Business Decision Making: Calculation of NPV and Payback Period

This essay discusses the calculation of net present value and payback period for AJ Plc chocolate manufacturing organization looking for investment related decision. It also explains financial & non-monetary factors affecting stakeholders and decision making process.

ESSAY ON BUSINESS
DECISION MAKING

TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
Calculation of net present value...............................................................................................................3
Computation of and payback period........................................................................................................4
Explaining financial & non-monetary factors affecting stakeholders and decision making process........5
CONCLUSION..........................................................................................................................................6
REFERENCES..........................................................................................................................................7

INTRODUCTION
Business decision making is concerned with making significant evaluation of both
monetary and non-financial factors in turn better compliance to achieve objectives can be done.
In the current era, it is important for company to make strategic business decision so that proper
ability to overcome competition can become possible. The current report is based on AJ Plc
chocolate manufacturing organization looking for investment related decision. The present report
will involve calculation of NPV & payback period technique of capital appraisal for making
effective decision. It will include information regarding financial & non-monetary components
affecting decision of business.
MAIN BODY
Calculation of net present value
NPV
Year
Project A
– Vegan
Chocolate
s Net
cashflow £
PV
factor
@
11%
Discounte
d cash
inflows
Project
B –
Vegan
Spreads
Net
cashflo
w £
PV
factor
@
11%
Discounte
d cash
inflows
1 52,000 0.901 46846.8 46,000 0.901 41441.4
2 58,000 0.812 47074 60,000 0.812 48697
3 82,000 0.731 59958 72,000 0.731 52646
4 105,000 0.659 69167 89,000 0.659 58627
5 118,000 0.593 70027 108,000 0.593 64093
Total discounted cash
inflow 293073 265504
Initial investment 140000 120000
NPV (Total
discounted cash 153073 145504

inflows - initial
investment)
From the above calculation it can be specified that organization will receive positive cash
flow from both the projects. Net present value obtained from project A vegan cholate is higher
than B vegan spread. On the basis of this, it can be identified that company will be beneficial by
selecting project A higher discounted cash flow can allow to gain objective of higher profitability
and liquidity.
Computation of and payback period
Year
Project A –
Vegan
Chocolates’s
Net
cashflow £
Cumulative
cash
inflows
Project B
–Vegan
Spreads’s
Net
cashflow
£
Cumulative
cash
inflows
1 52,000 52000 46,000 46,000
2 58,000 110,000 60,000 106,000
3 82,000 192,000 72,000 178,000
4 105,000 297,000 89,000 267,000
5 118,000 415,000 108,000 375,000
Initial investment 140000 120000
Payback period 2 2
0.36585 0.19444
Payback period
2 year and
4 months
2 years 2
months
On the basis of above illustrated table it can be articulated that AJ Plc will be able to
recover its initial investment of project A and B in 2.4 & 2.2 years respectively. Firm should
select that project which has less recovering duration. From the evaluation it can be specified
that organization should pay attention on adopting project B due to less payback period.

From the evaluation of the project it can be interpreted that net present value should be
high while making decision for investment (De Vries and et.al., 2017). Lower payback period is
considered to be beneficial in recovering investment and has less risk. On the basis of this it can
be stated that AJ Plc should make decision in favor of project B Vegan Spreads for having higher
stability in sector.
Explaining financial & non-monetary factors affecting stakeholders and decision making process
There are several factors which are need to be taken into consideration by the
organization for having depth insights in order to make strategic decision (Cunningham and
et.al., 2020s). Factors that affect the business decision making process involve both financial
and non-monetary aspects. The financial components that has impact includes cost, assets
structure, expected return, risk, profitability margins (Magni and Marchioni, 2020). It is
important for the organization to pay attention on having significant emphasis on its cost of
production by involving its direct &indirect both expenses. For gaining sustainability in sector it
is major component which need higher concentration in order to reach desirable position.
Reducing cost can lead to result in having higher profit margin as it as well affects the
stakeholders’ decisions (Scott and et.al., 2021). There are number of stakeholders who have
focus on profitability margin so that decision regarding investment lending, etc. can be made. It
becomes essential for the company to focus on reducing cost for having higher profitability
through optimizing resource utilization in turn better outcome can be achieved. Changing
interest, exchange, etc. rate has major influence on cost of capital and inclines expenditure of
enterprise. These elements ae taken into consideration by company while raising capital.
There are non-monetary factors as well which has both positive and negative impact on
the processing of the company (Factors Influencing Decision Making in a Business
Environment, 2021). The non-financial factors involve factors like availability of resources,
working environment, strategy formulation, risk management, etc. it can be deeply understood
that these are both internal external factors. External components like political, social, economic,
technological, environmental and legal. Having inadequate technology can decline efficiency of
productiveness which might has adverse impact in larger extent. Changing trend of customers
make difficult for the enterprise to focus on making changes in its internal process which as well
affect funds utilization. Legal compliance for having successful stability in industry is highly

essential as in absence of adherence can tend to result in arising of complications. It is
important to consider all rules & regulations imposed for having sustainability to eliminated
irrelevant components. Ordination of human resource in accepting changing circumstances play
significant role in affecting the business decision regarding adopting of new technologies,
application of policies strategies, etc. in turn higher competitiveness can be developed (Hering,
Olbrich and Rapp, 2021). Frequent changing demand of customer is one of the significant factor
which need to be included to investigate adopted investment appraisal project is capable of
meeting requirements of market or not.
On the basis of presented information regarding both monetary & non-financial elements
it can be stated that each factor has impact on smooth functioning of business. It is crucial for the
organization to focus on each aspect to increase productiveness by identifying lacking areas in
turn eliminating those for accomplishing objective of applying particular decision can become
possible.
CONCLUSION
From the above report it can be conclude that it is important for the company to take
strategic decision for gaining competitiveness. The current report has included calculation of net
present value and payback period for providing depth insights. Present study has involved
information regarding financial and non-monetary which affects business decision like
profitability margin, cost, changing customer trend, compliance with legal requirement, human
resource, etc.

REFERENCES
Books and Journals
Cunningham, B. and et.al., 2020. Accounting: information for business decisions. Cengage AU.
De Vries, R.E and et.al., 2017. Explaining Unethical Business Decisions: The role of personality,
environment, and states. Personality and individual differences. 117. pp.188-197.
Hering, T., Olbrich, M. and Rapp, D., 2021. Net present value, duration, and CAPM in light of
investment theory: a comment on Kruk. Quarterly Journal of Austrian Economics. 24(2).
p.25904.
Magni, C. A. and Marchioni, A., 2020. Average rates of return, working capital, and NPV-
consistency in project appraisal: A sensitivity analysis approach. International Journal of
Production Economics. 229. p.107769.
Scott, N. and et.al., 2021. Mobiles for Development–A Comparative Analysis of Business
Decisions. Journal of African Business. pp.1-18.
Online
Factors Influencing Decision Making in a Business Environment. 2021. [Online]. Available
though: < https://smallbusiness.chron.com/factors-influencing-decision-making-business-
environment-65082.html>