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

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
1