Business Decision Making: Financial and Non-Financial Factors

This essay explores the financial and non-financial factors that influence business decision making. It covers topics such as payback period, net present value, and the role of effective management teams. The essay concludes with recommendations for project selection and the importance of considering both financial and non-financial factors.

Essay
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INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Payback Period........................................................................................................................3
2. Net Present Value (NPV).........................................................................................................4
3. Financial factors.......................................................................................................................4
4. Non-financial factors...............................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7
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INTRODUCTION
Business decision making is a decision that can be described as a course of action purposely
selected from a set of alternatives to accomplish organisational or managerial objectives or goals
(Black, 2019). Decision making activity is ongoing and indispensable factor of administrating
any company or business activities. This essay is focus on a budget hotel chain that is XYZ Plc
which is UK based outsources company of software. XYZ plc's managers want to invest and they
have two different projects. With the aid of investment appraisal techniques,
managers evaluate the most profitable investment to spend their money. This essay covers the
several calculation and some financial or non financial factors which influence the
manager's decision making process.
MAIN BODY
1. Payback Period
Year Project A
(Software)
Cumulative
cash flow
Project B
(Laundrette)
Cumulative cash
flow
Year 0 £ 100,000 - £ 120,000 -
Year 1 £ 28,000 £ 28,000 £ 31,000 £ 31,000
Year 2 £ 32,000 £ 60,000 £ 38,000 £ 69,000
Year 3 £ 35,000 £ 95,000 £ 43,000 £ 112,000
Year 4 £ 55,000 £ 150,000 £ 64,000 £ 176,000
Year 5 £ 78,000 £ 228,000 £ 89,000 £ 265,000
Formula:
Payback period = Year before full recovery + unrecoverable cost / cash flow during the year
Project A (Software) = 3 + 5,000 / 55,000
= 3 + 0.90
= 3.90 years
Project B (Laundrette) = 4 + £ 56000 / £ 64000
= 4 +0.87
= 4.87 years
2. Net Present Value (NPV)
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NPV of Project A:
Year Software Project A Present Value @
11%
Discounted Cash Flow
(£)
Year 0 -£ 100,000 1 -£ 100,000
Year 1 £ 28,000 0.900901 £ 25,225.23
Year 2 £ 32,000 0.811622 £ 25,971.92
Year 3 £ 35,000 0.731191 £ 25,591.7
Year 4 £ 55,000 0.658731 £ 36,230.2
Year 5 £ 78,000 0.593451 £ 46,289.2
Net Present Value £ 59,308.25
NPV of Project B:
Year Laundrette Project PV @ 11% Discounted Cash Flow
(£)
Year 0 -£ 120,000 1 -£ 120000
Year 1 £ 31,000 0.900901 £ 27,927.93
Year 2 £ 38,000 0.811622 £ 30,841.65
Year 3 £ 43,000 0.731191 £ 31,441.23
Year 4 £ 64,000 0.658731 £ 42,158.78
Year 5 £ 89,000 0.593451 £ 52,817.17
Net Present Value £ 65,186.76
3. Financial factors
Below mention three financial factors affect the manager’s decision making process and
which are as follow:
Payback period: This is among the easiest method of capital budgeting that allows the
managers to make decisions on the basis of payback period (Gong and et. al., 2018). This
approach determines the duration of their expenditure in rehabilitation. This lets the managers
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pick the most suitable one that takes less time to recover the initial investment from the client.
Higher the payback time is selected as opposed to the return of another enterprise.
Net Present Value: It is one of the capital budgeting methods which are used
as investment appraisal techniques to evaluate project efficiency (Tseng, Chiu and Liang, 2018).
This is the current interest of every project that gives the administrators the impression that they
invest it or not. Positive Value of the project is chosen because the company become more
competitive or it provide advantageous in terms of profitability. On the other side, unfavourable
value of NPV refused by the organizations because it will not profitable as well as beneficial for
the business.
Internal Rate of Return (IRR): It is a capital budgeting method which is used to test the
return from any project. The cost of capital rate is defined as the discount rate for the calculation
of NPV when cash flows new proposal is equals to zero. Upper IRR is attractive for investors to
spend. XYZ plc administrators may use this approach to analyze their projects and determine
which one is better suited to invest.
On the basis of above calculation, it is analysed that shortest payback period of any project
is beneficial for the organization. So it recommended that, company should invest in Project A
because it has lower recovery period that is 3.90 years in comparison to Project B which take
4.87 years to recover their initial investment. It also observed that NPV of project B is more
favourable in context of XYZ plc. If decision made on the basis of net present value, then
manager should recommend Project B which provide higher value in comparison to Project A.
4. Non-financial factors
There are some non financial factors as well which affect the decision making process and
those are discussed below:
Effective management group: In an
organization, effective or strong management team help the business to achieve its goals
& objectives (Weygandt and et. al., 2018). It also used in the decision making process by the
involvement of each participants. By engaging participants from diverse cultural and
educational backgrounds in the conversation, they can encourage creativity and acquire a fresh
viewpoint on the project or problem at hand. This lets the administrators to respond the process
of decision taking.
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Diversify the risk of human capital: It defines the discrepancy between the goals of the
company and the knowledge and skills of its employees, arises from many sources. Such risks
may inflict major label, prestige, profitability, and profit losses. XYZ plc executives need to
analyze this void, which is an important aspect that helps to increase total productivity in the
decision making process.
CONCLUSION
From the above discussion it has been concluded that, by using different financial or non
financial factors company able to make appropriate decisions in respect of the project selection
duration. In addition, there several investment appraisal techniques which are used to evaluate
that which project is more favourable for the organization and provide more benefits in terms of
profitability.
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REFERENCES
Books & Journals
Black, K., 2019. Business statistics: for contemporary decision making. John Wiley & Sons.
Gong, M. and et. al., 2018. Inside out: The interrelationships of sustainable performance metrics
and its effect on business decision making: Theory and practice. Resources,
Conservation and Recycling, 128, pp.155-166.
Tseng, M. L., Chiu, A. S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
Weygandt, J. J. and et. al., 2018. Managerial Accounting: Tools for Business Decision-making.
John Wiley & Sons.
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