Business Decision Making: Investment Appraisal Techniques
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Added on 2023/01/04
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This project explores the case study of Genesis & Dreams Ltd and their investment decision making process. It discusses the use of appraisal techniques like payback period and net present value, and examines the influence of financial and non-financial factors on investment decisions.
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Table of Contents INTRODUCTION.................................................................................................................................3 MAIN BODY........................................................................................................................................3 Investment decision making..............................................................................................................3 CONCLUSION.....................................................................................................................................6 REFERENCES......................................................................................................................................7
INTRODUCTION Business decision making is denoted as taking decisions in favour of the organisation to enhance and boost the growth rate of company (Wang and Du, 2016). This project is based on the case study of Genesis & Dreams Ltd in respect to its investment decision making. The organisation is based in construction sector. Henceforth this report would analysis the investment decision making on the basis of different investment appraisal techniques such as NPV, payback period and different oter aspects. Financial and non financial factors also evaluate that influence the investment decision making of the company. MAIN BODY Investment decision making Payback period method Payback period method is a critical investment appraisal technique to make the best level of investment decisions. This is a key technique to analysis the investment decision making of organisation. Payback period is the time required to organisation to recover its overall investment in the certain decision. This is the minimum time needed to organisation to recover its overall investment money (Antony and Joseph, 2017). On the basis of the estimated future cash inflows investment decision is analysed in this method. Once the company generate its overall investment amount all the post period inflows of company are denoted as the profits of the organisation. In this method on the basis of the time of the payback period investment decision is taken. The minimum the payback period company address is favourable for the organisation. Project A= Software Project Total investments =£70000 Cash inflow YearCash Inflow (£)Total cash inflow (£) 11800018000 21600034000 (18000 + 16000) 31900053000(18000+16000+ 19000)
42200075000(18000+16000+ 19000 + 22000) 537000112000(18000+16000+ 19000 + 22000 + 37000) Payback period = 3 + 9.27 (17000/ 22000 * 12) [ 70000 – 18000 - 16000 - 19000] = 3 year and 9.27 months Project B – Hardware Project Total investment =£84000 Cash inflow YearCash Inflow (£)Total cash inflow (£) 12100021000 22700048000 (21000 + 27000) 33000078000(21000+27000+ 30000) 432000110000(21000+27000+ 30000 + 32000) 532000142000(21000+27000+ 30000 + 32000 + 32000) Payback period = 3 year + 2.25 (6000 / 32000 * 12) [£120000 – 21000 - 27000 - 30000] = 3 year and 2.25 months Justification On the basis of the payback period method company should investment in Project B as it contain lesser payback time as compare to project a. Net present value method Net Present Value is another technique that is used to make the investment decisions in favour of the organisation. This is the technique where investment decisions are taken on
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the basis of the cash inflow, total investment and time value of money. All these factors play role in this technique to make the best possible decision in favour of the organisation. Net present value generate result in financial form where company get to know about the potential level of financial benefits company will receive against the investment it has made in a certain project (Dhankar, 2019). This method denotes the maximum amount of potential financial advantage company would receive against the investment it has made in a certain project. Project A YearCash inflow (£)Timevalueof money (@14%) Actualfuturecash inflow (£) 118000.8815840 216000.7712320 319000.6712730 422000.5912980 537000.5219240 Total cash inflow (£) =73110( 15840 + 12320 + 12730 + 12980 + 19240) Net present value (£) =Total expected cash inflow – Total Investment = 3110 (73110 – 70000) ProjectB YearCash inflow (£)Timevalueof money (@14%) Actualfuturecash inflow (£) 121000.8818480 227000.7720790 330000.6720100 432000.5918880 532000.5216640 Total cash inflow (£) =94890 (18480 + 20790 + 20100 + 18880 + 16640)
Net present value (£) =Total expected future cash inflow – Total investment = 10890 (94890 - 84000) Justification On the basis of the net present value method company should invest in Project B. This contains the maximum net present value on the basis of the net present value method. Financial factor Financial factors are among the key factors that influence the investment decision of the organisation. This involve different factors such as total life of the project, scrap value of the investment, expected inflow of the project and different other factors. This also contains thefinancialstabilityoftheorganisation(Guptaand Ahmed,2016). Howmuchthe organization is financially capable influence the entire financial decision making of the organisation. Financial factors directly influence the investment decision making of the organisation. All these financial aspect influence the overall investment which organisation is supposed to make on its investment decision making. Non financial factor Non financial factors are also the key factors that influence the investment decision making of the organisation. This involve the business environment of the company, culture of organisation and different other factors (Liu and Yi, 2018). It also comprises with the potential and capabilities of the employees of company to utilise the investment in favour of the organisation. Its crucial that employees of company must be able to deal with the latest technology and equipment which company is aiming to investment in the organisation as a part of investment decision. Non financial factors also involve the feasibility of the project. All these non financial factors allow the organisation to make the best level of investment decision in favour of the organisation. CONCLUSION Investment decision making is about to make the best level of investment decision in favour of the organisation. Payback period is the time required to recover the overall investment company has done in a certain project. Net present value is the expected financial benefits company will gain out of the investment decision it has made.
REFERENCES Books and Journals Antony, A. and Joseph, A. I., 2017. Influence of behavioural factors affecting investment decision—An AHP analysis.Metamorphosis.16(2). pp.107-114. Dhankar, R. S., 2019.Capital Markets and Investment Decision Making. Springer India. Gupta, Y. and Ahmed, S., 2016. The impact of psychological factors on investment decision makingofinvestors:Anempiricalanalysis.EPRAInternationalJournalof Economic and Business Review.4(11). Liu, P. and Yi, S. P., 2018. Investment decision-making and coordination of a three-stage supply chain considering Data Company in the Big Data era.Annals of Operations Research.270(1-2). pp.255-271. Wang, X. and Du, L., 2016. Study on carbon capture and storage (CCS) investment decision- making based on real options for China's coal-fired power plants.Journal of Cleaner Production.112. pp.4123-4131.