Essay on Business Decision Making

This essay discusses the process of business decision making and explores the techniques used to select the best project. It focuses on the payback period and net present value as evaluation tools. The essay also examines the financial and non-financial factors that influence decision making. Based on the analysis, a recommendation is made for ABC Plc. to invest in a specific project.

Essay on business decision
making

Contents
INTRODUCTION...........................................................................................................................1
ESSAY MAIN BODY.....................................................................................................................1
The payback period and NPV......................................................................................................1
Financial and non-financial factors.............................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business decision making is the procedure of analysing all the aspects and selecting the best
alternative in a business organisation (Baker, 2018). It is a continuous process which helps
businesses to strategically plan their actions. In this essay, a company ABC Plc is selected which
is planning to invest in a project. In order to select the most appropriate project, the techniques of
business decision making are discussed and implemented. Apart from this, financial and non-
financial factors which aid in decision making are also discussed.
ESSAY MAIN BODY
The payback period and NPV
ABC Plc is a small scale company which operates in the region of United Kingdom and
deals as a software trading company. In order to attain further growth and develop, top level
managers of this company has decided to invest in a new project. Out of all the proposals, two
projects are selected by this company which are Motor Software Project and Hardware Project.
These two projects have initial investment of £40000 and £60000 respectively. In order to
identify the most appropriate project, the techniques of pay back period and net present value are
used.
Payback period
The term of pay back period refers to the time required by an investment to cover its initial
cost (Vladušić, Rebić and Hršum, 2016). It is considered that lower the payback period is, higher
the effectiveness of an investment is. It is a tool of capital budgeting which can ensure ABC Plc.
to compare their projects and recommend an appropriate project. Like every financial metric, this
technique also has few pros and cons. The most important pros of this technique includes quick
decision making and risk analysis. There are various cons of this technique due to which it
restricts the organisations to rely upon just at this technique. Payback period does not consider
the time value of money and results into cash flow complexity due to which results are
unreliable.
This period is calculated using total outflows against a project by the company and net
cash flows from that project in the company. Pay back period for both the projects for ABC Plc
is calculated below:
PROJECT A: Motor Software Project
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Year Net cash flow Cumulative Cash Flow
1 8000 8000
2 12000 20000
3 16000 36000
4 20000 56000
5 30000 86000
Initial investment = £40000
Recovery in year 3 = £36000
Unrecovered amount = 40000 – 36000
= £4000
Payback period = 3 + (4000 / 20000 * 12)
= 3 + 2.4
= 3 years and 2.4 months
PROJECT B: Hardware Project
Year Net cash flow Cash Flow
1 10,000 10000
2 20,000 30000
3 25,000 55000
4 30,000 85000
5 40,000 125000
Initial investment = £60000.
Recovery in year 3 = £55000
Unrecovered amount = 60000 - 55000
= £5000
Payback period = 3 + (5000 / 30000 * 12)
= 3 + 2
= 3 years and 2 months.
From the above calculation of pay back period, it has been observed that project A which
has an initial investment of £40000 has the capability to re coup all the invested amount in the
period of 3 years and 2.4 months. On the other project B which is a hardware project can pay
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back all the initially invested capital of £60000 in 3 years and 2 months. The difference between
the both projects is just .4 months due to which it can be said that project B is slightly more
effective than project A.
Net present value
NPV is a technique of calculating the intrinsic value of a project by computing the value of
all the future cash flows whether positive or negative over the invested amount of that project
including discount factor (de Andrade and Sadaoui, 2017). This technique is considered as most
effective investment appraisal technique due to its pros. The benefits of this tool includes
consideration of time value of money, plan for profitability and analysis the risk. There are few
limitations of this tool as well which includes identification of multiple assumptions and
ignorance of sunk cost.
This tool calculates net present value of a project by (Cash flows) / (1 + r) i.
PROJECT A: Motor Software Project
Year Net cash flow PV factor @ 12% Discounted cash flow
1 8000 0.892857143 7142.857143
2 12000 0.797193878 9566.326531
3 16000 0.711780248 11388.48397
4 20000 0.635518078 12710.36157
5 30000 0.567426856 17022.80567
Total discounted cash
flow 57830.83488
Less: initial investment 40000
Net Present value 17830.83488
PROJECT B: Hardware Project
Year Net cash flow PV factor @ 12% Discounted cash flow
1 10,000 0.892857143 8928.571429
2 20,000 0.797193878 15943.87755
3 25,000 0.711780248 17794.5062
4 30,000 0.635518078 19065.54235
5 40,000 0.567426856 22697.07423
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Total discounted cash
flow 84429.57176
Less: initial investment 60000
Net Present value 24429.57176
Above analysis provides a clear picture stating that project B has more NPV than project
A. Hardware project is able to earn the NPV of £24430 which is more than £17830. From the
above analysis of NPV and payback period, it is recommended to ABC Plc. to invest in Project
B.
Financial and non-financial factors
Decision making is a procedure which can be conducted by using various factors. Financial
factors which aid in this process includes liquidity ratio and interest rates. If ABC Plc. have
sufficient liquidity ratio of 2:1, then they can use their liquid funds to invest in a new project.
Another financial factor is the industrial interest rate (Borissova, Mustakerov and Korsemov,
2016). For making the decision of investing in a new project, funds are required which can be
procured against the interest rate. Interest rate of different financial institution will help in decide
that which project is appropriate.
Apart from this, there are various non financial factors as well which includes organisational
structure and skilled labour. ABC Plc. can only invest in a new project if they can reliable and
skilled workforce and their structure is sound (Reymen and et.al., 2017).
CONCLUSION
From the above essay, it is concluded that selection of project B is most appropriate for
ABC Plc. as it will result in higher net present value and lower payback period. By selecting this
project, they will experience the management implication of growth and development.
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REFERENCES
Books and Journals
Baker, A.J., 2018. Business decision making. Routledge.
Borissova, D., Mustakerov, I. and Korsemov, D., 2016. Business intelligence system via group
decision making. Cybernetics and Information Technologies. 16(3). pp.219-229.
de Andrade, P.R.M. and Sadaoui, S., 2017, October. Improving business decision making based
on KPI management system. In 2017 IEEE International Conference on Systems, Man,
and Cybernetics (SMC) (pp. 1280-1285). IEEE.
Reymen, I. and et.al., 2017. Decision making for business model development: a process study
of effectuation and causation in new technology‐based ventures. R&D
Management. 47(4). pp.595-606.
Vladušić, L., Rebić, M. and Hršum, A., 2016. Risk management for the purpose of business
decision-making in crisis situations. Strategic Management. 21(3). pp.13-21.
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