Business Decision Making: Computation of NPV and Payback Period

This report analyzes the feasibility of two projects using discounting and non-discounting techniques such as net present value and payback period. It also evaluates the financial and non-financial factors that affect investment decisions. The report concludes by recommending the use of NPV over PBP and highlights the importance of considering non-financial factors in investment decision-making.

Business decision
making

Contents
INTRODUCTION...........................................................................................................................1
Main body .......................................................................................................................................1
Computation of Net Present Value (NPV) of each projects........................................................1
Calculation of Payback period (PBP) of both the projects .........................................................3
Analysis and evaluating the both the techniques in project A and project B..............................4
Financial and non financial factors on investment decision .......................................................5
CONCLUSION ...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Business decision making process is range of process which allow experts to find the solution by
weighing proof, gathering information and analysing choices. Business decision is also known as
operational decision. In this written document, appraisal of the two projects by using discounting
and non discounting techniques which net present value or payback period (Castle and Smith
2019). Further, it consider to pick up one best techniques among these two to select one project
either A or B. In the end, report consider financial or non financial factors and their impacts on
investment conclusion.
Main body
Computation of Net Present Value (NPV) of each projects
In general, Net present value is a analysis tool which is used for deciding whether to make
money invested in a capital asset and determining the feasibility of project investment. It has
benefit in terms of reduced cash flows to one numeric value that is easily compared to other
projects Net present value(NPV). To determine the Net present value following formula to be
consider -
Cash flows
Net present value (NPV) = ------------- - initial investment
( 1 + i )t
Net present value of Project A
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Net present value of Project B
Calculation of Payback period (PBP) of both the projects
The time taken to retrieve an investment's first investment is called as the Payback period. In
general, it takes time for an assets to reaches a break even point. It is ascertained by dividing the
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sum of money for an investment by the yearly Cash flow(Cyert and March, 2021). Payback
period is simple to calculate as there is no involvement of any complexity and assist in
evaluating the reliability and accuracy of the project. To compute payback period following
formula should be used :
Payback period = Initial investment / yearly cash flows
(Averaging method)
Payback period = last year cash flow + (cash flows at the end of year / cash flow after that year )
Payback period for project A
Payback period for project B
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Analysis and evaluating the both the techniques in project A and project B
S&P Plc is bag production organisation who are thinking about venture which incorporates
whether or not to supply leather-based luggage or material luggage. For this choice, their
strategic supervisor thinking about to assess with the aid of using the Net present value(NPV)
and Payback duration(PBP) for each of the tasks. These techniques can degree the sustainability
and long time venture price. NPV is a economic technique for the usage of time value of money
that is taken into consideration as a fashionable approach for comparing any venture (Humphreys
and Moak 2021). On the opposite hand, PBP technique is used to figure out a venture to be
purchased. It identifies the duration in passage of years and months which tells approximately
specific term payback on funding made. NPV approach gets rid of the term thing in weighing
desire of tasks whilst payback technique concentrates on time wished for go back on funding. In
addition, PBP technique specializes in most suitable term of funding because it does now no
longer think about any probabilities. By analysing their advantages, PBP technique is simplex
and simpler to decide for little, iterative funding, elements in tax and depreciation rates.
Conversely, NPV is extra suitable and dependable device because it makes use of coins flows
now no longer income and effects in locating out the funding choice. For S&P Plc, to
accomplishing on an most excellent economic choice they must use NPV technique over the
payback duration technique due to the fact it's far extra correct and green device. By the usage of
Net present value, they could without any difficulty choose one venture whose NPV is extra. As
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venture A has £147,320 whilst venture B has £143,450. Hence, S&P Plc can choose the venture
A of Synthetic Leather luggage.
Financial and non financial factors on investment decision
Investment appraisal is not all regarding economic elements. There are non-financial elements
that performs important role in making any significant funding selection (Mowen and Heitger,
2022). In fact, maximum of these non-financial elements act as spine so one can both make or
mare the funding if taken.
Following are a number of the non-financial factors that affect investment decisions:
 Climatic Issues. Green activities has these days received recognition to the extent that
agencies now no longer making an investment in asset that keep the surroundings are
visible as a non responsive and irresponsible with the aid of using the general public who
will in turn become as clients later.
 Staff Motivation. The impact of an investment at the motivation of workers ought to be
taken into consideration earlier than furthering within the investment technique.
 Customers' pride. The pride and satisfaction that the clients gets from an funding is a
non-financial factor to keep in mind before making any investment. After all, the king is
always the client.
 Government regulation. This is an apparent however the maximum overlooked issue of
funding appraisal. There is requirement to consider in mind the authorities applicable
legal guidelines earlier than making funding appraisal.
An investment is a deliberate selection and a number of the elements which can be liable for
those selections are as follows (Street and et.al., 2021). The motive behind any investment
determines the short time period or long term period fund allocation. It is the start line of the
selection making technique. Managers prioritize returns that are positive—they are trying to
appoint constrained finances in a worthwhile asset or protection. The of periodic returns an
funding provide is vital. Financial control is primarily based technique on financial factors;
traders pick among investments that yield monthly, quarterly, semi-annual, or annual returns.
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CONCLUSION
This written report represents capital techniques to measure the practicability of the two project
which are considered by strategic manager of S&P plc. Further, this includes the analysis of the
best techniques among the Net present value(NPV) and Payback period(PBP) for both of the
projects. Additionally, this report considered the component in terms of financial and non
financial and its consequence on investment judgement making.
REFERENCES
Castle, E.N. and Smith, F.J., 2019. Farm business management: the decision making
process. Farm business management: the decision making process. Second Edition.
Cyert, R.M. and March, J.G., 2020. The role of expectations in business decision
making. Administrative Science Quarterly, pp.307-340.
Humphreys, N. and Moak, D.L., 2021. The ethical decision making process of small business
owner/managers and their customers. Journal of Small Business Management. 31(3). p.9.
Mowen, M.M. and Heitger, D.L., 2022. Managerial accounting: The cornerstone of business
decision-making. Cengage learning.
Street, M.D. and et.al., 2021. The impact of cognitive expenditure on the ethical decision-making
process: The cognitive elaboration model. Organizational Behavior and Human Decision
Processes. 86(2). pp.256-277.
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