Business Decisions Making

This essay discusses the decision-making process in enterprises and explores the calculation of payback period and net present value (NPV) for project evaluation. It also examines the benefits and drawbacks of these methods and discusses financial and non-financial factors that affect decision making. Recommended for students studying finance and business management.

Business Decisions
Making

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Calculate payback period.........................................................................................................1
2. Calculate Net Present Value (NPV)........................................................................................1
3. Analysis...................................................................................................................................2
CONCLUSION................................................................................................................................4
References........................................................................................................................................5

INTRODUCTION
Decision making process in enterprise is a step by-step procedure that helps experts to
overcome challenges by assessing facts, evaluating solutions, and selecting a direction from there
(Ball, 2013). This specified method often offers a chance, at the end to see if the determination
was the correct one. This essay based on XYZ Plc which is looking to invest in new software or
in laundrette project where they have two different proposals. So managers have to made
decisions to select any best project which provide them more benefits. This assessment covers
the calculation of NPV or payback period and what are the benefits and drawbacks of it.
MAIN BODY
1. Calculate payback period
Year Project A Cumulative
cash flow
Project B Cumulativ
e cash flow
0 100000 - 120000 -
1 28000 28000 31000 31000
2 32000 60000 38000 69000
3 35000 95000 43000 112000
4 55000 150000 64000 176000
5 78000 228000 89000 265000
Formula:
Payback period: Year before full recovery + unrecoverable cost / cash flow during the year
Project A = 3 + 5000 / 55000
= 3 + 0.90
= 3.90 year
Project B = 4 + 56000 / 64000
= 4 +0.87
= 4.87
2. Calculate Net Present Value (NPV)
Year Software Project PV @ 11% DCF
0 -100000 1 -100000
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1 28000 0.900901 25225.23
2 32000 0.811622 25971.92
3 35000 0.731191 25591.7
4 55000 0.658731 36230.2
5 78000 0.593451 46289.2
NPV 59308.25
Year Laundrette Project PV @ 11% DCF
0 -120000 1 -120000
1 31000 0.900901 27927.93
2 38000 0.811622 30841.65
3 43000 0.731191 31441.23
4 64000 0.658731 42158.78
5 89000 0.593451 52817.17
NPV 65186.76
3. Analysis
Benefits or drawbacks of payback period or NPV:
Payback Period: It is called a method of research with exploitable flaws and requirements
for its use, as it will not allow for the present value of capital, risk, funding or other essential
factors, such as environmental cost (Chiang, Nouri and Samanta, 2014). Although the period
value of assets can be corrected by implementing a moving average cost of capital depreciation,
it is widely understood that this method will not be used in particular for investment decisions.
 Benefits: The payback technique's primary benefit because of its efficiency. Comparing
many projects and then choosing one that has the fastest payback period is a simple way
to do so. The payback also has many realistic and conceptual disadvantages. Easy to
quantify and require less input, administrators are able to easily measure the work
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payback duration. This allows businesses make fast choices, which is really necessary for
resource-stricken businesses.
 Drawbacks: The most significant downside of the payback approach is it doesn't
recognize money's time value. Cash flows obtained after a proposal's earlier years have a
larger weight than retained earnings obtained in later life (Hope, Thomas and Vyas,
2013). Because a venture has a narrow payback period means it's not efficient. If the
expected returns end at the repayment period or are significantly reduced, a project could
never yield a gain and that it would somehow be an inappropriate investment.
Net Present Value (NPV): This approach could be a very useful way of assessing the
feasibility of a consumer spending or in a new project. But like other finance strategies, it is not
the end solution for organizations for their investments. It holds a few particular benefits and
drawbacks that may not make it suitable for other investment decisions.
 Benefits: The NPV approach always indicates everyone how an investment would
generate wealth for the enterprise or the lender, and for how much in money. Investment
returns are more expected in the future would have little effect on the net present value
than more stable cash flows which exist in earlier times.
 Drawbacks: It needs some speculation on the capital expense of the company. Having
an overly low cost of capital would result in inadequate spending. To believe the capital
costs are too high would result in all these good projects being overlooked. However, the
NPV approach is not effective when contrasting two projects of similar scale. Since the
NPV approach consists in a dollar response, the scale of the NPV output is mostly
determined by the width of the data.
Financial or non financial factors:
There are several financial or non financial factors which affect the decision making
process of stakeholders (Lisowsky and Minnis, 2018). Financial factors include the employee’s
motivation, practice of industry rules & regulation in the business operations, relationship with
suppliers or consumers. After evaluating these factors managers of XYZ Plc can make strategic
decisions accordingly which affect the stakeholder’s decision making process as well. On the
other side, financial factors include the analysis of project return, recovery period, initial
investment, profitability etc. Investment appraisal technique helps the stakeholders to measure
the project return and what benefit they take from it, if they invested in this.
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From the above calculation, it is evaluated that payback period for software project is
3.90 years and for Laundrette Project, payback period is 4.87. As per the analysis of this tool,
Project A is more favourable in comparison to Project B for XYZ Plc. Lower the recovery period
is profitable for the organization because business recover their initial investment in minimum
time. Net present value of Project A is 59308.25 or project B is 65186.76. According to this
capital budgeting tool, project B is more favourable for XYZ Plc because it has high NPV which
is beneficial for any portfolio. It is recommended that, company should invest in project A that
means in software because its recovery period is less and there is no such major difference in the
present value.
CONCLUSION
From the above discussion, it has been observed that there are several tools and techniques
are available which help the organization to select the best option to maximise their earning. Net
present value or payback period is the most usable technique which managers adopt to identify
the project profitability in context of organization. It has several advantages or disadvantages
which managers needs to evaluate before considering it.
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REFERENCES
Books & Journals
Ball, R., 2013. Accounting informs investors and earnings management is rife: Two
questionable beliefs. Accounting Horizons. 27(4). pp.847-853.
Chiang, B., Nouri, H. and Samanta, S., 2014. The effects of different teaching approaches in
introductory financial accounting. Accounting Education. 23(1). pp.42-53.
Hope, O. K., Thomas, W. B. and Vyas, D., 2013. Financial reporting quality of US private and
public firms. The Accounting Review. 88(5). pp.1715-1742.
Lisowsky, P. and Minnis, M., 2018. The Silent majority: Private US firms and financial reporting
choices. Chicago Booth Research Paper, (14-01).
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