Business Decision Making: Calculating NPV and Payback Period

This essay discusses the importance of calculating Net Present Value and Payback Period for effective business decision making. It also evaluates financial and non-monetary factors that impact decision-making. The case study focuses on DD Plc and its investment decisions.

Essay On Business Decision
Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Calculating Net Present value......................................................................................................1
Computation of payback period...................................................................................................2
Evaluating financial and non monetary factor for decision-making............................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business decision-making is related with taking series of steps for accomplishing
organizational objectives by involving all financial and non monetary data. In the current era,
taking all crucial factors into the process in turn achieving organizational objective can become
possible. The current report will pay attention on calculating net present value and payback
period so that proper selection of project can become possible. Present study will focus on
evaluating all financial l& non monetary factor aids in decision-making.
MAIN BODY
Calculating Net Present value
Net present value is one of the significant method of investment appraisal that is helpful
in estimating the time value of money of particular investment over a period (Senda, Rahayu and
Rahmawati, 2020). The particular method is helpful in evaluating that firm will get positive and
negative cash flow so that accurate decision-making can become possible by DD Plc.
Year
Project A –
Smoothies
Net cash
flow £
PV
factor @
15%
Discounted cash
inflows
Project B –
Non-Diary
Milk
Net cash
flow £
PV factor
@ 15%
Disco
unted
cash
inflo
ws
1 72000 0.870 62609 71000 0.870
6173
9.130
2 78000 0.756 58979 73000 0.756
5519
8
3 82000 0.658 53916 97000 0.658
6377
9
4 110000 0.572 62893 118000 0.572
6746
7
5 125000 0.497 62147 121000 0.497
6015
8
1

Total discounted
cash inflow 300544
3083
42
Initial investment 158000
1550
00
NPV (Total
discounted cash
inflows - initial
investment) 142544
1533
42
From the above presented table it can be identified that DD Plc should pay attention on
having higher net present value of the project so that greater profitability can be received. On the
basis of above shown information regarding two projects such as Project A & B which has NPV
of 142544 and h 153342 respectively. Project B non n diary milk is having higher NPV so DD
Plc should pay attention on having project B non diary milk so that better strategic outcome can
be received.
Computation of payback period
This is associated with having ability to evaluate that particular invested initial
investment will be covered in how much duration (Zabolotnyy and Wasilewski, 2019). It
provides assistance to get the information about the duration in which conducted capital
expenditure can be recovered.
Year
Project A –
Smoothies
Net cash flow £
Cumulative cash
inflows
Project B –
Non-Diary
Milk
Net cash
flow £
Cumulative
cash inflows
1 72000 72000 71000 71000
2 78000 150000 73000 144000
3 82000 232000 97000 241000
4 110000 342000 118000 359000
2

5 125000 467000 121000 480000
Initial investment 158000 155000
Payback period 2 2
0.10 0.113
Payback period
2 year and 1
months
2 year and
1months
On the basis of above illustrated table it can be specified that both the project have
similar payback period in respect to achieve the higher stability and effectiveness. DD Plc
require paying attention on adopting project A as it is comparatively lower than specified period
of B.
Evaluating financial and non monetary factor for decision-making
There are several components that influences the functioning of organization so having
information about all aspects should be taken into consideration. The financial factors which
impacts the decision-making of the business towards its investment are,
FINANCIAL FACTORS
Cost :
This is the factor which is said to affect the investment decisions of the organization as it
affects the profit it makes. Depending on the cost of investment the results of investments are
affected. Higher the cost incurred in the investment the business requires higher capital and less
chances it has to generate profit.
Interest rates :
Rates of interests are considered to be the factor which impacts the decision-making as it
has the potential of influencing the capital needed for investment. Higher rates means
organization will refrain from investing in the project (Liahmad, Utami and Sitompul, 2021).
Returns :
The returns from the investment can be said as the very important financial factor which
affects the profitability of the investment made by the business. It can be said that depending on
the level of financial returns from the investment it can be able to compare the different options
regarding their profitability. This is the reason which impacts the decision-making of the
organization which is considered to be regarding making more profit out of the investment
which has been made.
3

Liquidity :
Liquidity is a factor which decides the risk factor that is involved in the investment. It is
considered to be directly linked with organizational operations. It can be said that the liquidity of
the investment explains the viability of the organizational operations. An investment with higher
liquidity is considered to have less risk involved which impacts the decision-making of the
organization (Kitanov, 2018).
NON-FINANCIAL FACTORS
Apart from the financial factors that affect the decision-making towards the investment
there are other non financial factors also which are seen to affect the decision-making of the
organization.
Business reputation :
The business reputation is a factor for which it can change its decision-making. This is
due to the impact which is created by the issues in the business reputation. Reputation of the
business is considered very heavily during the determination of the investment decision-making.
Legislations :
Rules and regulations are factors which are known to impact the investment of the
organization very poorly. Thus, this is considered to be a factor which influences the
organization negatively (Tiron-Tudor and et.al., 2019).
Relationships :
The relationships the business has with its customers, suppliers and other stakeholders
are very crucial thus, it impacts their decision-making towards the investments. It can be said
that the investments of the organization cannot be made effectively if it is not able to satisfy the
needs of the stakeholders it may impact the relationship.
CONCLUSION
With the help of the above essay it can be concluded that the project B of Non Daily
Milk is the investment which it needs to prefer for the management of the organization. In essay
the different financial and non-financial factors which are considered during the decision-
making of the DD plc has been discussed.
4

REFERENCES
Books and Journals
Kitanov, Y., 2018. Non-financial declaration. Theoretical aspects. VUZF Review. (3). pp.43-56.
Liahmad, K.R., Utami, Y.P. and Sitompul, S., 2021. Financial Factors and Non-Financial to
Financial Distress Insurance Companies That Listed in Indonesia Stock Exchange.
Budapest International Research and Critics Institute (BIRCI-Journal): Humanities and
Social Sciences. 4(1). pp.1305-1312.
Senda, D.A., Rahayu, C.W.E. and Rahmawati, C.H.T., 2020. The Effect of Financial Literacy
Level and Demographic Factors on Investment Decision. Media Ekonomi Dan
Manajemen. 35(1). pp.100-111.
Tiron-Tudor, A., and et.al., 2019. ENCOMPASSING NON-FINANCIAL REPORTING IN A
COERCIVE FRAMEWORK FOR ENHANCING SOCIAL RESPONSIBILITY:
ROMANIAN LISTED COMPANIES'CASE. Amfiteatru Economic. 21(52). pp.590-606.
Zabolotnyy, S. and Wasilewski, M., 2019. The concept of financial sustainability measurement:
A case of food companies from Northern Europe. Sustainability. 11(18). p.5139.
5