Business Decision Making: Investment Appraisal Techniques

This essay discusses the investment appraisal techniques used in business decision making, specifically focusing on the concepts of net present value (NPV) and payback period. It provides calculations and analysis for two projects, highlighting their profitability and feasibility. Additionally, it emphasizes the importance of considering both financial and non-financial factors in decision making.

Business Decisions Making

TABLE OF CONTENTS
REFERENCES...........................................................................................................................7

Business decision making is the integral part of every business and without it business
cannot survive. The decision is mainly in respect to the investment, product expansion and
business expansion. This essay presents about the investment appraisal technique that can be
used by XYZ plc for taking decisions in respect to investments.
The net present value and payback period is used for evaluating the profitability and
feasibility of the project A and project B.
Net present value
Net present value is the capital budgeting technique which is used for determining the
profitability of the business proposal (Stretcher, Funck and Johnson, 2017). It determined by
subtracting present value of cash inflow and present value of cash outflow. The positive NPV
indicates that the investment can be done by the company as it is profitable.
Project A
Computation of NPV
Year Cash inflows
PV factor
@ 11%
Discounted
cash
inflows
1 28000 0.901 25225.2
2 32000 0.812 25972
3 35000 0.731 25592
4 55000 0.659 36230
5 78000 0.593 46289
Total discounted cash
inflow 159308
Initial investment 100000
NPV (Total
discounted cash
inflows - initial
investment) 59308
Project B
Computation of NPV
Year Cash PV factor Discounted

inflows @ 11%
cash
inflows
1 31000 0.901 27927.9
2 38000 0.812 30842
3 43000 0.731 31441
4 64000 0.659 42159
5 89000 0.593 52817
Total discounted cash
inflow 185187
Initial investment 120000
NPV (Total discounted
cash inflows - initial
investment) 65187
Analysis and interpretation:
NPV is the most widely used technique for evaluating the investment. It is completely
based on the future value of the cash flows over the life of the project which is discounted at
the discounting rate. Based on the above calculations, it can be said that both the projects are
profitable and feasible for the purpose of investment as both are having positive NPV £59308
for project A and £65187 for project B. But the NPV of project B is higher in comparison to
project A. Based on this, XYZ plc should invest in project B (Goyat and Nain, 2016). This
method is takes into account time value of money and evaluates cash flows over the life of
the project at the discounted rate. This method helps in identifying whether the particular
project will be able to generate enough cash flow that will exceed the cost of the project. This
technique is mostly useful at the time when only one project is to be selected from the
multiple projects.
In contrast to it, there are certain limitation of this technique. The process is little
complicated as identifying the right discounting rate is important and if the rate is wrong it
will end up taking wrong decision and incurring losses. It considers inflation and risk, in case
of mutually exclusive projects, net present value might give a misleading result. Also, there is
no such guidelines for calculating it. Short term project with higher NPV may not boost the

earning per share and return on equity and might not work in the favour of the company’s
shareholders. Despite these drawbacks, it is a very useful method used by businesses.
Payback period
This technique is used in determining the amount of time it will take to recover the
amount invested in the project (He and et.al 2019). It helps in evaluating the point at which
entire amount of money invested is recovered. It is favourable to have shorter period. This
method is used in taking quick decisions.
Project A
Computation of Payback period
Year
Total cash
flow
Cumulative cash
flow
0 -100000 -100000
1 28000 -72000
2 32000 -40000
3 35000 -5000
4 55000 50000
5 78000 128000
Payback
period 3.09 years
Project B
Computation of Payback period
Year
Total cash
flow
Cumulative cash
flow
0 -120000 -120000
1 31000 -89000
2 38000 -51000
3 43000 -8000
4 64000 56000
5 89000 145000
Payback 3.13 years

period
Analysis and interpretation:
It is the times taken to generate cash inflow on the account of the investment made.
The main advantage of this technique is that it is easy to calculate and it provides useful
information in relation to risk associated with the investment (Rostarova and Rentkova,
2016). It helps in measuring the liquidity. Based on these advantages, the above two projects
are evaluated, which determines that the payback period of project A is 3.09 years and that of
project B is 3.13 years. So, according to it project A is more feasible as payback period is
much lower in comparison to another.
On the other hand, it does not consider time value of money and is mainly concerned
with the liquidity and profitability. It also does not take into account cash flows outside the
payback period which may give misleading information. It cannot draw any distinction
between the projects having same payback period. Another important point is, it does not
consider residual value of the asset at the end of the project.
The above two techniques are giving different results and because of the major
drawbacks of payback period technique such as ignorance of inflation, depreciation,
maintenance cost and other factors, NPV method is considered to be more appropriate, thus,
based on NPV, project B should be selected for investment.
Financial and non-financial factors used to aid decision making
The above decision was completely based on the financial aspect but there are certain
non-financial aspects to be considered which is vital for business decision making (Roy and
Hota, 2017). The non-financial factors are stated below.
 Meeting the requirements of the both current and future legislation.
 Matching it with the industry standards and implementing good practice.
 Improving and enhancing the relationship with the local community along with the
improving the reputation of the business.
 Anticipating any future change in the economic and market condition which will
affect the business.
 Dealing with the uncertain events such as protecting the intellectual property with
respect to the potential competition.
 Staff morale is essential which helps in recruiting and retaining the employees.
For example, a company may not invest in the project of acquiring a new machinery if
it breaks health and safety regulations.

Thus, company should consider all the factors while taking decisions on investment
and also different techniques should be used to evaluate it effectively.

REFERENCES
Books and Journals
Goyat, S. and Nain, A., 2016. Methods of Evaluating Investment Proposals. International
Journal of Engineering and Management Research (IJEMR). 6(5). pp.278-280.
He, Y.and et.al 2019. Investment decision-making optimization of energy efficiency retrofit
measures in multiple buildings under financing budgetary restraint. Journal of cleaner
production. 215. pp.1078-1094.
Rostarova, M. and Rentkova, K., 2016. Investment criteria of the successful start-up
accelerators. Economic and Social Development: Book of Proceedings. p.109.
Roy, D. and Hota, D. C., 2017. Role of Non-Financial Factors in Industrial Investment
Decisions: Findings from Survey. Research Bulletin. 43(3). pp.33-48.
Stretcher, R., Funck, M. and Johnson, S., 2017. Capital investment and non-constant
marginal cost of capital. Journal of Economics and Finance, 41(1). pp.27-50.