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Business Decision Making: Calculation of Payback Period and NPV for Two Projects

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Added on  2023/06/08

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The report discusses the calculation of payback period and net present value for two projects and the financial and non-financial factors in decision-making. Project A has a higher NPV of £147,989, while project B has a payback period of 2 years and 6 months. Financial factors such as cost and cash flow, and non-financial factors such as organizational policies and COVID-19 are discussed. The report concludes that strategic decision-making is crucial for organizational growth and development.

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TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
MAIN BODY...................................................................................................................................1
PROJECT A.....................................................................................................................................1
Calculation of the payback period..........................................................................................1
Calculation of NPV................................................................................................................1
Analysis..................................................................................................................................2
Financial ad non financial factors in decision-making procedure..........................................2
PROJECT B.....................................................................................................................................3
Determination of the payback period....................................................................................3
Calculation of NPV................................................................................................................3
Analysis and Discussion:........................................................................................................4
Monetary and non financial factors in decision-making procedure......................................4
CONCLUSION ...............................................................................................................................5
REFERENCES................................................................................................................................6
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INTRODUCTION
Business decision-making is related with having the effective consideration of various
factors in turn attaining appropriate growth and development can become possible. In the current
era, making effectual business decision is important by taking various aspects so that effectual
growth can be obtained. The recent investigation is based on S&P which is one of the
manufacturing organization that produces synthetic leather bags and clothes bags. It will involve
the calculation of payback period, net present value and financial & non financial factors in
decision-making.
MAIN BODY
PROJECT A
Calculation of the payback period
Year Project A –
Synthetic Leather
Bags Net cashflow
£
Cumulative cash inflows
1 60000 60000
2 68000 128000
3 82000 210000
4 109000 319000
5 155000 474000
Initial investment 185000
Payback period 2
0.7
Payback period 2 year and 7 months
Calculation of NPV
Year Project A – PV factor @ Discounted cash inflows
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Synthetic
Leather Bags
Net cash flow £
11%
1 60000 0.901 54054.054054054
2 68000 0.812 55190
3 82000 0.731 59958
4 109000 0.659 71802
5 155000 0.593 91985
Total discounted
cash inflow
332989
Initial investment 185000
NPV (Total
discounted cash
inflows - initial
investment)
147989
Analysis
On the basis of the above information it can be mentioned that in payback period the
focus is provided on duration which is lower for collecting the invested capital. It is found to be
beneficial so that attention is paid on less time (Agu Bertram, 2018). From the assessment it can
be articulated that net present value is associated with the time value of money. In the current
case, project A has the NPV of 147989. Higher net present value indicate it to be more
beneficial of the company in turn attaining objective of organization can be achieved.
Financial ad non financial factors in decision-making procedure
There are distinct types of the factors which are required to be taken into the
consideration so that making reliable & relevant decision can become possible (Valaskova,
Bartosova and Kubala, 2019). It includes financial and non monetary aspects as it is associated
with possessing such reliable position in turn meeting the organizational objective of higher
profitability & stability can become possible. The financial factors are highly important for the
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organization so that attaining relevant growth and development can become possible. The
financial aspects comprise cost, risk, cash flow, control, etc. for making the successful decision
it is important for the company to pay attention on the aspect that how much cost it needs to
incur in order to meet the particular objective.
Financial Factors
Cost – it is one of the major factor which helps in evaluated that project A will be able to
offer good amount of profitability by covering all the mentioned expenses.
Cash flow- this is achieved from the implementation of A is one of the financial factor
that can affect its processing as it ensures the liquidity of firm.
Non-Financial Factors
Organizational policies -It is related with making reliable formulation and decisions
which can influence the particular decision prevailing, industrial & government policies
regarding the specific decision of company get influenced (Zahera and Bansal, 2018).
Maintaining relationship with suppliers and customers -It is important for the
company to give emphasis on this as it has the impact on the inventory, selling goods,
etc.
PROJECT B
Determination of the payback period
Year Project B –Clothes Bags
Net cashflow £
Cumulative cash inflows
1 65000 65000
2 69000 134000
3 77000 211000
4 105000 316000
5 145000 461000
Initial investment 182000
Payback period 2
0.6
Payback period 2 year and 6 months
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Calculation of NPV
Year Project B –
Clothes Bags
Net cash flow £
PV factor @ 11% Discounted cash
inflows
1 65000 0.901 58558.55855855
85
2 69000 0.812 56002
3 77000 0.731 56302
4 105000 0.659 69167
5 145000 0.593 86050
Total discounted
cash inflow
326079
Initial investment 182000
NPV (Total
discounted cash
inflows - initial
investment)
144079
Analysis and Discussion:
From the assessment of the above calculation it can be interpreted that investment 2
which is project B clothes bag is beneficial as it will be able to cover the invested capital in 2.6
year which is lower than 2.7 years of project A. On the basis of the assessment of the calculation
it can be articulated that the project A is beneficial for the organization as it offers the effective
insights about the time value of money. It is helpful in meeting the organizational objective of
higher profitability, stability, etc in turn significant growth & development can be attained. On
the basis of this, it can be articulated that project A is beneficial in order to meet the
organizational objective as it has higher NPV as Project B is having £144079.
Monetary and non financial factors in decision-making procedure
Financial factors
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Tax policy- For being successful it is important for the company to give emphasis on the
related tax policy so that attaining specific objective of higher profitability attaining is
possible or not (Dibb and et.al., 2021).
Capital structure- In addition to this the risks which are being associated with require to
be focused as it fluctuates as per the prevailing capital structure (Bateman and Mace,
2020). It can easily control or not by paying attention on the prevailing expenses as it
play important role in deciding the flow of cash. For becoming successful it is crucial for
the company to give emphasis on cash flow that is being hampered due to the
receivables payable, etc.
Non-Financial Factors
Acceptance of changing circumstances by employees- The non financial factors are
concerned with the acceptance of changing circumstances. It is one of the significant
aspect as is helpful in attaining organizational objectives (Non-financial factors, 2022).
The factors like organizational structure & culture so that making the reliable policy that
can boost motivation of employees in turn significant decision-making can be made.
COVID 19- it is another factor which can influence the operating pf particular project
which is uncontrollable and can affect the major functioning of firm by creating non
availability of resources.
On the basis of the overall findings it can be articulated that there are various monetary
& non financial factors that has the impact on the functioning of the company so considering ll
in respect to make strategic decision which can benefit the overall processing of firm.
CONCLUSION
From the above report it can be concluded that significant strategic business decision-
making is important in turn accomplishing the reliable growth and development can become
possible. The main reason behind this is that there are distinct types of the aspects so that
accomplishing the organizational growth & development can be attained. In current report the
emphasis has been given on having calculation regrading the payback period and net present
value for two projects and discussion have been involved. For becoming successful it is
important for the company to give emphasis on having the reliable decision-making by
considering all the financial and non monetary aspects. This has helped in gaining the insights
about industrial policies, human resource, etc so that strategic decision can be made.
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REFERENCES
Books and Journals
Agu Bertram, O., 2018. Economic growth and capital market development in Nigeria an
appraisal. Economic Research. 2(4). pp.27-38.
Bateman, I.J. and Mace, G.M., 2020. The natural capital framework for sustainably efficient and
equitable decision making. Nature Sustainability. 3(10). pp.776-783.
Dibb, S. and et.al., 2021. Whose rationality? Muddling through the messy emotional reality of
financial decision-making. Journal of Business Research. 131. pp.826-838.
Valaskova, K., Bartosova, V. and Kubala, P., 2019. Behavioural aspects of the financial
decision-making. Organizacija. 52(1). pp.22-31.
Zahera, S.A. and Bansal, R., 2018. Do investors exhibit behavioral biases in investment decision
making? A systematic review. Qualitative Research in Financial Markets.
Online
Non-financial factors .2022. [Online]. Available through:
<https://www.nibusinessinfo.co.uk/content/non-financial-factors-investment-appraisal>
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