Business Decision Making: Payback Period and NPV Analysis

Essay on Business
Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Calculation of Payback Period.....................................................................................................3
Calculation of Net Present Value (NPV).....................................................................................4
Analysis........................................................................................................................................4
Practical Implications...................................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES ...............................................................................................................................7

INTRODUCTION
Business decision making process is essential for organization and it should be fair which
helps in maximising operational productivity as well as profitability (Cole, 2013). At the time of
making decision in respect of organization, managers should understand business needs or values
which required to fulfil. ABC plc is software based company of UK and they wanted to invest in
new business. Managers have to make decision that in which project they have to invest and this
analysis will be done by using NPV or payback period of investment appraisal techniques.
MAIN BODY
Calculation of Payback Period
Year Project A (£) CCF (£) Project B (£) CCF (£)
Year 0 40,000 0 60,000 0
Year 1 8,000 8,000 10,000 10,000
Year 2 12,000 20,000 20,000 30,000
Year 3 16,000 36,000 25,000 55,000
Year 4 20,000 56,000 30,000 85,000
Year 5 30,000 86,000 40,000 125,000
Formula:
Payback Period = Year before full recovery + Unrecoverable amount / Cash flow of the year
Project A
= 3 + £4000 / £20000
= 3 + 0.2
= 3.2 years
Project B
= 3 + £5000 / £30000
= 3 + 0.16
= 3.16 years