Read this essay on business decision-making process with the help of a case study of AJ plc, a chocolate manufacturing company. Learn about payback period, net present value, and financial and non-financial factors that influence decision-making.
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Essay on Business Decision-Making
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Table of Contents INTRODUCTION..........................................................................................................................3 TASK..............................................................................................................................................3 CONCLUSION...............................................................................................................................6 REFERENCES................................................................................................................................7
INTRODUCTION Decision-making is a process in which a order of course that are taken up by an individual or a business firm to achieve predetermined objectives. This process involves identifying the goal and then taking different steps to achieve these goals(Rees, and et. al., 1991). These goals are generally achieved by different ways but in the decision-making, it is important to select the one alternative from the pool that would give the most benefit and help the business achieve their objectives. The following report highlights how decision-making is done with the help of a case business. TASK The case study provided is of AJ plc, a chocolate manufacturing company, the strategic managers of the organisation are planning to invest in a project which would either produce vegan chocolates or vegan spread(van Dijk, and De Dreu, 2021). The strategic managers will have to critically analyse both of these projects take up the most beneficial project for the company. Following is the analysis done. Payback Periodrefers to the time in which the organisation will acquire its initial cost of investment in a project. Every business is offered with different projects that they can invest in and grow their business(Ye, Zhan, and Xu, 2020). Payback period helps the strategic managers to analyse and compare what project to invest in as it shows in how much time they will recover the costs. Calculation of payback period in response to the case study is as follows. YearAnnual 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 152000-8800046000-74000 258000-3000060000-14000 382000520007200058000 410500015700089000147000
5118000275000108000255000 Payback Period = The period up to n-1 + cumulative cash flow in n-1 year / Cash inflow during the nth year n=year in which cumulative cash flow turned positive Payback Period of Project A= 2 + 30000 / 82000 = 2 + (0.36*12 months) = 2+ 4.3 = 2 Years and 4.3 months Payback period if the company invests in project A is 2 years and 4.3 months. Payback Period of Project B= 2 +14000/ 72000 =2 + (0.19*12 months) =2 + 2.33 = 2 years and 2.33 months Payback period if the company invests in project B is 2 years and 2.33 months. Net Present Value(NPV) is a tool in accounting that helps the managers decide what choice from the investing options should the institution choose that would give them the most profit. It measures the profitability of a project(Newnan, 1970). It calculates the future returns on the basis of current investments. It is calculated by taking the difference between the present value of cash inflows and outflows over a period of time. NPV = {Cash flow / (1 + i)^t} – initial investment where, i= discount rate t=year of cash flow Calculation of PV cash flow for project A Cash flows of projectPV factorCash flow/PV factor 520000.'90146852 580000.'81247096 820000.'73159942 1050000.'65969195
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1180000.'59369974 TOTAL293059 Net Present Value of Project A= 293059 – 140000 = 153,059 pounds The net present value of the investments in project A is153,059pounds. Calculation of PV cash flow for project B Cash flows of projectPV factorCash flow/PV factor 460000.'90141446 600000.'81248720 720000.'73152632 890000.'65958651 1080000.'59364044 TOTAL265493 Net Present Value of Project B= 265493 – 120000 =145,493 pounds The net present value of the investments in project B is145,493pounds. Financial and Non-financialfactors influence the decision-making for an investment.Financial factors include the inflation rate, recession in the country the company works in. Inflation refers to the rising of general prices of the country. Tax rates are also included in this factor. These impact the decision-making strategies of the business. These are mostly related to economic environment(Vanhoucke, Demeulemeester and Herroelen, 2001). The business environment is one of the non-financial factor. Social environment, trends in the purchasing of the buyers, political factors also influence these decisions. Marketing investigation for the demand of commodity is also interpreted to ascertain which product has more demand. Analysis and Decision-making Decision-making with the help ofpayback period: In the case of payback period, the lesser it is the better. Less payback period is considered more profitable for the business. This is because, it is the time in which the business will earn
back from the investment, the invested funds/initial investment(Mizobuchi and Takeuchi, 2013). By comparing the payback period of the both alternative, Vegan spread project which is project B has lesser payback period of 2.2.33 years. Project A has a slightly large payback period in comparison. Project B is more viable with payback period of 2 years and 2.33 months. Decision-making with the help ofNet Present Value: The net present value tool tells the managers about the current value of their investments in response to future. The cash flows are analysed in this. The higher the NPV is, the more desirable the project becomes. The above calculation of NPV of the two alternatives shows that the project A also has higher NPV which makes project A, Vegan chocolates more desirable and profitable for the business. Project B has slightly less NPV. Project A is more viable with NPV amounting 153,059 pounds Decision-making with the help offinancial and non-financial factors: The non-financial and financial factors that influence decision-making in the case of AJ plc are, the social factors like the needs and wants of the consumers. The study of 2019 shows that there have been a significant market growth in the demand of vegan chocolates due to the changing preferences of the consumers. Project A is more viable after analysing the above-mentioned factors. CONCLUSION The above report highlights the importance of different tools in the decision-making practice of a business. There are different tools that can be taken up by the business for effective decision making. The report highlights the three main aspects that have been taken in the case of AJ Plc. These are payback period, net present value and financial and non-financial factors. If AJ plc goes with the payback period, project B is more viable as the return rate in that project is faster. If the company takes up NPV as the decision factor then project A is more viable as the return in that project is greater than other project. If non-financial factors are taken up then vegan chocolates is more demanding in the market, hence AJ plc should go with project A.
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REFERENCES Books and Journals Mizobuchi, K. and Takeuchi, K., 2013. The influences of financial and non-financial factors on energy-saving behaviour: A field experiment in Japan.Energy Policy.63.pp.775-787. Newnan, D.G., 1970. Determining rate of return by means of payback period and useful life.The Engineering Economist.15(1). pp.29-39. Rees, J., and et. al., 1991. Decision making. van Dijk, E. and De Dreu, C.K., 2021. Experimental games and social decision making.Annual Review of Psychology.72.pp.415-438. Vanhoucke, M., Demeulemeester, E. and Herroelen, W., 2001. On maximizing the net present value of a project under renewable resource constraints.Management Science.47(8). pp.1113-1121. Ye, J., Zhan, J. and Xu, Z., 2020. A novel decision-making approach based on three-way decisions in fuzzy information systems.Information Sciences.541.pp.362-390.