Business Decision Making

This document discusses investment appraisal techniques, specifically NPV and payback period, in the context of business decision making. It compares two mutually exclusive projects based on their financial and non-financial factors. The conclusion emphasizes the importance of evaluating proposals before making investment decisions.

BUSINESS DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Investment appraisal is the technique to find out the profitability of the mutually
exclusive proposals and choosing the best alternative out of them. This process is also known as
the capital budgeting. This project shall be reflecting the two mutually exclusive proposals which
are to be compared on the basis of NPV, Payback period etc. Apart from that the project shall be
reflecting the financial and the non-financial factors that are used in the process of decision
making.
TASK
Two mutually exclusive projects:-
Project A: Belt
Initial investment: £ 170000
Project B: Trainers
Initial investment: £190000
Discounting rate: 14%
Calculation of the Net Present Value:-
Year Project A-
net cash
flows
Discounting
rate @ 14%
Present
value of
cash inflows
Project B-
net cash
flows
Discounting
rate @ 14%
Present
value of
cash inflows
0 -170000 -190000
1 45000 0.88 39600 50000 0.88 44000
2 45000 0.77 34650 45000 0.77 34650
3 35000 0.68 23800 70000 0.68 47600
4 70000 0.59 41300 90000 0.59 53100
5 82000 0.52 42640 90000 0.52 46800
Total 181990 226150
Project A
NPV:- PV of cash inflows – Present value of cash outflows
NPV:- 181990- 170000
NPV= 11990
The proposal is generating positive NPV of 11990.
Project B
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NPV:- PV of cash inflows – Present value of cash outflows
NPV:- 226150-190000
Net present value= 36150 Interpretation:- The NPV is the capital budgeting technique which is utilized for
evaluating the returns of the investment that is proposed by the management of the
company (Karlsson, Kurkkio and Hersinger, 2019). It is calculated by reducing the PV of
cash inflows from the present value of cash outflows that is undertaken by the company.
In the case of DDK plc it can be observed that the NPV of both mutually exclusive
projects is positive but project B is offering higher NPV which means that it shall be
generating higher returns for the company over and above the costs that are incurred (Net
Present Value (NPV), 2021).
Calculation of Payback period:-
Years Project A- net cash
flows
Cumulative cash
flows
Project B- net
cash flows
Cumulative cash
flows
0 -170000 -190000
1 45000 45000 50000 50000
2 45000 90000 45000 95000
3 35000 125000 70000 165000
4 70000 195000 90000 255000
5 82000 277000 90000 345000
Project A
Payback period:- 3 years + 12 / 70000*45000
Payback period:- 3 years + 7.71 months
Payback period:- 3 year and 7.71 months
Project B
Payback period:- 3 years + 12 / 90000*25000
Payback period:- 3 years + 3.33 months
Payback period:- 3 year and 3.33 months
 Interpretation:- The payback period is another such investment appraisal technique that
is used in analysing the capital budgeting decisions of whether the project must be
undertaken or not. The payback period analyses the time period in which the initial
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investments are recovered by the company. If they are being received within the life of
asset then it must be accepted but if not then the project must be rejected by the company.
In the current scenario it can be evidently noticed that both the investments are taking 3
complete years and some months in recovering the cost of projects (Farrar, 2020). Bsut
the company must go with the project that is taking lesser time which is project B
returning the amount in 3 year and 3 months.
As per both the investment appraisal techniques it can be analysed that project B is more
feasible and likely to provide higher returns to the company (Sharma, Bakshi and Chhabra,
2020). So it is suggested to the management of the DDK plc that out o the two mutually
exclusive projects it should select Project B.
Financial factors:- These are some essential financial factors that aids the capital budgeting
decision-making process of the company- Net cash inflows:- The cash inflows that are produced by the company over life of the
asset shall play a significant role in determining the feasibility of the investment. It can be
ascertained that the better investment is one which generates regular and higher returns
for the company throughout the life of the investment (Zore and et.al., 2018). These are
assessed post reducing all the expenditures pertaining to the particular financial year.
This ensures maintaining liquidity and stability in the business so that it can run its
operations smoothly.
 Potential Rate of return:- The potential rate of return also plays major role in the
business as it shall determine the long term growth and profitability of the company. The
IRR shows the lowest rate that must be earned to cover the costs and not make losses to
survive in the market (Basher and Raboy, 2018). Whereas the discounting factor is used
to discount the cash inflows to bring it to PV for facilitating the comparisons.
Non-financial factors:- There are some non-financial factors also that contribute in establishing
proper decisions in the business undertaking:- Efficient human resources:- The skills and competence that are possessed by the people
in the organization is also a major determinant of whether a particular investment will or
will not be successful in the company (Richmond, 2018). If the employees are resistant to
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change then the investments in the latest technology shall not be worthwhile and will be a
failure.
 Technology:- The technological incapacities are also one such factors that makes the
investment ineligible for the company and will not provide the resultant benefits to them.
The technological up-gradation helps in executing the new systems, approach,
equipments etc. (Woo and et.al., 2019).
CONCLUSION
It can be summarized from the above project that before executing any investment plan
the company must first evaluate the proposal, its related profitability, future growth prospects,
feasibility in the company environment etc. This can be undertaken by applying the various
investment appraisal techniques like NPV, payback, IRR etc. as these shall assess the viability of
the idea. Also, it shows some financial as well as the non-financial factors that shall be affecting
the decision of the business.
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REFERENCES
Books and Journals
Karlsson, B., Kurkkio, M. and Hersinger, A., 2019. The role of the controller in strategic capital
investment projects: bridging the gap of multiple topoi. Journal of Management and
Governance. 23(3). pp.813-838.
Farrar, S., 2020. Tax and Optimal Capital Budgeting Decisions. Routledge.
Sharma, R. K., Bakshi, A. and Chhabra, S., 2020. Determinants of behaviour of working capital
requirements of BSE listed companies: An empirical study using co-integration
techniques and generalised method of moments. Cogent Economics & Finance. 8(1).
p.1720893.
Zore, Ž. and et.al., 2018. Maximizing the sustainability net present value of renewable energy
supply networks. Chemical Engineering Research and Design. 131. pp.245-265.
Basher, S. A. and Raboy, D. G., 2018. The misuse of net present value in energy efficiency
standards. Renewable and Sustainable Energy Reviews. 96. pp.218-225.
Richmond, A., 2018. Direct net present value open pit optimisation with probabilistic models.
In Advances in applied strategic mine planning (pp. 217-228). Springer, Cham.
Woo, J. and et.al., 2019. Developing an Improved Risk-Adjusted Net Present Value Technology
Valuation Model for the Biopharmaceutical Industry. Journal of Open Innovation:
Technology, Market, and Complexity. 5(3). p.45.
Online
Net Present Value (NPV). 2021. [Online] Available through:
<https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-value-
npv/>
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