Business Decision Making: Machinery Purchase

This report discusses the decision-making process for machinery purchase, including capital budgeting methods such as net present value, payback period, internal rate of return, and accounting rate of return. It compares two options and recommends the best choice based on these methods.

Business decision
making

Table of Contents
Introduction-................................................................................................................................................3
Solution 1 (a)...............................................................................................................................................3
Solution 1(b)-..............................................................................................................................................6
Solution 1(c)-...............................................................................................................................................9
Conclusion-.................................................................................................................................................9
References-................................................................................................................................................10

Introduction-
This report is based on decision making of machinery purchase. Company needs to follow steps
to solve problems by comparing options and decisions also reviewed to check whether decision
is right or not. Company has two options between them company needs to choose one. Company
is using capital budgeting methods for assessment of investment. This method includes net
present value, payback period, internal rate of return and acquired rate of return. These methods
are compare the projects and give the best decision making power to company.
Task 1-
Solution 1 (a)
(1)- Payback Period
Project A - Dysn Model 1
Yea
r
Net Cashflows Cumulative cashflows
1 120000 120000
2 90000 210000
3 75000 285000
4 80000 365000
5 10000 375000
Initial
Investment
250000
Payback period = 2 years + [(250000 - 210000) / 75000 * 12
months
2 Years + (40000 / 75000) * 12 months
2 years + (0.533 * 12 months)
2 years + 6.396 months

Project A - Texla Model 1
Year Net Cash flows Cumulative cash flows
1 95000 950000
2 125000 220000
3 115000 335000
4 125000 460000
5 90000 550000
Initial
Investment
400000
Payback period = 3 years + [(400000 - 335000) / 125000 * 12
months
3 Years + (65000 / 12000) * 12 months
3 years + (5.42 * 12 months)
3 years + 65.04 months
(2) Accounting Rate of return-
Year Option A Option B
1 120000 95000
2 90000 125000
3 75000 115000
4 80000 125000
5 -10000 -90000
Average Annual Profit 355000 460000
ARR = (Average annual profit / Initial investment) * 100

Option A = (355000 / 250000) * 100
= 142%
Option B = (460000 / 400000) * 100
= 115%
(3) Internal Rate of return-
Dysn Texla
Years Cash Flow(in £) Cash Flow(in £)
0 -250000 -400000
1 120000 125000
2 90000 115000
3 75000 125000
4 80000 90000
Internal Rate of return 19% 6%
(4) Net Present Value-
Project A - Dysn Model 1
Yea
r
Net Cash
flows
Discount Factor @
12%
Present value of net cash
flows
1 120000 0.892 107040
2 90000 0.797 71730
3 75000 0.718 53850
4 80000 0.635 50800
5 10000 0.567 5670
Total Present value = 289090
Initial Investment = 250,000
NPV = 39,090

Project B - Texla Model 1
Yea
r
Net Cash
flows
Discount Factor @
12%
Present value of net cash
flows
1 95000 0.892 84740
2 125000 0.797 99625
3 115000 0.718 82570
4 125000 0.635 79375
5 90000 0.567 51030
Total Present value = 397340
Initial Investment = 400,000
NPV = -2660
Solution 1(b)-
Payback period-
It is defined as time period when company receives invested amount on project. If payback
period is less than expected than it is considered as good and vice versa. In case of company
payback period of Dysn is less than Texla. It means if company is going to invest money in
Dysn then cost of machinery will be received in 2.63 years but in case of Texla 3.65 years time is
taken which is comparatively more. So, decision is in favor of Dysn as it is having less payback
period. Advantages and disadvantages of payback period is as follows-
Advantages-
 It is very simple process. It does not take much time in calculation.
 Project evaluation can be done quickly.
 Risk of losses can be minimized by using this technique.
Disadvantages-
 Main drawback of this method is that it does not consider time value of money which is
very important in evaluation of project.
 Inflow of cash is not considered after payback period.

Accounting rate of return-
It is defined as expected percentage rate of return from a project when it is compared to initial
cost of investment. It helps business to know about whether to invest in project or not. It is seen
from calculation that ARR of first project is more than project B so company should go with
project A.
Advantages-
 It is very simple to calculate as it undertakes total savings over economic life of project.
 This method helps organization to compare different projects to know which one is
profitable.
 Clear picture of profitability can be seen by this technique.
 As investors always interested in returns on investment and this method only focus on
returns.
 Current performance of the company can be measured by it.
Disadvantages-
 It creates conflict between return on investment and accounting rate of return. It makes
investor confused.
 It totally ignores time value of money.
 External factors are also ignored.
 When investment is done in parts then this method is not considered.
Internal rate of return-
It is discounting cash flow technique. It is an indicator of annualized rate of return for
investment. It is defined as discount rate which makes NPV equal to zero. It checks profitability
of investment. If internal rate of return on investment is higher then, it is considered as good.
When two options are compared then high IRR is undertakes as best.

Advantages-
 Main advantage of this technique is that is uses time value of money. Other techniques
such as ARR and payback period do not consider time value of money.
 Interpretation of IRR is very simple. If IRR of the project is more than cost of capital then
project should be considered.
Disadvantages-
 Economies of scale is ignored in this technique.
 It ignores mutually exclusive projects.
 It also avoid dependent project.
 It is hard to measure that what would be increase in wealth.
Net present value-
Net present value is the best technique to know profitability of project. This method considers
time value of money. It is defined as present value of all the cash flows which will be occurring
in future. Advantages and disadvantages are as follows-
Advantages-
 It undertakes time value of money.
 It helps company in decision making.
Disadvantages-
 There is no proper guidelines available to calculate required rate of return.
 Different sizes of projects cannot be evaluated.
 There is hidden cost which is not considered in it.
Solution 1(c)-
It is suggested to company that Dysn is best choice for company. As payback period means
initial investment can be recovered in 2.63 years which is less than Texla. Texla is taking more
than 3 years. Accounting rate of return of Dysn is 142% and Texla is 115%. It means Texla is
giving less return on project when compared to Dysn. According to ARR Dysn should be chosen

by Dolapo plc. When it comes it internal rate of return Dysn is giving higher percentage return
than Texla and net present value of Texla is less than Dysn. Hence, it can be said that Dysn is
good choice for company on the basis of all these methods. Dysn model will help in growth of
the company.
Conclusion-
From above report, it is analyzed capital budgeting methods are very important for company to
compare the projects. In the report, all the techniques are used to evaluate the profitability of
project and it is concluded that Dysn model is profitable for company. If company invests in this
project then it help company in growth of the business. It is very important for company to make
wise decisions. Hence, it can be said that capital budgeting methods are very important to
analyze profitability of the project.
References-
Books and Journals-
Marcolin, C.B., Becker, J.L., Wild, F., Behr, A. and Schiavi, G., 2021. Listening to the voice of
the guest: A framework to improve decision-making processes with text data. International
Journal of Hospitality Management, 94, p.102853.
Rejikumar, G., Aswathy Asokan, A. and Sreedharan, V.R., 2020. Impact of data-driven decision-
making in Lean Six Sigma: an empirical analysis. Total Quality Management & Business
Excellence, 31(3-4), pp.279-296.
Souza, M.L.H., da Costa, C.A., de Oliveira Ramos, G. and da Rosa Righi, R., 2020. A survey on
decision-making based on system reliability in the context of Industry 4.0. Journal of
Manufacturing Systems, 56, pp.133-156.
Liu, B. and Zhang, N., 2020. Decision-Making for RPA-Business Alignment. In LISS2019 (pp.
741-756). Springer, Singapore.