Business Decision Making: Concept, Types, and Practical Implications

This report covers essential tools like NPV and Payback period which helps investors in finding the best project to work with. It discusses the concept of business decision making, types of decision making, and the practical implications of decision making in business.

B08529
BUSINESS DECISION
MAKING

Table of Contents
INTRODUCTION:..........................................................................................................................3
Business Decision Making: Concept...............................................................................................3
Types of decision making:...............................................................................................................3
Practical implication of business decision making:.........................................................................6
REFERENCES................................................................................................................................7

ESSAY:
INTRODUCTION:
This report covers essential tools like NPV and Payback period which helps investors in finding
best project to be work with. Practical problems with both the methods have done with
explanation of their advantages and disadvantages. The impact of decisions on financial
performance and positions of the firm is discussed in this report.
Business Decision Making: Concept
Today business facing many problems related with decision making, as it is a part of strategic
planning and requires lots of market studies, cost analysis and reporting tool to make some
conclusion about which alternative or option is suitable for company. In decision making
process; business experts have to choose the best alternative which can help company in
achieving success in long run. It is the decision which picks an organization to top and
sometimes due to bad decisions it crash business towards down. Big decisions keen to big
achievement (Adair, 2019).
Types of decision making:
There are two types of decisions; financial and non financial decisions:
 Financial Decisions: These decisions are based on financial operations and activities.
Decisions in finance are based on liabilities and stockholder’s equity (Watkinson, 2017).
Some of the financial decisions are discussed below:
1. Make or Buy decisions: In this type of decision, production related decision
higher management has to decide whether to buy or make a product. This decision
requires lots of cost and variable factor analysis to reach at right decisions
(Oncioiu, 2017).

2. Investment decisions: These decisions are for in which project company should
invest to get good rate of return. Company uses tools to find the best investment
option among various alternatives. Some of the tools helps organization to reach
at final decisions are discussed below:
 Payback Period method: This method tells investors about how much
time will it take to pay back their investment back. In this method for
uneven cash flows, cumulative cash flow is calculated, lesser payback
period is favorable (Banasiewicz, 2019). Below is the illustration, ABC
plc a software company has two alternatives project A and B having
different Investment amount and cash inflows.
Yea
r
Project A – Motor
Software Project
Cumulative cash
inflows
Project B –
Hardware Project
Cumulative cash
inflows
0 £40,000 40000.00 -£60,000 60000.00
1 £8,000 32000.00 £10,000 50000.00
2 £12,000 20000.00 £20,000 30000.00
3 £16,000 4000.00 £25,000 5000.00
4 £20,000 16000.00 £30,000 25000.00
5 £30,000 46000.00 £40,000 65000.00
Payback period for
Project A = 3 + 4000/20000
Payback period
for Project B = 3 + 5000/30000
3 + 0.2 3 + 0.6
3.2 years 3.6 years
Interpretation: As it can be seen that Project A and B both are giving amount invested in
between 3 to 4 years. On the basis of payback tool it is preferable to choose A (lesser time better
it is), but after seeing non financial factors total returns it was found that total returns of project
B is better than Project A and in future cash flow will increases.
Disadvantage: The main disadvantage of payback period is; it doesn’t consider the amount of
investment, it only considers how much time will it take to payback its invested money which is
a major drawback.
 NPV (Net present value method): This method calculates present value
of future cash inflows for the current year. It takes discounted rate for
calculating present value, to find NPV; initial investment has to deduct
from total net present value cash flow. Positive NPV is favorable

alternative for a business (Puranam and Vanneste, 2016). Below the
illustration where same project A and B will be evaluated on the basis
of NPV
Let's take rate of return as the base for discounting cash inflows
Year
Project A – Motor
Software Project Present Value@12% Calculation
0 £40,000
1 £8,000 7142.86 8000/1.12
2 £12,000 9566.33 12000/(1.12)2
3 £16,000 11388.48 16000/(1.12)3
4 £20,000 12710.36 20000/(1.12)4
5 £30,000 17022.81 30000/(1.12)5
Total present value of
cash inflows 57830.83
NPV of project A = Total pv of cash inflows 57830.83
Less: Intial Investment £40,000
17830.83
Year
Project B – Hardware
Project Present Value@12% Calculation
0 £60,000
1 £10,000 8928.57 10000/1.12
2 £20,000 15943.88 20000/(1.12)2
3 £25,000 17794.51 25000/(1.12)3
4 £30,000 19065.54 30000/(1.12)4
5 £40,000 22697.07 40000/(1.12)5
Total present value of
cash inflows 84429.57
NPV of project B = Total pv of cash inflows 84429.57
Less: Intial Investment £60,000
24429.57
Interpretation: On the basis of above calculations; it is recommended to go with Project
B as it is giving more positive NPV as compared to Project A.
Disadvantage: The major problem with this method is discounting rate, it is not possible
to take exact discounting rate as inflation rate due to change in economy, peak and boom

seasons, unwanted recession, etc. hence considering inappropriate discount rate impacts
undervalued or overvalued cash flows which can effect project decisions.
 Non financial decisions: These decisions doesn’t consider any financial factors, it only
reviews other factors like risk, economy rate, business relations, social values, etc
(Cottam, 2019). business is not only mark for earning revenues it also sometimes gives
jobs to lots of people and help management improving better relations with society.
For instance, suppose a company finds that by planting new machines it can reduced the
cost of production by 40%, but for this implementation it requires to fired 1500 workers,
on the basis of financial considerations, company should plant new machinery but by
taking non financial factors it will make 1500 workers unemployed hence it should take
preventive steps to handle this.
Practical implication of business decision making:
Bad decisions negatively impact organizations, companies left with two types of decisions;
whether make a decision and control result or don’t do anything just react what outcomes occurs.
There are many live examples of business failure due to delay in taking right decisions on right
time. Business managers require to analyze both financial and non financial factors to take
decisions for company, sometimes mix of both results in best output. Entrepreneur should use
different decision making tools according to the situations, because one tool or technique is not
enough for all circumstances; there’s no master key for perfect decisions. It requires supervision
skills, intuition, leadership qualities, reasoning mind, etc. to get at perfect conclusion.

REFERENCES
Adair, J., 2019. Decision Making and Problem Solving: Break Through Barriers and Banish Uncertainty at Work.
Kogan Page Publishers.
Watkinson, M., 2017. The Grid: The Decision-making Tool for Every Business (including Yours). Random House.
Oncioiu, I. ed., 2017. Ethics and Decision-making for Sustainable Business Practices. IGI Global.
Banasiewicz, A.D., 2019. Evidence-Based Decision-Making: How to Leverage Available Data and Avoid Cognitive
Biases. Routledge.
Puranam, P. and Vanneste, B., 2016. Corporate strategy: Tools for analysis and decision-making. Cambridge
University Press.
Cottam, M., 2019. Foreign policy decision making: The influence of cognition. Routledge.