Methods for Business Decision Making: Payback Period and NPV

Essay
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Introduction
Present business management relies heavily on decision-making. Primarily, the primary
duty of administration is to make logical or informed decision. A decision is course of action
selected from a selection of options with the intent of achieving corporate or managerial aims or
goals. The decision-making process is an ongoing and essential part of running every company
or organization (Alkaraan, 2017). The study covers key methods like NPV method, Payback
periods which support business decisions. Moreover, the study covers discussion about financial
as well as non-financial factors which may affect business decisions,
Main Body
Payback Period: Payback period approach is commonly used to assess the risk involved with
programs or acquisitions before proceeding with them. A payback time on investment can be
either shorter or lengthy. A faster payback period indicates that investment would be ‘repaid'
more rapidly, that is, cost of investment would be rapidly recovered by cash flow generated
by investment (Salim, 2018).
Project A - Belt Project
Year Net Cashflows Cumulative cashflows
1 45000 45000.000
2 45000 90000.000
3 35000 125000.000
4 70000
5 82000
Initial Investment 170000
Payback period = 3 years + [(170000 - 125000) / 70000 * 12
months
3 Years + (45000 / 70000) * 12 months
3 years + (0.643 * 12 months)
3 years + 7.71 months
Project B - Trainers
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Year Net Cashflows Cumulative cashflows
1 50000 50000.000
2 45000 95000.000
3 70000 165000.000
4 90000
5 90000
Initial Investment 190000
Payback period = 3 years + [(190000 - 165000) / 90000 * 12
months
3 Years + (25000 / 90000) * 12 months
3 years + (0.277 * 12 months)
3 years + 3.33 months
Analysis: The analysis of payback period shows that Project B with lower payback period i.e. 3
years and 3.33 months is quite more viable as compare to Project A. Thus, company should
go with project B.
NPV: NPV of a project is a corporation's assessment of the potential benefit (or loss)
from project. Companies must balance the advantages of incorporating projects against the
advantages of retaining capital. Net present value could be employed to measure savings over
period or to plan capital expenditures. Since net present value considers time value of monies,
this aids investors in determining whether holding their money or saving it would result in a
higher return at later date. NPV concept notes that if a proposal's NPV yield is greater than zero,
it might be worth investing in (Nnamani, 2017).
Project A - Belt Project
Year Net Cashflows Discount Factor @
14%
Present value of net cash
flows
1 45000 0.877 39474
2 45000 0.769 34626
3 35000 0.675 23624
4 70000 0.592 41446
5 82000 0.519 42588
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