Business Decision Making

This report explores the concept of business decision making, including the calculation of payback period and analysis of financial and non-financial factors. It discusses the practical implications of these factors and provides insights on net present value (NPV) and payback period. The report emphasizes the importance of making effective decisions for business success.

Business Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Calculation of the payback period...............................................................................................1
Analysis.......................................................................................................................................2
Financial factors & Non Financial factors analysis:...................................................................3
Practical implication....................................................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business decision making can be defined as a course of action where an organisation
select right alternatives to acquire organisational goals & objectives effectively. It is a continuous
procedure and indispensable element that arrange business operation of an organisation (Keren
and Wu, 2015). A manager play essential role in business related decisions. These decisions are
taken by managers as per the necessity and requirements. In this report consist of different
aspects that helps in decision making procedure such as Net present value, Pay back period and
other non financial factors.
MAIN BODY
Year
Project A –
Technologic
al Project (£)
Cumulati
ve
Discount
factor
(12%)
Present
value
Project B –
Mechanical
Project (£)
Cumulati
ve
Discount
factor
(12%)
Present
value
0 (£40000) (£40000) (£60000) (£60000)
1 8000 (32000) 0.893 7144 10000 (50000) 0.893 8930
2 12000 (20000) 0.797 9564 20000 (30000) 0.797 15940
3 16000 (4000) 0.712 11392 25000 (5000) 0.712 17800
4 20000 16000 0.636 12720 30000 25000 0.636 19080
5 30000 40000 0.567 17010 40000 65000 0.567 22680
Total 57830 Total 84430
£20000-
£18000 £2000
£30000-
£25000 £5000
Calculation of the payback period
For Project A
Payback period = 3 years + (4000/20000 * 12) Months
= 3 Years + 2 Months
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As the most appropriate and closest value for initial investment will be in 3rd year.
For Project B
Payback period = 3 Years + (5000/30000 * 12) Months
= 3 Years + 3 Months
As the most appropriate and closest value for initial investment will be in 3rd year.
Calculation of NPV
For Project A
NPV = (£ 40000) + 7144 +9564 + 11392 + 12720 + 17010
= 40000 – 57830 =
= (17830)
For Project B
NPV = (60000) + 8930+ 15940+ 17800+ 18080+ 22680
= 60000 – 84430
= 24430
Analysis
Net Present Value
It is the value of all future cash flows (positive and negative) over the whole life an
investment discounted to the present. This method mainly applied by the business to analysis the
current value which are generated through a project in which consist of initial capital investment.
It is mainly utilised by business to set up projects which are likely to turn for highest revenue
(Kumar and Dash, 2016). The positive amounts shows approbate indication that project is
executable so manager do not select project with negative NPV should be neglected. The are
calculated of NPV for project A and Project B which is (17830) and 24430. Thus, there is
selected project B because negative NPV should be avoided.
Advantages:
 The main advantage of this method that it focus on time value and provide effective
outcomes for decision making where consist of discounting factor as well as present
value of cash flows.
 Through this method take quick decision to compare different projects and enable to
select most cost effective option among more than one alternatives.
Disadvantages:
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 For this method require to some guess work in regard of cost of capital. Many times it is
too low will outcome in making suboptimal investments.
 Projects are facing various life that can not be easy by selected though results of NPV.
How NPV helps a business to take a decision
Net Present value is using by business for decision making procedure in order to decide
whether to engage a project like acquisition. When a project NPV is positive (>0) so organisation
can expect a profit and should focus moving forward with the investment.
Pay Back Period
The concept of pay back period mainly applied by the business for financial and capital
budgeting. It has been determined the cost saving of energy and efficient technology. It is a
critical technique that helps a business in effective decision making. Through this method
analysis the timeline of an organisation require to get return from different sources as against of
actual investment. As per the calculation it is identified that Project A takes about 3 years 2
months and Project B takes 3 years and 3 months respectively (Black, 2019). Where as project
life cycle id 5 years so here is selected Project A which is more feasible and will recover the
initial investment in less period of time as compare with other projects.
Advantages:
 It is easiest method that can applied to measure risk in a particular project. Since cash
flows that occur late in a project's life are related with uncertainty.
 This method helps to sort out the problem of liquidity and offer a good ranking of
projects as per the return.
Disadvantages:
 This method shows only timing of return, it does not presents the amount of return on
investment.
 Another problem of this method, it does explicitly discount in context of risk and
opportunity cost related with the project.
Useful for business: It is useful for business because it helps to select right project for the
investment. Through this method analysis that in which time company get invested amount.
Financial factors & Non Financial factors analysis:
Financial as well as non financial factor both are important for business in order to take
financial decision for business. Financial factors are consisting of interest rate and current
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economical growth. With low interest rate, company get more advantages for project which is
paid by enterprise on borrowed amount.
Non financial factors also plays significant role in decision making procedure in direct &
indirect manner. For this conduct SWOT analysis that supports to analysis of strong points and
vulnerabilities related with venture in appropriate manner. Through these factors analysis the
weakness, threats, opportunity and strength of business so according to that company take
effective decision (Zeng, Chen and Li, 2016).
Practical implication
From the overall analysis it is getting that Project A pay back is more favourable as
compare of Project B. The NPV is positive of Project B so project A should be neglected.
Therefore, a manager take decision on basis of financial and non financial factors. So select
project B because NPV more accurately define the profiatbility of particular project.
CONCLUSION
As per the above report it has been concluded that to select a project for business is
critical and it is not easy to take right decision on right time. So for this apply financial & non
financial factor and select Project B.
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REFERENCES
Books and Journal
Keren, G. and Wu, G. eds., 2015. The Wiley-Blackwell handbook of judgment and decision
making. Wiley-Blackwell.
Kumar, A. and Dash, M. K., 2016. Using DEMATEL to construct influential network relation
map of consumer decision-making in e-marketplace. International Journal of Business
Information Systems. 21(1). pp.48-72.
Black, K. U., 2019. Business statistics: for contemporary decision making. Wiley.
Zeng, S., Chen, J. and Li, X., 2016. A hybrid method for Pythagorean fuzzy multiple-criteria
decision making. International Journal of Information Technology & Decision
Making. 15(02). pp.403-422.
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