Business Decision Making

This report discusses the importance of decision making in business entities and focuses on the use of investment appraisal methods such as payback period and NPV. It analyzes two projects, Dishwashing and Software, and provides calculations for payback period and NPV. The report concludes that project A should be considered based on favorable values from both methods.

BUSINESS DECISION
MAKING

Contents
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
1. Calculation of payback period.........................................................................................................3
2. Calculation of NPV:........................................................................................................................4
3. Analysis:..........................................................................................................................................5
CONCLUSION..........................................................................................................................................8
REFERENCES..........................................................................................................................................9

INTRODUCTION
In business entities, it is important to take decision in accordance of suitable basis and
framework. Eventually, financial decisions are need to be taken in an appropriate manner and for
this purpose there are a range of techniques (Black, 2019). In order to choose a suitable
investment, there are various investment appraisal methods on which this report is based. In the
project report, there is a company that wants to invest in two projects: Dishwashing and
Software. For this purpose, both proposals have been assessed by help of investment appraisal
methods such as payback period, NPV etc.
MAIN BODY
1. Calculation of payback period.
Payback period: Year before recovery + Amount to be recovered/Next years’ cash flow.
Project A(Dishwashing)
Investment: £120000
Year Cash flow (In £) Cumulative cash flow
1 30000 30000
2 35000 65000
3 40000 105000
4 60000 165000
5 90000 255000
Year before recovery: 3rd year
Amount to be recover: £ (120000-105000)
= £15000
Next years’ cash flow: 60000
Hence,
Payback period: 2+15000/60000
= 2+0.25

= 2.25 years or 2 years and 3 months
Project B(Software)
Investment: £150000
Year Cash flow (In £) Cumulative cash flow
1 40000 40000
2 45000 85000
3 50000 135000
4 75000 210000
5 80000 290000
Year before recovery: 3rd year
Amount to be recover: £ (150000-135000)
= £15000
Next years’ cash flow: 75000
Hence,
Payback period: 2+15000/75000
= 2+0.2
= 2.2 years or 2 years and 2 months
2. Calculation of NPV:
NPV: Discounted cash Flow-Initial investment
Project A(Dishwashing)
Investment: £120000
Year Cash flow (In £) Calculation of
discounted cash
Discounted cash
flow (In £)

flow
1 30000 30000/(1+14%)1 26315.79
2 35000 35000/(1+14%)2 26931.36
3 40000 40000/(1+14%)3 26998.86
4 60000 60000/(1+14%)4 35524.82
5 90000 90000/(1+14%)5 46,743.18
Total discounted cash flow 162514
Hence,
NPV: £ (162514-120000)
= £ 42514
Project B(Software)
Investment: £150000
Year Cash flow (In £) Calculation of
discounted cash
flow
Discounted cash
flow (In £)
1 40000 40000/(1+14%)1 35087.72
2 45000 45000/(1+14%)2 34626.04
3 50000 50000/(1+14%)3 33748.57
4 75000 75000/(1+14%)4 44,406.02
5 80000 80000/(1+14%)5 41549.49
Total discounted cash flow 189417.8
Hence,
NPV: £ (189417.8-150000)
= £ 39,417.8
3. Analysis:
 Comparing and contrasting the payback period and NPV:

Payback period- It can be understood as a form of method in which estimated
time is measured for recovering invested sum of money into different projects.
This is computed in both years and months (Maunder, 2019). In this technique
those projects are accepted whose time period is lower as compared to others.
This technique has some merits and demerits which are explained below in such
manner:
Merits- The key benefit of this method is that under it users do not need to make
any complex calculation or follow a long process to measure efficiency of
projects. This technique requires minimum values to compute estimated time span
to recover cost of investment.
Demerits- The main issue in this method is that under it all years’ cash flows are
not considered. It focuses those years’ cash flows in which invested amount is
recovered. As well as some factors are also ignored under this method such as
time value of money factor that is one of the main element for analysis of
projects.
Net present value- Under this technique, difference between discounted cash flow
and investment is used in order to measure current value of project. On the basis
of this, it becomes easier for project managers to take suitable action about
selecting a project. Similar to above method, this also has some positive and
negative aspects which are mentioned underneath:
Merits- The main plus point of this method is that it is useful to measure
efficiency of different sized projects in an effective manner. As well as
consideration of time value factor makes this method more accurate and correct
compared to other approaches.
Demerits- The negative aspect of this method is that under it curtained assumed
values are used to compute current value of a project (Woods, Danes and Uhalt,
2019). Due to this, it becomes difficult to companies to relay on this method
because assumptions cannot provide accurate outcome.

Comparison of NPV and payback period:
Basis NPV Payback period
Measurement Under this method,
outcome is computed in
terms of currency value.
While in this outcome is
measured in terms of time period.
Consideration
of cash flows
In this method, all years’
cash flows are used to
measure efficiency of a
project.
On the other hands, in this
method only some years’ cash
flows are considered till
investment is covered.
Assumptions Under it, assumption for
cost of capital is done.
While, there is no assumed
values are used for evaluation of
project.
Analysis on the basis of computed values:
NPV- From the measured values of NPV of both projects, this can be find out that
project A has present value of £ 42514 and project B has of £ 39,417.8. This
shows that project A has higher value which will lead to positive outcome in
future.
Payback period- In terms of payback period, both projects’ efficiency seem equal
as project A is estimated to cover cost of investment in 2 years and 3 months
while project B in 2 years and 2 months.
Final decisions- On the basis of above analysis, this can be suggested to above
company that they should accept project A. The rationale behind this is that
project A has higher present value along with cost will be covered in less time.
 Financial and non-financial factors along with their implication on stakeholders.

There are a range of factors including financial and non-financial factors which
have an ability to affect investors decisions. Some of them are mentioned below:
Financial factors-
Return on investment- This is one of the main factors that is considered by
stakeholders before making investment (Lin, Chang and Hsu, 2019). As well as in
decision making process, managers consider this element to select any operation
or activity.
Profit margin- In addition, the volume of profitability is also evaluated by internal
stakeholders so that they can take suitable decisions.
Non-financial factors-
Employee turnover- It is a key factor which is considered by both internal and
external stakeholders before taking a decision. This is so because higher turnover
of employees is not a good sign for a company.
Competitive environment- As well as competitive environment is also a main
component of non-financial factor that is taken into the account by managers and
external stakeholders to make any strategy or policy (Wang, Gao and Wei, 2019).
CONCLUSION
On the basis of above project report, this has been concluded that investment appraisal
methods are useful to take crucial decisions. The report is based on analysis of two project by
help of NPV and payback period. From comparative analysis, it can be concluded that A&B plc
should consider project A because both methods are showing favorable value to accept this
project.

REFERENCES
Books and journal:
Black, K., 2019. Business statistics: for contemporary decision making. John Wiley & Sons.
Maunder, W.J., 2019. The uncertainty business: risks and opportunities in weather and climate.
Routledge.
Woods, J.A., Danes, S.M. and Uhalt, J., 2019. The impact of customer orientation and family
decision-making style on family business performance. Journal of Enterprising
Culture, 27(02), pp.147-176.
Lin, S.J., Chang, T.M. and Hsu, M.F., 2019. An emerging online business decision making
architecture in a dynamic economic environment. Journal of Intelligent & Fuzzy
Systems, 37(2), pp.1893-1903.
Wang, J., Gao, H. and Wei, G., 2019. The generalized Dice similarity measures for Pythagorean
fuzzy multiple attribute group decision making. International Journal of Intelligent
Systems, 34(6), pp.1158-1183.