Business Decision Making: Payback Period and Net Present Value

This essay discusses the relevance of capital budgeting tools in business decision making, specifically focusing on the computation of payback period and net present value. It also explores the role of financial and non-financial factors in the decision-making process. The case study of ABA plc, a company in the electronic cycle industry, is used to illustrate these concepts.

Essay on Business Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1.Computation of pay back period of project A & project B......................................................3
2.Computation of net present value of project A and project B..................................................4
3.Final decision...........................................................................................................................5
4.Role of financial as well as non financial factors in decision making procedure....................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Business decision making is systematic procedure through which manager able to take
decision regarding which beneficial for organization. In order to understand procedure of
decision making ABA plc has been taken. This organization run business in selling their
electronic cycle products, within and outside UK. This report has been define relevance of
capital budgeting tool for the purpose of take decision as well as impact of financial and non
financial factors during the time of taken essential business decision.
MAIN BODY
1.Computation of pay back period of project A & project B.
Pay back period: This is tool of capital budgeting. Manager use to calculate pay back
period for the purpose of determine time require to cover up or fulfil initial cost required for run
specific business project. Higher pay back period show organization required more time to cover
up their cost (Yang, 2018).
Project A ( Electric Cycles)
Year Cash flow Cumulative cash inflow
1 35000 35000
2 40000 75000
3 45000 120000
4 80000 200000
5 92000 292000
Pay back period = Year before cost recovery + Remaining cost / Cash flow for particular year=
3.25
Project B ( Electric Scooters)
Year Cash flow Cumulative cash inflow
1 46000 46000
2 55000 101000

Year Cash flow Cumulative cash inflow
3 60000 161000
4 80000 241000
5 100000 341000
Pay back period = 3.23
Interpretation: ABA plc able to cover up their initial cost within 3.25 years when they
take decision regarding manufacturing of electronic cycle. On the other side it took 3.2 years
when manager use to take decision of manufacturing electronic scooter within their organization.
2.Computation of net present value of project A and project B.
Net present value: This is also consider as essential technique of capital budgeting
through which manager recognize value of cash inflow for particular period of time (Lee, Park,
Lee Byun., Yoon and Lim, 2019).
Project A
Year Project A –
Electric Cycles
Project Net
cashflow £
PV factor at 16% discounted cash
flow
1 35000 0.8621 30173.5
2 40000 0.7432 29728
3 45000 0.6407 28831.5
4 80000 0.5523 44184
5 92000 0.4761 43801.2
176718.2
NPV DCF-Investment
36718.2

Project B
Year Project B –Electric
Scooters Project Net
cashflow £
PV factor at 16% discounted cash flow
1 46000 0.8621 39656.6
2 55000 0.7432 40876
3 60000 0.6407 38442
4 80000 0.5523 44184
5 100000 0.4761 47610
210768.6
3.Final decision
From calculation of pay back period and net present value it has been recognized that
ABA plc if they choose to select option of manufacturing electronic cycle as well as scooter
within their organization then it will be beneficial for them as compare to outsourcing of these
products.
As they can able to complete the initial cost required for manufacturing these products
within 4 years and by implementing these project in organization, the rate of cash inflow also
increases thus management department of ABA plc need to taker decision regarding
manufacturing of project both projects, however in comparison between these two alternative
project A, that means manufacturing of electronic cycle is more profitable then manufacturing of
electronic scooters (Wang, Dou and Jia, 2016).
4.Role of financial as well as non financial factors in decision making procedure.
Financial Factor: Theses includes those elements which useful in determine financial
position of organization. With the use of financial factor organization able to collect and manage
their capital which useful in run business operations. Following are the factors of finance

Profit: This is the value which organization able to generate after deduction all the essential
operating and non operating business expenses. Growth rate of organization is measure by
evaluating rate of profit.
Sales: This is consider as essential financial factor. As organization able to generate cash
inflow activities by selling their products. Higher rate show strong position of organization
within market. Success of organization depend of sales rate.
Working capital: This is consider as essential financial elements as working capital use
in run business by fulfilling requirements of day to day business liabilities. Working capital is
different between current asset and current liabilities. Value of working capital help in
determining ability of organization to fulfil their short term debt requirement.
Non financial factor: Theses are factors which are not related with finance however they
are directly impacted on decision making process. Following are the elements which effected
during the time ABA plc take future business decision.
Human resource: Theses are essential factor, it is required for manager to select skilled
and qualified personal as for their business operations. Success of project depend on how
effectively team assigning and work in order to attain business goals.
Goodwill: Organizations able to generate money when their goodwill is strong in the
market. Thus they need to use effect promotion tools which useful in maintain position of
organization within the market.
Equipment: For running any business operations it is essential to use effective tool.
Manager thus need to focus on using those raw material, machineries which systematically help
in completion of project activities (Mirboloukand et. al.2018).
Manager of ABA plc on the basis of evaluating requirement of financial as well as non financial
factors take decision regarding manufacturing of their electronic cycle and scooter for the
purpose of saving cost of outsourcing of they use products.
CONCLUSION
From the above analysis it has been concluded that manager needs to use tools and
technique of financial management through which they can take effective business decision. By
using pay back period manager able to determine time required for fulfilling initial cost, they
also use net present value through which organization can evaluate future value of cash inflow.

With the use of these technique and understanding impact of financial and non financial factors
manager able to select those alternatives which help in attaining future business goals.

REFERENCES
Books and journals
Yang, M. H., 2018. Payback period investigation of the organic Rankine cycle with mixed
working fluids to recover waste heat from the exhaust gas of a large marine diesel
engine. Energy Conversion and Management.162. pp.189-202.
Lee, B., Park, J., Lee, H., Byun, M., Yoon, C. W. and Lim, H., 2019. Assessment of the
economic potential: COx-free hydrogen production from renewables via ammonia
decomposition for small-sized H2 refueling stations. Renewable and Sustainable
Energy Reviews. 113. p.109262.
Wang, Q., Dou, J. and Jia, S., 2016. A meta-analytic review of corporate social responsibility
and corporate financial performance: The moderating effect of contextual
factors. Business & Society. 55(8). pp.1083-1121.
Mirbolouk, M., Charkhchi, P., Kianoush, S., Uddin, S. I., Orimoloye, O. A., Jaber, R.,
Bhatnagar, A., Benjamin, E. J., Hall, M.E., DeFilippis, A. P. and Maziak, W., 2018.
Prevalence and distribution of e-cigarette use among US adults: behavioral risk factor
surveillance system, 2016. Annals of internal medicine.169(7). pp.429-438.