Importance of NPV and Payback Period in Business Decision Making

Essay on business decision
making

Contents
ESSAY TOPIC................................................................................................................................1
INTRODUCTION...........................................................................................................................1
ESSAY BODY................................................................................................................................1
Net present value with its benefits and drawbacks......................................................................1
Payback period with its benefits and drawbacks.........................................................................3
Financial and non-financial factors.............................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

ESSAY TOPIC
“An understanding of the decision making for an organisation with the help of NPV method
and payback period method along with various financial and non-financial factors”
INTRODUCTION
Every organisation whether small, medium or large can achieve desired results from their pre-
determined projects only if their management makes an effective decision and plans after proper
evaluation of alternatives (Berger and Bouwman, 2017). Thus, decision making process is
important for the growth of business due to which it is important for managers to examine each
methods used to execute desired project so as to achieve huge profitability by incurring less cost.
In the present essay, the importance of financial as well as non-financial factors are briefly
discussed. In addition with this, methods used for investment decision are also determined which
includes NPV and Payback period method.
ESSAY BODY
XYZ Plc. is currently operated in UK providing various kinds of hospitality services at small
scale. Services includes Laundrette and Hotel software are some kinds of services such hotel
currently outsourced. Thus, the managers now decides to acquire one of these services so as to
minimise business cost (Bridge and Dodds, 2018). For this, they first analyse profitability of
each option through using NPV and Payback method and decide which will bring more suitable
for the business in near future. XYZ Plc. invest £100,000 to acquire software whereas £120,000
will be invest to acquire Laundrette on 11% rate of return.
Net present value with its benefits and drawbacks
NPV is the difference between the present values of cash outflows and inflows over period
of time It mainly emphasis on the fact that the amount earned today by organisation is worth
more than the same amount earned in future. By using such method, company can calculate the
return on investment by introducing time element factor. It has many benefits and drawbacks due
to which the management of XYZ Plc. need to understand these first before thinking to use such
method (Cunningham and et. al., 2018). The main benefit of using such method is that it is based
on the time value of money and put more focus on converting savings or earnings of project into
present value of money (Spetzler, Winter and Meyer, 2016). Alongside, it has some demerits as
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