Business Decision Making: Analysis of Two Investment Projects

This report analyses two investment projects for a manufacturing company in the UK, using payback period and net present value as decision-making tools. It also discusses financial and non-financial factors that could impact the projects.

Business Decision
Making

Contents
INTRODUCTION...........................................................................................................................3
Project A..........................................................................................................................................3
Payback Period........................................................................................................................4
Net Present Value....................................................................................................................4
Analysis...................................................................................................................................4
Project B..........................................................................................................................................5
Payback Period........................................................................................................................5
Net Present Value....................................................................................................................5
Analysis...................................................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In any type of organization, the various methods and procedures used are relevant in decision
making. The decisions made therefore are crucial for maximization of wealth and significant
increase in the turnover. For such purpose the management needs to concentrate on first
identifying the problem which requires immediate action and afterwards collection of material
information which will help draft the cause of the problem and as a result, propose appropriate
decisions (Bratasanu, 2018). In the given report, the most common and important business
decision making tool is analysed through a case study which proposes a manufacturing company
which operates in United Kingdom and is looking for investing in the production of synthetic
leather bags, for which it has chosen the two projects for the same purpose. By understanding the
importance of payback period along with related financial and non-financial factors the company
can propose appropriate decision and avoid risks related to over and under investments.
Furthermore, the operations performed by the management in executing and implementing the
proposed decision and bringing it to life, require proper budget to be prepared and henceforth
requires the management to calculate the Net Present Value of the investments and the pay-back
period.
Project A
The company’s first option is to produce the synthetic leather bags, which will provide them with
significant turnover and can help them avoid costs and irregularities in the outsourcing process
which is currently followed (Garg, 2018). Below mentioned is the process adopted for
calculating the required decision making theories. The company made initial investments of
£185,000 in the project and the Discounting Factor is 11%.
(Amount in £)
Year
(A)
Cash Flow
(B)
Cumulative
Cash Flow (C)
Present Value
Factor (D)*
Present Value OF Cash
Flows (E)
0 (185000) - 1 (185000)
1 60,000 60000 0.901 54060
2 68,000 128000 0.812 55216
3 82,000 210000 0.731 59942
4 109,000 319000 0.659 71831

5 155,000 474000 0.593 91915
*Present Value Factor = [1/ (1+Discount rate) No. of years]
Payback Period
Payback Period = {[(Original cost – C.F of previous year when cost is fulfilled)/Cost of fulfilled
year] + Completed years}
PBP = {[(185000 – 128000)/82000] + 3 = 3.7 years
Net Present Value
Net Present Value = Present Value of Cash Inflow – Present Value of Cash Outflow
NPV = 332964 – 185000 = £147964
Analysis
The above analysis presents a clear view about the company’s position in the future, if it adopts
the first option of investing £185000 for production of synthetic leather bags. The Payback
period or the time period in which the company will be able to redeem its initial investment is
calculated at 3.7 years and the Net present value of the same is calculated at £147964 which
defines the current value of cash flows of five years compared to the investment made.
Financial Factors
 Interest Rates - The financial factors which could affect the proposal could be the
interest rate which can fluctuate, for leather synthetically produced and in return can
adversely affect the company, due to its dynamic nature and inflation rates impacting the
commodity industry every minute (Doménech Martínez, 2019).
 Labour Availability – The labour conditions and availability, which needs to be sourced
for in-house production, if the company adopts Project A, need to be favourable.
However, the labour for production of a newly introduced good, will require training and
development process to be followed.
Non-Financial Factors
 British Exit from European Union - The non-financial factor which can adversely
affect the production process, are the “Brexit” issue or notion given to the withdrawal of
United Kingdom from the European Union. With this change, the company will not apply

the provisions led down by the custom unions, however zero tariffs and zero quotas will
be applicable for trading in consumer goods.
 COVID-19 – The pandemic has given rise to various adverse conditions for the
economy, henceforth the company must address the same. The consumers who will
purchase the products of the company, will significantly increase due to “stay at home”
policies. However, with this pandemic, many individuals became unemployed, leading to
lower purchasing power, hence, may generate lower turnover of company.
Project B
The company would like to earn the profits and reduce their costs of outsourcing the services
incurred in the production and manufacturing of the Cloths Bags. Henceforth, the initial sum of
money amounting to £182000 and the discounting rate will remain the same that is 11%. For
understanding what this option is worth and in how many years will the company will be able to
redeem its initial investments made are calculated as under:
(Amount in £)
Year
(A)
Cash Flow
(B)
Cumulative
Cash Flow (C)
Present Value
Factor (D)*
Present Value OF Cash
Flows (E)
0 (182000) - 1 (182000)
1 65,000 65000 0.901 58565
2 69,000 134000 0.812 56028
3 77,000 211000 0.731 56287
4 105,000 316000 0.659 69195
5 145,000 461000 0.593 85985
*Present Value Factor = [1/ (1+Discount rate) No. of years]
Payback Period
Payback Period = {[(Original cost – C.F of previous year when cost is fulfilled)/Cost of fulfilled
year] + Completed years}
PBP = {[(182000 – 134000)/77000] + 3 = 3.62 years
Net Present Value
Net Present Value = Present Value of Cash Inflow – Present Value of Cash Outflow

NPV = 326060 – 182000 = £144060
Analysis
The second option available for the company, is the production and manufacturing of the cloth
bags, which may be able to improve their contribution towards the environment if they produce
cloth bags with sustainable and eco-friendly fabrics and materials (El Nemar, 2020). The initial
investments for the same is £182000, which lower than the previous project investment, also the
Net Present Value for this project is £144060 and as a result the Payback period for the same is
3.62 years. As per these details, the company will be able to incur better return if they invest in
the previous project.
Financial Factors
 Tax rates - In this project the financial factors are tax rates levied, related policies to be
followed and inflation conditions ahead. The tax rates which are levied on the company,
will depend on the raw material, which is cloth or fabric, and the production process
which will be followed.
 Inflation – The increase of prices of consumer goods sold within an economy, are
referred to as inflation and may impact the company, with rise in the production costs of
the raw materials and labour costs. Henceforth, if a surge in the demand of cloth based
products, is noted, then may not be beneficial for this process.
Non-Financial Factors
 Sustainability Impact – If the company chooses to implement and adopt this option,
then they may produce clothing bags from sustainable raw materials, to lower their
impact on environment. However, manufacturing a product from sustainable fabric will
be more expensive and will require workers to be trained, as well as new machinery to be
purchased, which is specifically made for such purpose.
 British Exit from E.U – As previously discussed, the exit of United Kingdom, from the
European Union, will impact the consumer industry as a whole. It will impact the trading
practices which were adopted earlier, with implementation of trade obstacles and barriers
for cross-border transactions, which were not in force before 1 January 2021.
By examination of the above analysis, the company should opt for Project A, to garner
better investment value in the future, as this option reveals a better Net Present Value.

CONCLUSION
From the above report, the concepts related to decision making procedures can easily be
understood and the various methods adopted such as the Net Present Value and Payback period
are discussed in relation to the case of S&P plc. The company will be able to make relevant
decision as per the methods followed and can impact its business practices and the revenue it is
currently earning (King, 2020). Furthermore, various financial and non-financial factors which
could impact the workings of the company are also mentioned, so as to give an idea about the
dynamic market conditions.

REFERENCES
Books and Journals
Bratasanu, V., 2018. Leadership Decision-Making Processes in the Context of Data Driven
Tools. Quality-Access to Success, 19.
Doménech Martínez, S., Campos Fernández, F.A. and Villar Collado, J., 2019. Generation
expansion planning based on positive net present value.
El Nemar, S., Vrontis, D. and Thrassou, A., 2020. An innovative stakeholder framework for the
student-choice decision making process. Journal of Business Research, 119, pp.339-
353.
Garg, H. and Kumar, K., 2018. Distance measures for connection number sets based on set pair
analysis and its applications to decision-making process. Applied Intelligence, 48(10),
pp.3346-3359.
King, M. and Renedo, E.U.G.E.N.I.O., 2020. A net present value assessment of NPL's support to
UK businesses.