Business Decision Making: Computation of NPV and Payback Period for S&P Plc

This report analyses two investment projects of S&P Plc and determines the most profitable one by computing NPV and payback period. It also evaluates financial and non-financial factors that aid in business decision-making.

BUSINESS DECISION
MAKING

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1.Computation of net present value of the two projects..............................................................1
2.Calculation of payback period of both the projects..................................................................2
3.Financial and non-financial factors that help in decision making............................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business decision making is a stepwise procedure that assists and permits the business
professionals to figure out the issues and problems of the business by considering the respective
evidences, results, examining the different alternatives and deciding the most suitable option
from that (Monfared and Akbari, 2019). In this report, two different projects of S&P plc which
is a bag manufacturing organization, have been considered and analysed to determine the highly
profitable project for the business. Along with this, various financial and non financial factors
have been evaluated which assist in business decision-making.
MAIN BODY
1.Computation of net present value of the two projects.
S&P Plc, a bag manufacturing business, which functions in the UK and some parts of
Europe. The business has two different investment projects, project A (synthetic leather bags)
which involves a cash outflow of £185,000 and for project B (clothes bags) that relates to a cash
outflow of £182,000.
NPV assists to calculate the present values of future cash flows of the project at a
particular rate of return in comparison to the initial investments made. It is the difference
between the present value of cash inflows and the resent value of cash outflows for a time
period. This method in capital budgeting helps to determine whether the investment made will
be profitable for the business or not in terms of the returns realised from that investment (Turner
and Angulo, 2018).
NPV= Cash flow / (1+i ) ^t −initial investment
where: i=Required return or discounting rate
t=Number of time periods
Calculation of Net Cash Flow when the discounting rate 11% is as follows:
Year Discounting
Rate (11%)
Project A
(Synthetic
Leather Bags)
Project A
Discounted
cash inflow
Project B
(Clothes
Bags)
Project B
Discounted
cash inflow
Year 0 1 -185000 -185000 -182000 -182000
Year 1 0.9 60,000 54060 65,000 58565
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Year 2 0.81 68,000 55216 69,000 56028
Year 3 0.73 82,000 59942 77,000 56287
Year 4 0.66 109000 71831 105,000 69195
Year 5 0.59 155000 91915 145,000 85985
Net cash flow 147964 144060
Net present value = (Cash flows/ (1+ i) t – Initial investment
Net present value of Project A= Discounted cash inflows – Discounted cash outflows
= 332320-185000
=> 147320
Net present value of Project B=Discounted cash inflows – Discounted cash outflows
= 325450-182000
=> 143450
Project A is more profitable for the business because the net present value of cash inflows is
higher in project A in comparison with project B. Hence project A is better and gainful.
2.Calculation of payback period of both the projects.
It refers to the number of years which are a requisite to recover the original amount of
cash investment made. This primarily states the time period at the end of which an investment
has made adequate returns in the form of net revenues so as to recover the initial cost of
investment made (Sharma and Sehrawat, 2021). The lesser payback period the, the better is the
investment made whereas if there is longer payback period then the investment is considered not
so profitable. This is one of the most simple methods to analyse the profitability of an
investment.
When the annual cash flows are Uneven:
=> Years before full recovery + (Unrecovered cost in start of the year / cash flow during the
year)
Payback period for project A
Years Cash flows
Cumulative Cash
flows
1 60000 60000
2

2 68000 128000
3 82000 210000
4 109000 319000
5 155000 474000
Total 474000
= 2 + [(185000-128000)/82000]
= 2 years and 8 months
Payback period for project B
Years Cash flows
Cumulative Cash
flows
1 65000 65000
2 69000 134000
3 77000 211000
4 105000 316000
5 145000 461000
Total 461000
= 2 + [(182000-134000)/77000]
= 2 years and 7 months
3.Financial and non-financial factors that help in decision making. Financial factors: The financial factors that assist in decision-making majorly involve
factors which are both internal and external to the organisation. The internal financial
factors involve he liquidity position of business, terms of credit, asset structure and the
level of risks and stability in earnings. The external factors include state of economy,
structure of capital and money markets and the tax policy of the country (Neziraj , and
Shaqiri, 2018). Along with all this, the firm also considers the financial statements of the
business such as income statement, balance sheet and cash flow statement to analyse
whether the investment projected would be profitable fr the business or not and make
decisions accordingly.
 Non- Financial methods: The non-financial factors which aid in business decision
making involves evaluating the decisions on non financial terms. These includes the
government regulations, meeting all requisites of present and future legislations,
matching the industry standards and improvement of relationship within all the suppliers
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and customers and uplifting the business goodwill to attract gainful projects from
reputed organisations (Sony and Baporikar, 2019).
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CONCLUSION
From the above report, it can be concluded that business decision making in an essential
concept which helps the companies to analyse and evaluate the business projects and their
respective alternatives to determine the most profitable one. From the analysis of two projects, it
can be said that project A is more profitable for S&P Plc as it has higher present value when
compared to Project B therefore, the company should pick this project for the business. Also it
has been concluded that evaluating and considering both financial and non financial factors is
necessary when making business decisions for S&P Plc.
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REFERENCES
Books and Journals:
Monfared, J. H. and Akbari, Z., 2019. Using Business Intelligence Capabilities to Improve the
Quality of Decision-Making: A Case Study of Mellat Bank. International Journal of
Economics and Management Engineering. 13(2). pp.159-170.
Neziraj, E. Q. and Shaqiri, A. B., 2018. The impact of information systems in decision making of
pharmaceutical industry. Journal of Pharmaceutical Sciences and Research. 10(6).
pp.1333-1335.
Sharma, M. and Sehrawat, R., 2021. Decision-making in management of technology: a literature
review. International Journal of Technology Intelligence and Planning. 13(1). pp.38-62.
Sony, M. and Baporikar, N., 2019. Antecedents of irrationality in organizational decision
making. International Journal of Sociotechnology and Knowledge Development
(IJSKD). 11(1). pp.1-16.
Turner, L. A. and Angulo, A. J., 2018. Risky business: An integrated institutional theory for
understanding high-risk decision making in higher education. Harvard Educational
Review. 88(1). pp.53-80.
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