneficial in the considerations of all flows of cash as well. After using this method, the
business can simply measure its profitability in market place.
Drawbacks: This method’s first drawback is that, it is very difficult and complicated to use in
daily operations of the business (Groot, 2016). This method is also difficult in calculating
appropriate rate of discount as well. A small business can’t afford this method to measure its
profitability index.
Use of financial and non-financial factors
Use of financial and non-financial factors is very necessary to upper management of
Genesis & Dreams Ltd while making decisions in the workplace. Financial factors are going to
include the costs which are going to be present in a business. Non financial factors are going to
be those which are going to impact on the financial performance and decision which is
associated with the company. Full closure in an organization is going to be resulting in losses of
jobs which is not going to be good for a long run. There are a lot of suppliers which are present
and for that the ethical issues have to be resolved so that the working environment can be
maintained healthier. Currently accounts receivable, net income, revenue generation, working
capital, fixed assets and sales activity are major financial factors to this business, in which upper
management should always consider each factor while take any important decision.
On the other side, meeting the needs of future and current legislation, matching ethical
practices and industry standards, improving moral of employees, retail employees are some
major non-financial (Boutieri, 2016). In this situation, these all non-financial factors also have to
be considered in decision-making process. Inventories in the company also have to be
maintained so that there is going to be higher performance and operations which can take place
in the organization. Non financial can also be associated with the planning and development
decisions which are being taken so that there is going to be better decisions and future operations
which are going to be present in the company. There is a standard, brand value and reputation
which needs to be present in the market so that there is going to be higher operations and more
customers can be attracted in the organization as well.

CONCLUSION
It can be concluded that upper management of Genesis & Dreams Ltd have to make
business decisions after deeply analysing all above-mentioned data, because this is necessary to
take very appropriate decisions. Use of financial and non-financial factors also too necessary to
the company to gain huge advantages through taken decisions.

REFERENCES
Books & Journals
Benamraoui, A., and et.al., 2017. Net Present Value Analysis and the Wealth Creation Process:
A Case Illustration. The Accounting Educators' Journal. 26.
Boutieri, C., 2016. Learning in Morocco: Language politics and the abandoned educational
dream. Indiana University Press.
Groot, N., 2016. Powerful individuals and their dominant role in organisations: time for
reflexivity. International Journal of Business and Globalisation. 17(4). pp.514-527.
Pathirawasam, C., 2016. Capital budgeting practices: Evidence from Sri Lanka listed
companies. International Journal of Management and Applied Science. 2(5). pp.23-26.
Vasconcelos, A. F., 2020. Spiritual intelligence: a theoretical synthesis and work-life potential
linkages. International Journal of Organizational Analysis.