Business Decision Making: NPV and Payback Period Analysis

This report discusses the process of business decision making and the importance of financial and non-financial factors. It includes an analysis of the NPV and payback period for two projects to make a profitable investment. The report concludes that investing in project A will generate more profit for S&P PLC company.

BUSINESS DECISION
MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
Calculation for NPV....................................................................................................................3
Calculation for payback period....................................................................................................4
Analysis and discussion:..............................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................1

INTRODUCTION
Business decisions making is the process that allow business professionals to solve issues
by examine alternatives, compare each other, weighing evidence and choosing a path from there.
This helps provide opportunities to know about that which decision is right for business. S&P
PLC is manufacturing company in UK. Company invest in producing the clothes bag and
synthetic bag project so there is business decision-making to used to make decision. This report
will elaborate the key aspects financial and non financial factors, NPV and payback period for
making decision which is right.
Calculation for NPV
Calculation of NPV for project A
Year Cash inflows PV
factor
@ 11%
Discounted cash inflows
1 60000 0.901 54054.05
2 68,000 0.812 55190.33
3 82,000 0.712 58365.98
4 109,000 0.659 71801.68
5 155,000 0.593 91984.96
Total discounted cash inflow 331397
Initial investment 185000
NPV (Total discounted
cash inflows - initial
investment)
146397

Computation of Payback period
Year Cash inflows Cumulative cash inflows
1 60000 60000
2 68000 128000
3 82000 210000
4 109000 319000
5 155000 474000
Initial investment 185000
Payback period 3
-0.2
Payback period 3 year and 7 months
Calculation of NPV for project B
Year Cash inflows PV
factor @
11%
Discounted cash
inflows
1 65000 0.901 58558.56
2 69,000 0.812 56001.95
3 77,000 0.712 54807.08
4 105,000 0.659 69166.75
5 145,000 0.593 86050.44
Total discounted cash
inflow
324585
Initial investment 182000
NPV (Total discounted
cash inflows - initial
investment)
142585
Calculation for payback period
Computation of Payback period

Year Cash inflows Cumulative cash inflows
1 65000 65000
2 69000 134000
3 77000 211000
4 105000 316000
5 145000 461000
Initial investment 182000
Payback period 3
-0.3
Payback period 3 year and 7 months
Analysis and discussion:
Net present values is referred as the difference between the present values of cash
outflow and the present values of cash inflow over a period. It is the values of future cash flow
that represent that cash generated by project with the initial capital. Present values cash flow is
depends on the discount rate and its accounts for time values of money. Manager of S&P PLC
only invested in project in transition that have a positive NPV (Metcalf, Askay and Rosenberg,
2019). S&P PLC company need to invest in project where net present value is greater than zero.
Investment should helpful for business to increase profitability and its growth which associated
with future.
NPV used in the capital budgeting project and take idea for future money and business
also use the discounted cash flow reflect the changes in wealth from project.
In given project,it has been evaluated that company will select the project A because the
NPV of project A is high as compare to the project B. Project as better for business so, S&P PLC
company needed to invest in this project because It helps in make better profits for company and
also helps in large number of production. Moreover, bidding strategy also helps in enhance the
net present vale of project (De Adelhart Toorop, Schoenmaker and Schramade, 2021). This
strategy helps in consider the drawbacks of front line bidding strategy that is sustainable or S&P
company.
In the context of payback period, it refers as the various numbers if years needs to
recover the business original cash investment. Moreover, it is the period which includes facility,

machine and other investments has produced the sufficient net revenues to recover its
investments cost. it is calculated by dividing the cost of investments in project by annual cash
flow utile the calculate cash flow is positive. It is expressed in years.
Financial factors in business helps in effect the company decision-making process because it
includes the choice between debt or equity funds and associated cost. Business financial internal
factors also influence the decision-making process and business face issue in order to understand
the capital structure for long term capitals and fixed investments for assets. Business liquidity
position also impact on financial decision-making and working capital is large to understand the
past obligations as compare to present and dividend paid out (Sniazhko, 2019). In context of
external factors, it influences related to the economy and it directly impacts on business
decision-making. Structure money and capital market influence business which is not easy for
them to select the proportion mix of capital structure for business project. Company require
focusing on generate revenues for business and also focus on demand of products in competitive
market so, as per the comparison and examine the project A and project B, net present values of
project A is higher than project B so company need to focus on invest project A synthetic leather
bags because company gain more profits and production will also increase as compare to the
cloth bag. Company need to make right decision for investment with the helps of examine the
NPV values of both project and investment for long term profit.
In furthermore, to understand the financial data because it is most important for business
management to determine the profitability and growth of organization otherwise it can be seen
critical for business as well as internal and external stakeholders and management not able to
provide credit to non financial that affect business (Shou, 2022). In this, the non-financial
investments directly impact on business to meet the requirements of current legislation and
future legislation. So financial investment are important for accomplish all the good practices
and matching industry which important for improve the relation with suppliers and customer for
understand their expectation and preferences as well as evaluate factors which helps in make
profit for S&P company. It helps in enhance the business productivity and its profitability with
company reputation and also able to build the experience and skills in business management
(Dirman, 2020). So, there are both factors are important in making decision for business for
better investment which leads in generate profit.

CONCLUSION
As the conclusion, there are various types of factors which helps in business decisions
making. S&P PLC company have its synthetic and cloth bag manufacturing project. In order to
produce large number of goods so business ill invest in project A because it helps in business to
get more profit rather than project B.

REFERENCES
Books and Journals
De Adelhart Toorop, R., Schoenmaker, D. and Schramade, W., 2021. Decision rules for long-
term value creation.
Dirman, A., 2020. Cost of Debt: The Impact Of Financial Factors and Non-Financial
Factors. Dinasti International Journal of Economics, Finance & Accounting. 1(4).
pp.550-567.
Metcalf, L., Askay, D.A. and Rosenberg, L.B., 2019. Keeping humans in the loop: pooling
knowledge through artificial swarm intelligence to improve business decision
making. California Management Review.61(4). pp.84-109.
Shou, T., 2022, July. A Literature Review on the Net Present Value (NPV) Valuation Method.
In 2022 2nd International Conference on Enterprise Management and Economic
Development (ICEMED 2022) (pp. 826-830). Atlantis Press.
Sniazhko, S., 2019. Uncertainty in decision-making: A review of the international business
literature. Cogent Business & Management.6(1). p.1650692.

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