Decision Making

This report discusses the importance of payback period and net present value in decision making process. It explains how these methods help in evaluating investment options and determining profitability. The report includes calculations of payback period and NPV for two investment options and provides practical implications for decision making.

Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Calculation of the payback period...........................................................................................1
2. Calculation of NPV.................................................................................................................2
3. Analysis...................................................................................................................................2
4. Practical Implications..............................................................................................................3
CONCLUSION ...............................................................................................................................3
REFERENCES ...............................................................................................................................5

INTRODUCTION
In modern business environment, every company is needed to make a sound-full and
important decision which support in reaching the desired target in appropriate time which
increase the overall profitability and productivity of company (Business decision making, 2019).
It is observed that decision considering the core value of business will help to figure out the
actual worth and morals of company. Strategic judgements support to define the target segment
of market, competition and sources of funding.
In this report X plc have to make choice from two investment option covering the
payback period and NPV and
financial and non-financial factors used to aid decision making.
TASK 1
Year
Project A –
Technological
Project (£)
Cumu
lative
Discount
factor
(10%)
Present
value
Project B –
Mechanical
Project (£)
Cumul
ative
Discount
factor
(10%)
Presen
t value
0 (£20000) (£30000)
1 8000 8000 0.909 7272 10000 10000 0.909 9090
2 10000 18000 0.826 8260 15000 25000 0.826 12390
3 12000 30000 0.751 9012 17000 42000 0.751 12767
4 15000 45000 0.689 10335 19000 61000 0.689 13091
5 19000 64000 0.621 11799 20000 81000 0.621 12420
Total 46678 Total 59758
£20000-£18000 £2000
£30000-
£25000 £5000
1. Calculation of the payback period
For Project A
Payback period = 2 years + 2000/12000 * 12 months
= 2 years and 2 months
As the most appropriate and closest value for initial investment will be in 2nd year.

For Project B
Payback period = 2 years + 5000/17000 * 12 months
= 2 years and 3 months
As the most appropriate and closest value for initial investment will be in 2nd year.
2. Calculation of NPV
For Project A
NPV = (£ 20000) + £46,588
= £ 26,588
For Project B
NPV = (£ 30000) + £ 59,644
= £ 29, 644
3. Analysis
Importance of Payback period
The actual time taken to recover the total amount invested within an asset from its
specific net cash flows is known as payback period (Foster, O'Reilly and Dávila, 2016). It is
observed that manager consider this method to determine the risk linked with the actual
projected project. There are number of advantages and disadvantages of payback period that is
discussed underneath:
Benefits:
 It is simple to use and bring easy understanding to the manager within company. As they
need less input and is relatively easier in which actual yearly cash flows are calculated in
respect to investments. For industries which are unpredictable or undergo technological development shifts, the
payback approach is very valuable (Quanyu, Tong and Leonard, 2013). These
uncertainty allows the potential annual cash inflows hard to estimate and sometime lead
to wrong results thus this method is beneficial.
Drawbacks:
 The payback approach is so straightforward that normal business situations are not
considered. Capital investments were not necessarily just one-time investments.

 There is no assurance that a project with either a shorter payback time would be
successful. If the proposal's cash flow ceases during the repayment period or falls during
the payback time
Importance of Net present value
In general term, the difference among the present worth of cash inflows and the outflows
within a specific period of time is known as net present value (Cosgrove and Rijsberman, 2014).
It is mainly used by the manager to evaluate the profit margin of a particular proposal. It is
regarded that each project that have a positive NPV in the financial term must be pursued by the
company that will give positive outcome to respective company.
Benefits:
 The main advantage of NPV is that is includes the consideration of time value of money
that how does money value fluctuate during time frame of deflation and inflation
(Bogner, 2014).
 It help to compare the actual capability of project in order to earn back the invested
amount. The estimate takes into account at the time of the expenditure every one of the
anticipated cash refunds and payments made and the amount of the money.
Disadvantages:
 This method requires more complicated calculation by using the numeric figures and
table which gives multiplier for different time frame and interest rate.
 In this method manager needs of make certain assumption about the cash dealing related
with the specific project (Tseng, Chiu and Liang, 2018).
4. Practical Implications
From the above discussion it is clear that payback period and net present value method
are both important for determining the favourable investment for a company in respective time
period. It help to calculate the actual repayment time taken to recover the invested amount as
well as the total amount recovered in that specific period considering the initial investment. In
the context of X plc there are two new business proposal such as Project A is £20000 and for
project B £30000. The expected rate of return is 10%. For project A the payback period is 2 year
and 2 months and the expected net present value in that year will be £26588. similarly on the
other side the expected net present value will be £29644 and the pay back period is 2 year 3

month. Thus from the above calculation it has been recommended that new business proposal for
project A will be more beneficial for company as it have shorter period to recover the actual
investment of £20000.
CONCLUSION
In the end of this report, it has been concluded that business decision-making is the
process which includes the assortment of a specific course of action from the two possible option
in order to gain the most possible benefit. By using NPV method of capital budgeting manager
can calculate the present value of project depending upon the respective discount rate. On the
other side the payback period is used to determine the time in order to reach the break even of
invested amount.

REFERENCES
Books and Journals:
Quanyu, H., Tong, C. and Leonard, J. W., 2013. Business decision making in China. Routledge.
Tseng, M. L., Chiu, A. S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
Bogner, M. S., 2014. Naturalistic decision making in health care. In Naturalistic decision
making (pp. 81-90). Psychology Press.
Cosgrove, W. J. and Rijsberman, F. R., 2014. World water vision: making water everybody's
business. Routledge.
Foster, G., O'Reilly, N. and Dávila, A., 2016. Sports business management: Decision making
around the globe. Routledge.
Online
Business decision making. 2019. [Online] Available Through:
<https://www.decision-making-solutions.com/business_decision_making.html>.