Business Decision Making: Calculation of Payback Period and Net Present Value

This essay discusses the importance of business decision making and provides calculations of payback period and net present value for two projects. It also considers financial and non-financial factors for decision making in a business organization.

Essay on Business
Decision Making

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Introduction
Business decision making is considered as an important component of an organization. It
plays an important role in developing a financial management system that must be strong enough
to deal with the organizational financial activities. It is a process that includes various steps
which can be taken in order to achieve the objectives of the organizations in a highly efficient
manner. In context to this report, there are two different projects that have been provided for the
purpose of selection. For this purpose calculations have been made using the technique of
payback period and net present value so that a better output can be obtained to select the best
project. In addition to this, financial and non financial factors have been considered because
there contribution is considered as an essential part of the business decision making process.
Calculation of the payback period of two projects namely Project A – Vegan Chocolates and
Project B –Vegan Spreads.
Year Project A –
Vegan
Chocolates
Cumulative Cash
flow
Project B –Vegan
Spreads
Cumulative Cash
flow
1 52,000 52000 46,000 46000
2 58,000 110000 60,000 106000
3 82,000 192000 72,000 178000
4 105,000 297000 89,000 267000
5 118,000 415000 108,000 375000
The initial investment for the project project A (vegan chocolate) is stated at is £140,000.
The initial investment for the project project B (vegan spread) is stated at is £120,000.
Calculation:
Payback Period Formula: 3+ Cash flow of 3rd year/ Cash flow of 4th year
Project-A Project-B
3 + 110000 / 97000 3 + 106000 / 267000

Payback Period – 3.37 Payback Period – 3.39
Calculation of Net Present Value of Project – A Vegan Chocolates and Project – B Vegan
Spreads
Year Project A –
Vegan
Chocolates
Present
Value Factor
Present
Value
Project B
–Vegan
Spreads
Present
Value
Factor
Present
Value
1 52,000 0.9 46800 46,000 0.9 41400
2 58000 0.81 46980 60,000 0.81 48600
3 82,000 0.73 59860 72,000 0.73 52560
4 105,000 0.65 68250 89,000 0.65 57850
5 118,000 0.59 69620 108,000 0.59 63720
Total 291510 264130
Less: Initial Investment 140000 120000
Net Present Value 151510 144130
Formula of Net Present Value: ⨊(P / ( 1+i ) t ) – C
where,
P = Net Period Cash Flow
i = Discount Rate (or rate of return)
t = Number of time periods
C = Initial Investment
From the above mentioned calculation it can be seen that the payback period of project A
Vegan Chocolates is better than that of the project B Vegan Spreads. the major reason behind
that it is taking less amount of time in order to provide the returns that are required for the
purpose of achieving business goals effectively (Abdel-Basset, and et. al., 2018). Also, if the net
present value is also considered for taking a decision to select the project amongst the two, it can
be seen that Project A is better and having a higher amount of the value at 151510 while on the

other hand the value of the Project B is 144130. Therefore, it can be considered that amongst
both of the projects it is highly recommended to execute the Project A as its financially better
and convenient for the business organisation to go for to achieve success in long run. This
project will help in returning a very higher amount of revenue along with higher returns.
Financial and non Financial Factors for decision making of an business organization
In order to execute the process of business decision-making, an effective business plan
can be made which helps in attaining the goals of the business organization (Qin, Peak and
Prybutok, 2021). The projection based on different types of components can be effectively made
so that the business operations can be performed without any type of hindrance.
 Depreciation: It is considered as an important part of a business entity because the
depleting value of the assets affects the capital structure of the business organization to a
greater extent.
 Revenue: It can be basically defined as the amount of income that is earned by the
business organisation with all its business operations (Senthil, Murugananthan and
Ramesh, 2018). It is highly significant for any business organization to generate revenues
that must be enough to at least cover the input cost of the company on a great level.
 Gross Profit Margin: It can be defined as the difference between the total revenue and
the cost of goods sold. It is considered that the business organization must make it sure
that it is maintaining sufficient levels of gross profit to attain higher amounts.
Other than the above mentioned financial factors it is considered that business decision
making is also affected by the non financial factors which play a major role in an business
organization majorly (Medina, and et. al., 2020). They must be considered as highly significant
and taken into consideration so that the business operations can run smoothly that too without
any hindrance with an objective to attain the end goal of the company. The main non-financial
factors are explained beneath:
 Management Structure: For a business organization to run on success path it is highly
important to have a strong and stable business management structure. The management
must include dynamic and skill full employees who can work in all types of situation
effectively.
 Growth Potential: The financial statements can be considered as the major indication of
achieving the potential success and growth. The business organization must utilize all the

capabilities and skills that directly helps in increasing the growth potential of the
company. This helps the organization in becoming successful in a short period of time.
 Diversified risk of human capital risk: an organization should always focus on a
diversified structure of the suppliers, customers and employees that help in avoiding the
risk of depending on one supplier (Thill ed., 2019).
Conclusion
From the above report, it can be concluded that it is highly important for an organization
to critically analyse the payback period and the net present value of various projects as it helps in
taking certain important business decisions. Also, the financial and non financial factors that
have been explained above should be considered as important as they aims at enhancing the
efficiency of the company or the business entity to take the business decisions.

References
Books & Journals
Abdel-Basset, M., and et. al., 2018. A group decision making framework based on neutrosophic
VIKOR approach for e-government website evaluation. Journal of Intelligent & Fuzzy
Systems, 34(6). pp.4213-4224.
Senthil, S., Murugananthan, K. and Ramesh, A., 2018. Analysis and prioritisation of risks in a
reverse logistics network using hybrid multi-criteria decision making methods. Journal
of Cleaner Production, 179. pp.716-730.
Medina, C. A. G., and et. al., 2020. The processing of price during purchase decision making:
Are there neural differences among prosocial and non-prosocial consumers?. Journal of
Cleaner Production, 271. p.122648.
Thill, J. C. ed., 2019. Spatial multicriteria decision making and analysis: a geographic
information sciences approach. Routledge.
Qin, H., Peak, D. A. and Prybutok, V., 2021. A virtual market in your pocket: How does mobile
augmented reality (MAR) influence consumer decision making?. Journal of Retailing
and Consumer Services, 58. p.102337.