Corporate Decision-Making: Payback Period and Net Present Value

This study focuses on corporate decision-making using capital budgeting techniques such as payback period and net present value. It explores the calculation process and discusses financial and non-financial factors to consider. The study uses the example of DDK plc, a clothing producer, to illustrate the decision-making process. The conclusion highlights the importance of considering both financial and non-financial factors when making investment decisions.

Essay

Contents
Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................1
Calculation of Payback Period-.......................................................................................................1
Calculation of Net Present Value-...................................................................................................2
Financial and Non-financial Factors-..............................................................................................4
Financial Factors-........................................................................................................................4
Non-financial Factors-.................................................................................................................4
Conclusion-......................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
The study focuses on corporate decision-making. Making a decision is described as picking
one option from a list of options (Li and Ahlstrom, 2019). To make financial decisions, capital
budgeting techniques such as net present value and payback period can be used. These methods
provide details on the feasibility of a project. A organisation must make decisions in order to
grow. DDK plc is a producer of clothing. It offers services in the United Kingdom and in Europe.
The company has two project options from which to choose, and it must decide which is the best.
This could be accomplished using capital budgeting techniques. Non-financial factors like
goodwill, business practises, and supplier partnerships should all be taken into account.
Calculation of Payback Period-
Payback period of Project A
Years Cash Flow(in £)
Cumulative Cash
Flow
1 45,000 45,000
2 45,000 90,000
3 35,000 125,000
4 70,000 195,000
5 82,000 277,000
Payback Period 3.77 Years
Payback period of Project B
Years Cash Flow(in £)
Cumulative Cash
Flow
1 50,000 50,000
2 45,000 95,000
3 70,000 165,000
4 90,000 255,000
5 90,000 345,000
Payback Period 3.33 Years
Calculation steps-

Step 1- Take all the cash flows from year 0 to 5 which includes initial investment too.
Step 2- Calculate cumulative cash flow of all the given cash flows. It can be calculated by
cumulative cash flow of first year + second year and so on.
Step 3- For calculating payback period of project A-
= 3 years + (170000-125000/70000) * 12 months
= 3 Years and 7.7 months
Payback period of project B –
= 3 Years + (190000-165000/90000)*12 Months
= 3 Years and 3.3 months.
Project A has a reimbursement duration of 3.7 years, as calculated, and project B has a
reimbursement time of 3.3 years. Project B has a shorter payback period. It implies that project B
would recoup its investment costs more quickly than project A. If a company compares projects
based on payback time, Project B should be chosen (Lichtenstein, Lichtenstein and Higgs, 2017).
Calculation of Net Present Value-
Discount Rate=
14% Net Present Value of Project A
Years Cash Flow(in £) PV Factor CF*PV
1 45,000 0.877 39465
2 45,000 0.769 34605
3 35,000 0.675 23625
4 70,000 0.592 41440
5 82,000 0.519 42558
Total Present
Value 181693
Discount Rate=
14% Net Present Value of Project B
Years Cash Flow(in £) PV Factor CF*PV

1 50,000 0.877 43850
2 45,000 0.769 34605
3 70,000 0.675 47250
4 90,000 0.592 53280
5 90,000 0.519 46710
Total Present
Value 225695
Calculation Steps-
Step 1- Take all the cash flows.
Step 2- Discount rate is given 14%. So calculate write the PV factors according to discount rate.
Step 3- Multiply the cash flows with PV factor.
Step 4- Calculate the sum of all the multiplied cash flows with PV factor.
Step 5- For calculating net present value of project A-
Net present Value = Present Value – Initial Investment
= 181693 – 170000
= 11693
Net Present value of project B is –
Net present Value = Present Value – Initial Investment
=225695– 190000
= 35695
The current value of the potential cash flows is known as net current value at the
necessary rate of return for the project. It is regarded as commendable to have a positive net
present value. All cash inflows equal cash outflows if the NPV is zero, and a negative net present
value means that the investor is not interested in the project.
All programmes have a positive net present value, according to the previous table. The net
present values of Projects A and B are 11693 and 35695, respectively. So, although both projects
are worthwhile investments, project B has a higher net present value. The organisation should
choose project B because it yields a higher return than project A.

Financial and Non-financial Factors-
Financial Factors-
 Financial Ratios- It helps to make decisions. Financial ratios look at a company's
performance over time. A business can also be compared to other companies. It contains
data on the firm's liquidity, solvency, profitability, and efficiency. Financial reports will
help investors make decisions. Management's financial statements are used to construct
financial reports. As a result, financial ratios are the most powerful method for making
decisions (Noureddine and Ristic, 2019).
 Return on investment- As its name suggests, the feasibility of an investment
undertaking is assessed. A formula for estimating return on investment is net
return/investment cost*100. A 5:1 ROI ratio is optimal. It is thought to be advantageous
to the majority of businesses.
 Cost of capital- This is the cost of funds for the business. According to investors, it is the
desired rate of return on a project that a company requires from its investment. A
organisation could use this method to make big decisions like purchasing a new machine
or building a new factory.
Non-financial Factors-
 Government regulations- A business must comply with government regulations
before making investment decisions. The political stability of an organisation is
important. The company will lose revenue if the government changes the rules and
regulations.
 Social factors- Market demand changes can also affect corporate decisions.
Consumer preferences and desires change over time. It's impossible to predict the
future.
 Technological factors- At breakneck pace, technology is progressing. It is difficult
for a company to choose innovations from a wide range of possibilities.
 Environmental factors- Environment influences the business. It may be of either
internal or external origin. Employee protests or labour disputes are examples of
internal causes. External influences include pandemics, natural disasters, and political
laws and regulations.

A number of non-financial factors affect the decision-making process of the business.
The company's goodwill, brand credibility, strategies, priorities, and culture are all non-financial
factors to consider. Project B could be refused if it has a negative impact on the company's
goodwill or reputation in the industry. Management should assess whether the investment
opportunity aligns with the firm's strategies, goals, and community.
The business must make a legal, economic and ethically sound investment decision. The
corporation should consider the impact of this decision on shareholder relations. Both of these
considerations should be taken into account by the company. The market value of a business is
reduced when it participates in a project that is financially profitable but has a negative effect on
its goodwill. The organisation should make well-informed decisions that take into account both
financial and non-financial factors (Pimentel, 2017).
Conclusion-
According to the article above, NPV and the payback period is the best way to make
financial choices. Project B should be DDK Textile's top priority. Project B has a shorter
payback time than Project A. It means that project B will be able to recoup its costs more quickly
than project A. Similarly, Net Present Value is used to make financial decisions. The net present
value of both projects is positive. The organisation will approve Project B because it has a higher
NPV than Project B. A higher rate of return on investment is indicated by a higher net present
value.

REFERENCES
Books and journals
Li, Y. and Ahlstrom, D., 2019. Risk-taking in entrepreneurial decision-making: A dynamic
model of venture decision. Asia Pacific Journal of Management, pp.1-35.
Lichtenstein, S., Lichtenstein, G. and Higgs, M., 2017. Personal values at work: A mixed-
methods study of executives’ strategic decision-making. Journal of General
Management, 43(1), pp.15-23.
Noureddine, M. and Ristic, M., 2019. Route planning for hazardous materials transportation:
Multicriteria decision making approach. Decision making: applications in management
and engineering, 2(1), pp.66-85.
Pimentel, D.N.G., 2017. A family matter?: business profile decision and entrepreneurship in
family business: the case of the Azores.