Business Decision Making Essay

This essay discusses the importance of decision-making in business and the tools used for it such as Payback period & Net present value. It includes a case study on AJ plc and explains how financial & non-financial drivers contribute to decision-making. The essay concludes by presenting different factors upon which a decision-making depends.

Business Decision
Making
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Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................6
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INTRODUCTION
The concept of decision-making refers to a procedure within which certain steps are
considered by a person or by a business organisation in order to accomplish predetermined
targets. This procedure includes determination of goals & then considering various steps to attain
such targets. These objectives are commonly attained by several ways but in respect to decision-
making, it is essential to choose any one alternative available from all which would provide the
highest benefit as well as helps the company in achieving their objective. The present essay
includes certain key concepts of tools such as Payback period & Net present value along with
financial & non-financial drivers which will contribute in the process of decision making related
to the case study furnished.
MAIN BODY
In case of AJ plc, a chocolate producing business, the company’s strategic managers of the
company is planning to invest their money into a project to manufacture Vegan chocolates or
could be a manufacturing of Vegan spreads. In order to have favourable decisions it is important
for a business to company & analyse both the two projects through various tools that will further
help in decision making.
Payback Period: The payback period denotes to the time period within that an organisation
would recover its initial investment for a project. Each organisation is provided with variety of
projects in which they could invest & attain growth for their company. The calculation of
payback period in respect to the provided case study is under.
Year Annual cash flow
of A
Cumulative cash
flow of A
Annual cash flow
of B
Cumulative cash
flow of B
0 (Initial
Investment)
-140000 -140000 -120000 -120000
1 52000 -88000 46000 -74000
2 58000 -30000 60000 -14000
3 82000 52000 72000 58000
4 105000 157000 89000 147000
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5 118000 275000 108000 255000
Payback Period = time period up to n-1 + cumulative cash flow in n-1 year / Cash inflow
for the nth year
Where; n is the year within which a cumulative cash flow converted into
positive
From the above information:
Payback Period of Project A= 2 + 30000 / 82000
= 2 + 0.36
= 2.4 Years
The payback period for the Project A would be 2.4 years.
Payback Period of Project B= 2 + 14000 / 72000
= 2 + (0.19*12 months)
=2 + 2.33
= 2 years and 2.33 months
The payback period for the Project B would be 2.2.33 years.
Net Present Value (NPV): This is the most essential tool used for decision-making. This
provides assistance to the managers for deciding that which alternative for investment options
must be chosen by company for higher profitability.
NPV = {Cash flow / (1 + i)^t} – initial investment
Where, i is the discount rate
T is the year of cash flow
Calculation of PV cash flow for project A
Cash flows of project PV factor Cash flow/PV factor
52000 0.'901 46852
58000 0.'812 47096
82000 0.'731 59942
105000 0.'659 69195
118000 0.'593 69974
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TOTAL 293059
Calculation of PV cash flow for project B
Cash flows of project PV factor Cash flow/PV factor
46000 0.'901 41446
60000 0.'812 48720
72000 0.'731 52632
89000 0.'659 58651
108000 0.'593 64044
TOTAL 265493
Net Present Value of Project A= 293059 – 140000
= 153,059 pounds
The NPV for project A would be 153,059 pounds.
Net Present Value of Project B= 265493 – 120000
= 145,493 pounds
The NPV for project B would be 143,493 pounds.
Financial and Non-financial drivers or factors are those which has an influence upon the
decision making of company for the investments made. These could be any factor which may
encourage the constant working of company. Among all a business environment could be one
factor. The financial factors comprises of such funds & the country’s monetary policies allow a
company to make investment in either projects or not. A decision by a company in respect to
different projects depends upon certain factors that are inflation rate, tax rate and the borrowing
rate that is associated with the project.
Analysis and Decision-making
After the calculation of payback period as well as NPV for both investments options, this
part would critically evaluate the outcomes of the calculations & decide which project should be
adopted among both.
Decision-making with payback period:
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The payback period is better which is having shorter time period. This is due to the time
within which a firm would generate its funds back out of the investment. After analysing both
options it is found that Project B is offering less payback period which is only 2.2.33 years
whereas the Project A is taking time little longer than B.
Decision-making with Net Present Value:
The NPV tool represents the managers related to the present value of investments in
response to the future time period. Higher NPV is, the most desirable the project. From the above
project it has been analysed that Project A is having higher NPV rather than project B. SO
Project A should be decided.
Decision-making with financial and non-financial factors:
The non-financial & financial factors influences decision-making by AJ plc in a manner
that if the market is experiencing an inflation in economy then this will give rise to the high cost
and the prices will also be raised. The time of inflation is not right for AJ Plc to make its
investment at higher rates. On the other hand, when a company is required to pay higher taxes
for such investment then it should not select such project as this can lead to the generation of less
profit margin. The last factor upon which a decision making depends is the cost of borrowing
which is associated with the project during its initial phase. AJ Plc must accept the project which
is having low borrowing cost or process charges so that can work with lesser expenses and attain
higher profits.
CONCLUSION
From the above essay, it can be concluded that the decision making for a company is highly
significant for their growth & success. From the proper analysis of above situation it completely
depends upon AJ plc that on what foundation does it wishes to consider its future actions. If Aj
plc wishes to move with payback period, then the project B is more profitable. But if they wish
to go with the concept of NPV method then the project A is beneficial. The report also presents
an idea for different financial and non-financial factors upon which a decision making depend.
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REFERENCES
Books and Journals
Abdurrabby, J., Zaenal, Z.Z. and Wijaksana, I.K., 2021. Analisis Sensitivitas Net Present Value
(NPV) terhadap Perubahan Parameter Harga Jual dan Biaya Produksi pada
Penambangan Tras di CV. An-Nakhl Desa Cupang Kecamatan Gempol Kabupaten
Cirebon Provinsi Jawa Barat.
Diki, Z., Inge Lengga Sari, M. and Fatahurrazak, F., 2020. Analisis Kelayakan Usaha (Payback
Period, Net Present Value Dan Break Even Point) Penangkapan Ikan Teri
Menggunakan Pukat Cincin Di Dusun Tukul Desa Pasir Panjang Kecamatan Bakung
Serumpun Kabupaten Lingga (Doctoral dissertation, Universitas Maritim Raja Ali
Haji).
Grant, C.A. and Hicks, A.L., 2020. Effect of manufacturing and installation location on
environmental impact payback time of solar power. Clean Technologies and
Environmental Policy, 22(1), pp.187-196.
Lidia, V.E.S.A., 2020. THE NET PRESENT VALUE AND THE OPTIMAL SOLUTION OF
LINEAR PROGRAMMING IN INVESTMENT DECISIONS. Annals of the University
of Oradea, Economic Science Series, 29(2).
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