Business Decisions Making

This report discusses the importance of business decision making and different investment appraisal techniques. It covers the calculation of payback period and NPV for two investment projects. The report also provides practical implications for making profitable decisions.

Business decisions
making

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Calculation of the payback period...........................................................................................1
2. Calculation of NPV.................................................................................................................2
3. Analysis...................................................................................................................................2
4. Practical Implications..............................................................................................................3
CONCLUSION ...............................................................................................................................4
REFERENCES ...............................................................................................................................5

INTRODUCTION
In a today's business atmosphere, every business intends to make a sensible and
intelligent decision that supports the achievement of the preferred outcome in a timely manner
that increases the increased profit margins and efficiency. It is founded that manager takes the
judgement into account which are fundamental for increasing the company's value and probably
determine the monetary value or financial status (Business decision making, 2019). This also
support in making better and valuable decision which increase the values of the product and
services provided by company. Strategic decisions endorse the concept of the target audience
group cost and revenue sources.
This report covers the final decision to be made by X plc as company wants to open new
business. In addition different investment appraisal techniques are used to determine the most
profitable investment for X Plc.
TASK 1
Year
Project A –
Technological
Project (£)
Cumu
lative
Discount
factor
(10%)
Present
value
Project B –
Mechanical
Project (£)
Cumul
ative
Discount
factor
(10%)
Presen
t value
0 (£20000) (£30000)
1 8000 8000 0.909 7272 10000 10000 0.909 9090
2 10000 18000 0.826 8260 15000 25000 0.826 12390
3 12000 30000 0.751 9012 17000 42000 0.751 12767
4 15000 45000 0.689 10335 19000 61000 0.689 13091
5 19000 64000 0.621 11799 20000 81000 0.621 12420
Total 46678 Total 59758
£20000-£18000 £2000
£30000-
£25000 £5000
1. Calculation of the payback period
For Project A
Payback period = 2 years + 2000/12000 * 12 months
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= 2 years and 2 months
As the most appropriate and closest value for initial investment will be in 2nd year.
For Project B
Payback period = 2 years + 5000/17000 * 12 months
= 2 years and 3 months
As the most appropriate and closest value for initial investment will be in 2nd year.
2. Calculation of NPV
For Project A
NPV = (£ 20000) + £46,588
= £ 26,588
For Project B
NPV = (£ 30000) + £ 59,644
= £ 29, 644
3. Analysis
Importance of Payback period
The real time required by specific total net balances or flows to regenerate the overall
amount spent through an investment is recognised as payback time (Bogner, 2014). This is noted
that such a technique is considered by the management team to establish the risk related to the
different project proposal. This method have number of benefits and drawback which are listed
below:
Advantages:
 In context to those business firms which have uncertain business atmosphere or even
business operation changes with the change in technological shift this method is useful.
 It's straightforward method to get and implement as it make possible for the administrator
inside the corporation to make profitable decision. As this method need fewer
information and it is comparatively easier to measure overall annual cash flows for
expenditure.
Disadvantages:
 The method of Payback period do not consider the normal business condition due to
which many time it leads to wrong results. As capital investment are not made by
company for only one time (Cosgrove and Rijsberman, 2014).
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 There really is no guarantee that even a business proposal will be effective either with a
smaller payback time. In case if the cash inflow of the proposed plan stops after the term
of the loan or collapses during the repayment period.
Importance of Net present value
In particular, the disparity between the current value of currency cash flows and outflows
is defined as the net present value within the same given period of time (Foster, Reilly and
Dávila, 2016). It is primarily used by business owner to determine the proposal's profit margin. It
is assumed that each plan which has a significant NPV in the monetary future should be
undertaken by the business which will offer the particular corporation a favourable result.
Advantages:
 One of the major benefit of net present value is related with involvement of time worth of
monetary resources engaged in a business. It also define the actual movement of these
resources at the time of inflation and deflation.
 This support in comparing the overall ability of a proposed projects to recover the present
value of investments.
 The calculation includes each of the expected cash returns and money paid and the
amount of revenue for years when the actual investment was made by company.
Disadvantages:
 This approach requires further complex estimation through using quantitative statistics
and column that provides multipliers for various time periods and interest rates (Quanyu,
Tong and Leonard, 2013).
 Among this technique, the administrator intends to make certain assumptions regarding
the current cash handling related with particular project which gives wrong results at
many situations.
There are different financial and non financial factors due to which the results of NPV
and payback period might gets impacted. So manager of company consider each factors, some of
these are as follows:
Financial Factors:
 Investment cost
 Discounted rate
 Modified Internal rate of return.
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Non financial Factors:
 Climatic issues which hamper business activity.
 Staff motivation.
 Customer satisfaction and trends in demands.
4. Practical Implications
The above discourse define the importance of different investment appraisal techniques
which support in identifying the most profitable and efficient investment for company. Payback
period is used in ascertaining the total time taken to recover the amount of investment
(Tseng, Chiu and Liang, 2018). Similarly Net present value of all the cash inflows which must be
higher than the investment amount so company can make profitable decision. There have been
two new investment plans in the sense of X plc, like Project A is £ 20000 and £ 30000 for
Programme B. The average annual return rate is 10%. The return on investment for project A is
2.2 years as well as the net present value expected in the same year is £ 26588. At the other side,
the current value anticipated will be £ 29644 as well as the return on investment will be 2 years 3
months. Therefore it was suggested according to the above estimate that new investment plan for
plan A will become more advantageous because it has shorter time frame to regain the real
investment of £ 20000.
CONCLUSION
It was stated at a the conclusion of such a report the strategic decision-making is the
method that involves the variety of a potential plan of action from either the two available
options in order to achieve as much profit as feasible. The current value of the investment can be
estimated based on the associated rate of return while using the process of NPV. The repayment
duration at the other side is being used to calculate to break even point to the amount invested on
a certain project.
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REFERENCES
Books and Journals:
Bogner, M. S., 2014. Naturalistic decision making in health care. In Naturalistic decision
making (pp. 81-90). Psychology Press.
Cosgrove, W. J. and Rijsberman, F. R., 2014. World water vision: making water everybody's
business. Routledge.
Foster, G., O'Reilly, N. and Dávila, A., 2016. Sports business management: Decision making
around the globe. Routledge.
Quanyu, H., Tong, C. and Leonard, J. W., 2013. Business decision making in China. Routledge.
Tseng, M. L., Chiu, A. S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
Online
Business decision making. 2019. [Online] Available Through:
<https://www.decision-making-solutions.com/business_decision_making.html>.
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