Business Decision Making: Payback Period and NPV Analysis

This essay discusses the importance of financial statements in making business decisions. It includes a computation of payback period and NPV for two investment options, and a description of monetary and non-monetary factors that affect business performance.

Essay on Business
Decision Making

Contents
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
Compute the payback period of DD Plc................................................................................3
Compute the NPV of option A and B....................................................................................4
Describe the monetary and non-elements in detail................................................................5
CONCLUSION..........................................................................................................................6
REFERENCES...........................................................................................................................7

INTRODUCTION
The financial statements are prepared by the companies to identify its financial status
which is used for making choice for the betterment of future of the organisation. For this, the
firm have to develop a units and form a meeting regarding the operation of the business
activities. It is an acute process which every organisation should consider and follow so that it
could remain in the market for long – haul of time (Albuhisi and Abdallah, 2018). The report
consists of the entity which manufactured the vegetarian food ad is operated majorly in UK
and Europe. In the report, payback and NPV will be computed for determining that whether
the company should invest in smoothies or non – dairy milk project. This is called the
decisions making. This will be done considering the financial and non – fiscal factory of the
corporation.
MAIN BODY
Compute the payback period of DD Plc.
A range of approaches for grading projects are used in financing choices. The old model does
not take into account the changing purchasing power over time. This calculator is used to
determine how long it will take to recuperate full cost of resources. The shorter the adopt
time on a task, the preferable; initiatives with a protracted lease term are not deemed
profitable (Balasubramanian and et.al., 2019). The original cost and estimated yearly inflows
are used to compute it.
Project A (smoothies) Project B (non-diary )
Year Cash flow Cumulative cash
flows
Cash flow Cumulative cash flow
0 -158000 -158000 -155000 -155000
1 72000 86000 71,000 -84000
2 78000 -8000 73,000 -11000
3 82000 74000 97,000 86000
4 110000 184000 118,000 32000
5 125000 309000 121,000 153000
Project A = 2 years + 8000 / 82000

= 2 years + 0.097
= 2.09 years.
Project B = 2 years + (155000 - 144000) / 97000
= 2 Years + 11000 / 97000
= 2.11 years
According to DD plc's statistics, project A has a payoff approaching 2.09 years, whereas
option B appears to have a potential return of 2.11 years. As a result, it is reasonable to
conclude that initiative A generates a financial benefit in a shorter period of time than project
B. As a result, project A is far more lucrative for the corporation.
Compute the NPV of option A and B.
Some stock methodologies take into account the cash's time worth and use a discounting
factor to convert past data to market prices. It comes in handy when deciding between
initiatives which are at contradiction among each other (Ji-chao and Sobhani, 2021). This is
computed by comparing total net income, taxes, or withdrawing money to overall net income,
taxes, or cash transactions. When contrasted to zero, it has an adverse value. The proposal
will be chosen if the number is higher than zero.
Year Project A - Smoothies Project B – Non- Diary Products
Cash flow Discount factor
@15%
Present
value
Cash flow Discount
factor
@15%
Present value
1 72000 0.87 62568 71,000 0.87 61699
2 78000 0.756 58968 73,000 0.76 55188
3 82000 0.66 53874 97,000 0.66 63729
4 110000 0.57 62810 118,000 0.57 67378
5 125000 0.5 62125 121,000 0.5 60137
300345 308131
Project A = Net present value of cash inflow – Net present value of cash outflow
= 300345 – 158000

= 142345
Project B = Net present value of cash inflow – Net present value of cash outflow
= 308131 – 155000
= 153131
Project A has an NPV of 142345, while Option B has an NPV of 153131. Initiative A has a
lower net present value than Option B. As a result, plan B will be chosen from the two
projects stated previously.
Describe the monetary and non-elements in detail.
Several forms of investment project take into account the time value of money and use a
discounted ratio to convert previous values to current values. Every company develops its
own set of standards, which are then compared to the real ones. Defects in performance can
be detected via performance measurement, and top-level management can rewrite the plan to
remedy them (Narayanan, Vaijayanthi and Shreenivasan, 2018). Some of the financial and
non-financial subjects that can be covered are as follows:
 Fiscal variable: The company's performance is influenced by liquidity, debt, and the
company's organisational structures. The percentage of equity and debt used to
finance the company is determined by capital structure decisions. Increasing debt
within a firm decreases the cost of financing and raises the company's worth. As a
result, establishing a company's cost and worth might assist with a variety of
financing possibilities. Liquidity is required for a business's operations to run
smoothly.
Liquid assets are those that can be readily converted into cash. The
fundamental concern of the company is to maintain an appropriate level of liquidity.
Inflation is defined as a considerable increase in the price of money. A significant
increase in market product rates has an impact on the government's money supply. It
has an impact on customers' purchasing power.
 Non – monetary factors: The following are the factors that have an unintended
impact on the outcome process: Every country follows the rules and regulations set
out by its leader. Business has been impacted by government structural reforms. Tariff
rate hikes, for example, limit retail businesses, which, as a result, diminish operational
efficiency. An organization's strategies should be adaptable enough that changes have
no effect on the company's profits (Zhou and Cao, 2020). Improved customer service

improves promotional efforts and increases consumer confidence. Not only should
profitability be prioritised, but so should the development of a positive relationship
with customers.
CONCLUSION
The findings below imply that corporate finance tools can assist in making critical
choices about the profitability of various programmes. It denotes the amount of money paid
out to owners. Although the benefits of economic and non-financial components cannot be
regulated, there appear to be a number of methods that can be taken to reduce the impact of
various elements that have attracted widespread attention.

REFERENCES
Books and Journals
Albuhisi, A.M. and Abdallah, A.B., 2018. The impact of soft TQM on financial performance:
The mediating roles of non-financial balanced scorecard perspectives. International
Journal of Quality & Reliability Management.
Balasubramanian, S. and et.al., 2019. Modeling corporate financial distress using financial
and non-financial variables: The case of Indian listed companies. International
Journal of Law and Management.
Ji-chao, Y. and Sobhani, B., 2021. Integration of biomass gasification with a supercritical
CO2 and Kalina cycles in a combined heating and power system: A thermodynamic
and exergoeconomic analysis. Energy, 222, p.119980.
Narayanan, K.T.L., Vaijayanthi, P. and Shreenivasan, K.A., 2018, March. Financial Viability
of Residential On-grid Solar PV Systems in India. In 2018 2nd International
Conference on Green Energy and Applications (ICGEA) (pp. 93-97). IEEE.
Zhou, Y. and Cao, S., 2020. Coordinated multi-criteria framework for cycling aging-based
battery storage management strategies for positive building–vehicle system with
renewable depreciation: Life-cycle based techno-economic feasibility study. Energy
Conversion and Management, 226, p.113473.