Business Decision Making: Investment Appraisal Techniques for Better Performance and Higher Profitability

This document discusses the importance of business decision making in improving performance and profitability. It explores investment appraisal techniques, such as payback period and net present value, for project A and project B. The document also highlights the role of financial and non-financial factors in the decision-making process.

Business
Decision
Making

Contents
Contents...........................................................................................................................................3
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1.Computation of payback period of project A & project B:......................................................1
2.Computation of net present value of project A and project B..................................................2
3.Final decision:...........................................................................................................................4
4.Role of financial as well as non financial factors in decision making procedure:....................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Business decision making are the process for financial decision making which company
makes for running its activities in better way. It is important element for the company’s for
making effective decisions. It helps managers for managing activities as per the decisions.
Businesses are takes decisions for its financial position which follows various methods.
Managers takes decisions by undertaking the financial statements. For example, if any company
wants to do investment for any project it going for see which project gives it higher profitability.
For this company use various investment appraisal methods. The company which is includes for
this report is ABA plc. It is the branded cycle company, operating in the UK and some parts of
the Europe. This report includes topics which are investment appraisal techniques which
company use for its decision making which helps for better performance which helps for higher
profitability for the businesses (Metcalf, Askay and Rosenberg, 2019) .
MAIN BODY
1.Computation of payback period of project A & project B:
Overview: strategic managers of ABA plc are looking to invest in a project
manufacturing electric cycles or electric scooters. They have called new business proposals and
have finally, chosen two projects using managers’ discretion to make final decision. Initial
investment required for project A (electric cycles) is £140,000 and for project B (electric
scooters) is £180,000. It uses investment appraisal methods which are payback period method,
net present value method.
Payback period method: This method is about which views how much time project
takes for its returns on investment. The time for covering investment amount for the company.
Project A ( Electric Cycles)
Year Cash flow Cumulative cash inflow
1 35000 35000
2 40000 75000
3 45000 120000
4 80000 200000
1

Year Cash flow Cumulative cash inflow
5 92000 292000
Payback period = Year before cost recovery + Remaining cost / Cash flow for particular year=
3.25
Project B ( Electric Scooters)
Year Cash flow Cumulative cash inflow
1 46000 46000
2 55000 101000
3 60000 161000
4 80000 241000
5 100000 341000
Payback period = 3.23
As per the above information it shows project A & project B for the investment option of
ABC plc company. The company uses payback period method for knowing which option gives
returns earlier. As per this data it shows the company it shows project B gives earlier return to
the company. Project B gives returns for 3.23 years where the project A gives return for 3.25
years.
2.Computation of net present value of project A and project B.
Net present value: This is about which consider the essential technique of capital
budgeting through which manager know value of cash inflow for particular period of time. This
method is about the net present inflows which com
pany earns for invested in project. It is about company’s decision making regarding which
project gives higher cash flow. It shows the value for the company’s investment.
Net present value = Cash outflow – cash inflow
Project A
2

Year Project A –
Electric Cycles
Project Net cash
flow £
PV factor at 16% discounted cash
flow
1 35000 0.8621 30173.5
2 40000 0.7432 29728
3 45000 0.6407 28831.5
4 80000 0.5523 44184
5 92000 0.4761 43801.2
176718.2
NPV DCF-Investment
36718.2
Project B
Year Project B –Electric
Scooters Project Net
cash flow £
PV factor at 16% discounted cash flow
1 46000 0.8621 39656.6
2 55000 0.7432 40876
3 60000 0.6407 38442
4 80000 0.5523 44184
5 100000 0.4761 47610
210768.6
As per the above information it shows that company uses net present value for knowing
the best investment option. The company uses this for completing its tasks (Oumlil and Balloun,
3

2017). Net present value method for the company shows project A gives 36718.2 return, project
A gives 210768.6
This is views that project A gives higher benefits for the company which makes it higher returns
on its cash flows.
3.Final decision:
From the above calculation for cash inflow & outflow it views that for payback period
method company has beneficial for project B. But as per the net present value method it
shows company has beneficial option which is project A which gives higher returns. From
the both it shows that as per payback period there are no higher difference for payment
return period. So it is suggested that company should invest in project A which gives
higher returns for the company which helps for better performance which helps for higher
profitability. The company ABC plc which wants to purchase the project manufacturing
electric cycles or electric scooters. The A project will be beneficial for the company as it
gives higher returns to it for its profitability for its investments.
4.Role of financial as well as non financial factors in decision making procedure:
The non financial factors:
The top three non-financial factors that can significantly affect business values are
management structures, diversification, and potential growth.
In context to consumer, these things can help them see a bigger picture without numbers
and get an idea of what really drives a successful business.
In context to owner, these things can give them a sense of what important driver values are
and what mistakes them can make to increase the value of thier business to potential
customers.
The financial factors:
The financial factors are which includes Interest rate, The investment is funded by current or
borrowed funds, Economic growth, Factors invest in meeting future needs, Self-confidence,
Investing is more risky than savings, Inflation, Capital production, Financial availability, Salary
costs, Depreciation, profits etc (Tseng, Chiu and Liang, 2018).
4

CONCLUSION
From the above report it has been concluded that business makes decision for running its
activities which helps for better performance which helps for higher profitability for the
businesses. Company’s use capital budgeting methods for knowing better investment options.
There are financial, non financial factors which gives company helps for its decision making.
These factors business considers for its financial decision making for the higher profitability for
the businesses.
5

REFERENCES
Books and journals:
Metcalf, L., Askay, D. A. and Rosenberg, L. B., 2019. Keeping humans in the loop: pooling
knowledge through artificial swarm intelligence to improve business decision
making. California Management Review. 61(4). pp.84-109.
Oumlil, A. B. and Balloun, J. L., 2017. Cultural variations and ethical business decision making:
a study of individualistic and collective cultures. Journal of Business & Industrial
Marketing.
Tseng, M. L., Chiu, A. S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
6