Business Decision Making: Capital Budgeting Techniques and Investment Appraisal

This report evaluates the payback period and NPV of two investment opportunities for AJ plc, a chocolate manufacturer in the UK and Europe. It also highlights financial and non-financial factors to consider when making investment decisions.

Business Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Calculation of the payback period...............................................................................................3
Computation of the NPV in project A and B...............................................................................4
Assessing financial and non-financial factors used to aid decision making................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Business decision making may be defined as a process which lay emphasis on solving
problem by examining and evaluating all the possible alternatives. In the context of business
organization, manager uses several techniques with the motive to assess the extent to which
decision will prove to beneficial. The present report is based on the case scenario of AJ plc,
which manufactures chocolate, deals in UK and some parts of Europe. This report will develop
understanding about the concepts of capital budgeting and its use in investment decision making.
Further, it will highlight key financial and non-monetary factors which manager should consider
while taking decision about investment.
Calculation of the payback period
Payback period helps in assessing time which firm will take for reaching at break-even
point in the context of specific investment opportunity (Gorshkov and et.al., 2018). This method
is highly significant as it helps in measuring investment risk and evaluating liquidity aspect as
well.
On the basis of given case scenario business unit has two investment opportunity such as
vegan chocolates and spreads. In order to assess financial viability capital budgeting tools have
been used in the following way:
Year Project A – Vegan Chocolates
Net cash inflow £ Cumulative cash inflows (in £)
1 52,000 52,000
2 58,000 110,000
3 82,000 192,000
4 105,000 297,000
5 118,000 415,000
2 + (140000 – 110000) / 82000

= 2 + .4
= 2.4 years
Year Project B –Vegan Spreads
Net cash inflow £ Cumulative cash inflows (in £)
1 46,000 46,000
2 60,000 106,000
3 72,000 178,000
4 89,000 267,000
5 108,000 375,000
2 + (120000 – 106000) / 72000
= 2 + .2
= 2.2 years
The above depicted evaluation clearly presents that AJ plc should go with project B over
A. The rationale behind this, in the investment opportunity of Vegan chocolate firm will recover
the amount of initial investment within 2 years and 2 months. Hence, comparatively, in the case
project B, AJ Plc will recoup II before 2 months. This in turn considered as good for the
organization as it is highly aligned with profitability aspect. However, payback method ignores
time value of money concept which in turn limits its significance to the large extent.
Computation of the NPV in project A and B
NPV is considered as one of the most effectual method of investment appraisal which
helps in determining the current value of all the future cash flows associated with project
(Gaspars-Wieloch, 2019). It helps manager in doing investment planning by highlighting
profitability aspect of potential opportunity.

Year
Project A – Vegan
Chocolates Net cash
flow £
PV factor @
11%
Discounted cash
inflows (in £)
1 52,000 0.901 46847
2 58,000 0.812 47074
3 82,000 0.731 59958
4 105,000 0.659 69167
5 118,000 0.593 70027
Sum of PV cash flows 293073
Less: Initial
investment 140000
Net present value 153073
Year
Project B –Vegan
Spreads Net cash
inflow £
PV factor @
11%
Discounted cash
inflows (in £)
1 46,000 0.901 41441
2 60,000 0.812 48697
3 72,000 0.731 52646
4 89,000 0.659 58627
5 108,000 0.593 64093
Total discounted cash
inflows 265504
Less; Initial investment 120000
NPV 145504
Outcome of investment appraisal technique exhibits that AJ plc will generate high return
in monetary term by investing money in the proposal of vegan chocolate. According to the
criteria project with positive and higher return is good for an organization. Thus, referring time
value of money concept (11% PV factor) it has found that project A will aid in the growth and

profitability of AJ Plc. Thus, it can be said that project A will help company in getting the
desired level of outcome or success.
Assessing financial and non-financial factors used to aid decision making
Financial analyst of AJ Plc should keep in mind following aspects while making
assessment of investment options or opportunity:
Financial factors
 Manager of AJ plc should focus on analyzing the minimum rate of return associated with
investment opportunity. Moreover, maximization of profitability is one of the main
motive of firm (Baum, Crosby and Devaney, 2021). By evaluating this aspect manager
can assess whether opportunity will aid in company’s success or not.
 Along with this, availability of funds and project cash inflows are another main factors
which must be monitored by investment manager. The reason behind this, at initial level
firm has to make some investment for getting desired margin. In this regard, company
should assess whether it has enough fund for investment purpose or not. By this,
feasibility of project can be measured and evaluated in the most effectual way.
Non-financial factors
 At the time of decision making manager should assess whether firm would become able
to comply with laws associated with investment aspect (Evaluating Investment Appraisal,
2021).
 Availability of skilled and potential employees must be evaluated while appraising future
project. As, without having skilled workforce firm would not become able to meet its
objectives.
 Intangible factors such as goodwill, industrial relationship, employee safety etc should
also be considered by the manager at the time of project selection. In addition to this,
market trends are highly fluctuating which place direct impact on profitability. Hence, in
order to remain competitive at marketplace manager needs to give high priority to such
factors.

 Macro-environmental factors such as social, political, legal, environmental etc must be
evaluated by the manager. Moreover, all these factors have significant and indirect
impact on project’s performance.
CONCLUSION
By summing up this report it has been articulated that investment appraisal techniques
provide high level of assistance in assessing viability of proposed investment. It can be seen in
the report that project A pertaining to Vegan Chocolate will prove to be more beneficial for AJ
Plc. Moreover, recovery period of project A is lesser in comparison to other investment
opportunity. Further, it can be summarized from the evaluation that project A will offer higher
return after the period of five years. Besides this, at the time of decision making manager of AJ
Plc should consider both monetary and non-monetary factors. This in turn helps in selecting
suitable option for investment aspect.

REFERENCES
Books and Journals
Baum, A. E., Crosby, N. and Devaney, S., 2021. Property investment appraisal. John Wiley &
Sons.
Gaspars-Wieloch, H., 2019. Project net present value estimation under uncertainty. Central
European Journal of Operations Research. 27(1). pp.179-197.
Gorshkov, A. S. and et.al., 2018. Payback period of investments in energy saving. Magazine of
Civil Engineering. (2).
Online
Evaluating Investment Appraisal. 2021. Online. Available through: <
https://www.tutor2u.net/business/reference/evaluating-investment-appraisal>.