Business Decision Making

This report explores the concept of business decision making, focusing on the capital budgeting techniques used to evaluate investment decisions. It discusses the computation of payback period and net present value for two projects, as well as the impact of financial and non-financial factors on decision making. Study material and solved assignments on this topic are available on Desklib.

BUSINESS DECISION
MAKING
Contents
1

Contents...........................................................................................................................................2
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Computation of payback period...................................................................................................3
Computation of Net Present Value..............................................................................................3
Financial factor............................................................................................................................3
Non financial factors....................................................................................................................3
CONCLUSION................................................................................................................................3
REFRENCES...................................................................................................................................3
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INTRODUCTION
Business decision making is a process which help companies to determine best alternative
project for their future expansion. In order to understand the concept clearly XYZ plc had
been taken, it is situated in UK and part of hotel chain . This reports includes how manager
use capital budgeting technique to evaluate whether their decision regarding investing in
software and laundrette is correct or not. This report also define how financial and non
financial factors effect business decision making process .
TASK 1
Computation of payback period
About payback period: It can be refers as time period required for business organizations to
recover their initial cost incurred on respective project. In other words payback period is the time
takes for the cash flows of revenue from particular project to equal the initial investment . It is a
technical of capital budgeting which is used when managers need to decide the best alternative
within a short period of time (Panepinto and et.al.2016). Payback period is one of the most
popular budgeting techniques as it provides quick solutions and preferred liquidity however this
method does not consider the value of time money and ignore realistic profitability. Managers
accept those alternatives which take less time to recover the money then compare to others.
Higher pay back period represent lower benefits and profitability ate for business organizations.
Payback period for Project A (Software Project)
Year Cash inflow in £ Cumulative cash inflow
1 28,000 28000
2 32,000 60000
3 35000 95000
4 55000 150000
5 78000 228000
Formula of payback period= Base year +Initial investment- Cumulative cash inflow of base
year / Upcoming year cash inflow
3+100000-95000/55000= 3.90
Payback period for project B (Laundrette Project)
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Year Cash inflow in £ Cumulative cash inflow
1 31000 31000
2 38000 69000
3 43000 112000
4 64000 176000
5 89000 265000
PAYBACK PERIOD: 3+120000-112000/64000 = 3.125
Interpretation: The value of payback period of XYZ plc if they invest in software project is
3.90 time and if they invest for Laundrette Project then they are able to recover the cost of
investment within 3.125 years, this represent that both projects are beneficial for organization as
they give higher profitability rate and able to cover up the cost within 4 year time period thus
manager should stop outsourcing of project and take decision to invest in theses project.
Computation of Net Present Value
About NPV: It is equal to the present value of all the future cash flows less the initial outlay of
project. Net present value gives explicit consideration to the time value of money. It is
considered as sophistic capital budgeting technique. Managers use this method to identify the
profitability rate or take decision regarding accept or reject decision of business proposals. Net
present value is identify as most reliable method of capital budgeting as it will also help in
maximize shareholders worth and consider time value in calculation(Nobil and Taleizadeh,
2016).
For software project
Year Value of cash inflow Discount rate factor
11 %
Present value of net
cash flow
1 28,000 0.901 25228
2 32,000 0.812 25984
3 35000 0.731 25585
4 55000 0.659 36245
5 78000 0.593 46254
Total 159296
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Net present value: Present value of cash inflow of software project – Present value of initial
investment cost of software: 159296-100000: 59296
For Laundrette project
Year Value of cash inflow Discount rate factor
11 %
Present value of net
cash flow
1 31000 0.901 27931
2 38000 0.812 30856
3 43000 0.731 31433
4 64000 0.659 42176
5 89000 0.593 47971
Total 180367
Net present value: Present value of cash inflow – present value of initial investment of
Laundrette project: 180367-120000: 60367
Interpretation: In this case the net present value of software project is 59296 which is higher
then its initial cost. On the other side in project B the value of present value is 60367 it is also
higher then initial investment. Higher amount of net present value shows higher rate of
profitability in future thus manager of XYZ plc should accept the decision of investing in
software and Laundrette project.
By using both technique of capital budgeting it has been analysis that future revenue return is
higher and both projects are valuable for XYZ PLC
Financial factor:
Financial factors includes those elements which are help in measurement of financial
performance and directly effect the financial resource of organization Following are the
financial factors (Ro, Kim and Kim, 2017).
Net profit: The net value of revenue earned by deducting all the expense and cost from
total revenue is known as net profit. Higher value of net profit incurring financial position
of XYZ plc.
Income: Returns earn from busies activities is define as income. It is essential part as
sustainability of organization depends on income factor.
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Cost of goods: It considers all the costs charge during sale of products of organizations in
inventory. Higher cost reason of decreases of financial income of organization.
Non financial factors
Theses factors includes elements which help in recoganization of performance of organization.
Following are non financial Factor that affects company profitability:
Quality of personals: Success of business depends on capabilities of human resource the more
work form of organization have higher skills the higher chances of success of entity increases.
Legal considerations: Business entity needs to fulfil law and legal considers and work in ethical
manner.
Technology: The methods, equipments and technologies used by companies to provide goods
and service is also effect performance of organization(Hasan and Daud, 2014).
CONCLUSION
Business decision making is essential part of managerial functions, in which managers take
decision regarding future business activities through which they can raise the funds and
build strong position in market. For this purpose business entity used capital budgeting tools,
manger apply payback period or net present value technique through thy can recognized the
cost and profitability return of alternative in future. Managers also consider financial and
non financial factors ding decision making process as they directly and indirectly affect on
performance rate of organization.
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REFRENCES
Books and journals
Panepinto, D., Fiore, S., Zappone, M., Genon, G. and Meucci, L., 2016. Evaluation of the energy
efficiency of a large wastewater treatment plant in Italy. Applied Energy, 161, pp.404-
411.
Nobil, A .H. and Taleizadeh, A. A., 2016. Analysing a fuzzy integrated inventory-production-
distribution planning problem with maximum NPV of cash flows in a closed-loop supply
chain. International Journal of Inventory Research, 3(1), pp.31-48.
Ro, Y. J., Kim, I .C. and Kim, J. W., 2017. Financial development and investment in
Korea. Emerging Markets Finance and Trade, 53(3), pp.534-543.
Hasan, A. and Daud, M .N., 2014. The success factors of financial performance of Bank
Pembangunan Daerah (BPD), Indonesia before and after autonomy. Advances in Natural
and Applied Sciences, 8(4), pp.187-203.
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