Business Decision Making: NPV, Payback Period, and Factors

Essay on business decision
making

Contents
ESSAY TOPIC................................................................................................................................1
INTRODUCTION...........................................................................................................................1
ESSAY BODY................................................................................................................................1
Net present value including its benefits and drawbacks..............................................................1
Payback period including its benefits and drawbacks.................................................................3
Financial and non-financial factors.............................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

ESSAY TOPIC
“An understanding on business decision making including NPV & Payback period, and
financial & non financial factors used in decision making process”
INTRODUCTION
Business decision making is a concept of making viable and informed decisions in an
organisational structure. This concept assists an organisation to be profitable and able to achieve
its objectives. The main aim of this essay is to build an understanding about the implementation
of investment appraisal techniques such as NPV and Pay back period. For this purpose, a case of
ABC Plc is selected which is seeking advice for appropriate investing decision. In this essay,
NPV and Payback period is computed along with analysis of financial and non-financial decision
making factors.
ESSAY BODY
ABC Plc is a growing company which trades in the region of United Kingdom and plans to
expand the business. In order to ensure the smooth functioning of the operations, the company
has decided to invest in a new project. The most effective two projects are shortlisted which are
motor software project and hardware project which are compared using their suitability checked
through NPV and Payback period. Initial investments of both the projects is £40000 and £60000
respectively and the company’s rate of return is 12%.
Net present value including its benefits and drawbacks
Net present value is a technique in which all the net cash flows of a company are
discounted in order to account value of time to calculate the profit which an organisation will
earn against the investment in a certain project (Weygandt and et.al., 2018). The benefits of
technique are that it helps in considering the risk factors which company may face in future and
it helps in analysing the opportunity cost of alternative projects. Like any other financial metric,
this technique also has few limitations which includes requirement of professional skills and
considerate time which makes it difficult to use for small scale companies.
For ABC Plc., NPV calculation is done below, which can provide them a benefit of
consideration of contingent factors:
PROJECT A: Motor Software Project
1