Business Decision Making: Payback Period and NPV Analysis

This report explores the process of business decision making using financial management techniques such as payback period and net present value (NPV) analysis. It discusses the calculation of payback period and NPV for XYZ plc projects and the factors that influence decision making. The report also highlights the importance of considering both financial and non-financial factors in decision making.

Business decision
making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Calculation of payback period for XYZ plc projects...................................................................1
Calculation of NPV for XYZ projects.........................................................................................2
Final decision...............................................................................................................................3
Financial factors...........................................................................................................................4
Non financial factors....................................................................................................................4
CONCLUSION................................................................................................................................5
REFRENCES...................................................................................................................................6

INTRODUCTION
Business corporations formulate their plans and policies by taking business decision. It is
systematic procedure of analysing and evaluating the most efficient alternative which help
organization to attain business objective. For taking best decision mangers use various technique.
This report is formulated in order to solve the problem of XYZ plc . This organization provides
hotel facilities and service to their relevant customer. This report define how mangers take
decision on the basis of using financial management technique which considered, pay back
period and net present value and effect of financial and non financial factor on decision making
criteria.
TASK 1
Calculation of payback period for XYZ plc projects
Pay back period can be define as tool of financial management which define the time
require by organization to cover up the value of project's original cost required to established
specific project. In other words it is minimum period required by business entity to recover r
initial investment cost (Moore and Bone, 2017).
Manager take decision on the basis of time require by alternative to cover the cost. Projects
whose duration of time is lower is beneficial for running business.
PAYBACK PERIOD FOR SOFTWARE PROJECT A
Formula of payback period: = Base year +primary outlay- collective cash inflow of base year /
future year cash inflow(Trad, 2020).
PAYBACK PERIOD FOR LAUNDRETTE PROJECT
3+100000-95000/55000= 3.90year
Year Cash inflow in £ Cumulative cash inflow
1

1 31000 31000
2 38000 69000
3 43000 112000
4 64000 176000
5 89000 265000
PAYBACK PERIOD:
Interpretation: From calculation of pay back period of software as well as Laundrette project it
identifies that if organization set up software then they require 3.19 years to cover up the
cost and on the other side if XYZ plc set up Laundrette project then they need to take 3.125
years to fill up their cost (Yang, 2018).
Calculation of NPV for XYZ projects
Net present value define as value identified by deduction of sum up of total present cash
flow from project's cost of initial investment. This technique is used by corporations which
require to find out the real value of cash inflow and ability of organization to cover up their
initial investment from present cash inflows. NPV is essential and vital tool which used by
financial manger as their capital budgeting technique. Manager take decision on the basis of net
present value by identifying the higher profitably rate of projects. They select those alternative
through which organization able to generate higher rate of profitably
For software project
Net present value: current value of money inflow of software project – current value of original
outlay cost of software: 159296-100000: 59296
For Laundrette project
2

Net present value: Present value of cash inflow – present value of initial investment of
Laundrette project: 180367-120000: 60367
Interpretation: Value of software project is higher then its initial cost. On the other side project
laundrette value is also more then its initial investment. The difference of the present value
and initial investment is 60367.
Final decision
Benefits of payback period:
 Pay back period considered as easiest method of taking business decision.
 Manager only take short time for identifying best alternative.
Drawbacks of payback period
 It is not reliable for large business organization .
 Pay back period does not considers time element which is most essential element for
taking decision regarding business.
Benefits of NPV
 NPV help manager to take reliable and accurate decision (Richmond, 2018).
 In this method time element is included while identifying best alternative.
Drawbacks of NPV
 It is time consuming process of capital budgeting.
 For calculating rate and net present value skilled personal require.
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Financial factors
These are those factors which directly affect cash flow activities of organization. It
consider all factors which gives monetary benefits to the organization. All financial factors are
described below
Income: Gross value of revenue attain by organization by their business transactions. It is the
main source of capital.
Working capital: Value of current asset required to fulfil bas and day to day needs in order to
run business in effective manner.
Profit: Amount of net revenue generated or gain by organizations after deducting various kind of
expense which are the result of cash outflow. Profit showcase goodwill of the organization and
build strong image in market (Sun Chen, Sun, and Taghizadeh-Hesary, 2020).
By calculating value of pay back period and identified the profitably rate of present value of
alternatives, manager of XYZ plc should take the decision to invest in software and Laundrette
project as they can able to cover up cost within 4 years and the value of present cash inflow is
also higher as compare to initial investment.
Non financial factors
Theses are factor which are not direct affect business efficiency rate but indirect impact
on organization's profitably and effective rate Following are the non financial factors
Skills: human Resource are play vital role in any success of project alternative. Without skilled
workforce XYZ plc will never able to fulfil their objective within given time period.
Technology: Today's market s totally depend on technologies. T hoes organization able to build
higher piston in economy which use advance technology to impress their customer. However
selection of technology according to workforce is also required as it is really hard for employees
to accept changes of system.
Strategies of marketing: Success of business depend on how effective and efficient strategies
and policies manger use to promote and advertise their products. Manager of XYZ plc need to
build effective policies which help in retain old customer and attract new customers for their
hotel industry.
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CONCLUSION
From the above analysis of this report it can be identified that to in order to run business
in effective manner, manger of business organization ned to take business decision. For thus
purpose they use various types of capital budgeting technique, pay back period and net present
value method, which define the profitably rate as well as time required to completion of the
project. On the basis of that and analysing the effect of financial and non financial facto on
running business activities , manger able to take best decision which help in aching goal as well
as build strong market position in market economy.
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REFRENCES
Books and journal
Moore, B. and Bone, E. A., 2017. Decision-making in crisis: Applying a healthcare triage
methodology to business continuity management. Journal of Business Continuity &
Emergency Planning, 11(1), pp.21-26.
Trad, A., 2020. Applied Mathematical Model for Business Transformation Projects: The
Intelligent Strategic Decision-Making System (iSDMS). In Handbook of Research on IT
Applications for Strategic Competitive Advantage and Decision Making (pp. 269-308).
IGI Global.
Yang, M. H., 2018. Payback period investigation of the organic Rankine cycle with mixed
working fluids to recover waste heat from the exhaust gas of a large marine diesel
engine. Energy Conversion and Management, 162, pp.189-202.
Richmond, A., 2018. Direct net present value open pit optimisation with probabilistic models.
In Advances in applied strategic mine planning (pp. 217-228). Springer, Cham.
Sun, Y., Chen, L., Sun, H. and Taghizadeh-Hesary, F., 2020. Low-carbon financial risk factor
correlation in the belt and road PPP project. Finance Research Letters, p.101491.
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