Understanding Business Decision Making through NPV and Payback Period Method

Business Decision
Making

Contents
ESSAY TOPIC................................................................................................................................3
INTRODUCTION...........................................................................................................................3
ESSAY BODY.................................................................................................................................3
Net present value with its benefits and drawbacks.................................................................3
Payback period with its benefits and drawbacks....................................................................5
Financial and non-financial factors........................................................................................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

ESSAY TOPIC
“For an understanding of decision making of the businesses through NPV and Payback Period
method as well as various financial and non-financial factors.”
INTRODUCTION
The decision-making process of the business enables the business to identify the viability of
the option that the business is planning to undertake. Efficiency in the decision-making facilitates
an organisation to accomplish its objectives and improve their profitability (Madura, 2020). In
this essay two business options are given for a hotel chain which is to be analysed with the help
of NPV and payback period method to determine the better option. Also various financial and
non-financial factors that affect decision making are taken into consideration.
ESSAY BODY
Xyz Plc is a hotel chain that has been operating in various parts of the UK and Europe. They
have outsourced some of their services as they do not have sufficient resources for undertaking
such activities on their own. Now the manager of the organisation has planned to organise either
of the services outsourced within their hotel (Mao, 2017). For this they have proposed two
projects i. e., software project and launderette project. For analysing both the proposals the
strategic managers will identify the more viable option with the help of the net value method and
payback period method. The initial investment which they have for the two projects is £100000
and £120000 respectively for the rate of return of 11%.
Net present value with its benefits and drawbacks
Net present value method is the method that facilitates to determine the present value of
the inflow of the cash in comparison to the outflow of the cash for a specific period of time. This
method is generally used by the organisation for conducting planning for investment and in
capital budgeting for analysing the profitability from the project. NPV method is beneficial as
with this the opportunity cost of another project can be determined (Wu and Law, 2016). But to
incorporate such method a significant professional knowledge is required which makes it
possible for projects or organisation on a large scale.
The net present values of both the projects are given below: