Essay on Business Decision Making

This essay explores the aspects of business decision-making in the context of ABA plc, including the calculation of payback period and net present value. It also discusses the decision-making process and factors that influence it.

Essay on Business Decision
Making
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Table of Contents
Introduction .....................................................................................................................................3
Main Body.......................................................................................................................................3
Calculation of payback period....................................................................................................3
Calculation of Net Present Value................................................................................................3
Decision-making process............................................................................................................4
Conclusion.......................................................................................................................................5
References........................................................................................................................................7
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Introduction
A business requires to make many decisions related to the operations and growth of the
business and is critical to the success of the business (Tseng, Chiu and Liang, 2018). Below
mentioned essay is aimed at exploring aspects related to business decision-making in the context
of ABA plc which is a branded cycle company. Company is on a lookout to invest in a project
related to manufacturing electric cycles or scooters and has shortlisted two projects to make a
final investment decision. Payback period and NPV has been calculated below to arrive at the
conclusion as to investment in which project is better. Also, analysed are other financial and non-
financial factors that can be used to aid decision-making.
Main Body
Calculation of payback period
Project A
Year Cash Inflow Cumulative Cash flow
0 140000 1,40,000.00
1 35000 1,05,000.00
2 40000 65,000.00
3 45000 20,000.00
4 80000 -60,000.00
5 92000 -1,52,000.00
Payback Period = 3.25 years
Project B
Year Cash Inflow Cumulative Cash flow
0 180000 1,80,000.00
1 46000 1,34,000.00
2 55000 79,000.00
3 60000 19,000.00
4 80000 -61,000.00
5 100000 -1,61,000.00
Payback Period = 3.2375 years
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Calculation of Net Present Value
Project A
Year Cash flow Discount factor Present Value
1 35000 0.86 30172.41
2 40000 0.74 29726.52
3 45000 0.64 28829.6
4 80000 0.55 44183.29
5 92000 0.48 43802.4
176714.21
Less: Initial Investment 140000
Net Present Value 36714.21
Project B
Year Cash flow Discount factor Present Value
1 46000 0.86 39655.17
2 55000 0.74 40873.96
3 60000 0.64 38439.46
4 80000 0.55 44183.29
5 100000 0.48 47611.3
210763.18
Less: Initial Investment 180000
Net Present Value 30763.18
Decision-making process
Decision-making forms an integral function at every level of management in an
organisation. Decision-making process starts from identification of goal or determination of
problem which requires attention of the management. Once the issue has been identified,
relevant information is arranged and processed to arrive at various alternatives that can be a
solution to the issue (Black, 2019). These alternatives are then evaluated in order to arrive at a
final conclusion i.e. choosing the best course of decision to execute it. Decision-making process
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for one problem does not terminate when the decision is implemented as it has to be monitored
and controlled regularly. Therefore, it can be said that decision-making process is continuous and
pervasive function in an organisational setup. There are various factors which are to be
considered by managers while making decisions for the operations of business.
In the given scenario, ABA Plc in order to expand their business operations has been
looking for projects in which they can invest. Managers have already identified two projects and
have calculated their estimated future cash inflows and initial outflow. Two investment appraisal
techniques are being considered to arrive at the final decision – payback period and net present
value. Payback period refers to that period in which project inflows are able to recover initial
outlay made. Therefore, shorter the payback period is better it is considered. It is easy to
calculate however, it ignores time value of money as well as inflows post payback period (Gerbl,
McIvor and Humphreys, 2016). Net present value refers to the difference between present value
of future inflows of the project net of initial outlay. Therefore, whichever project offers higher
positive NPV should be considered. It considers time value of money but is little complicated to
calculate. At the discount rate of 16%, both the projects have positive net present value which
means that both are viable option to invest. Project A is calculated to have a payback period of 3
years and 3 months while Project B is calculated to have a payback period of approximately 3
years, 2 months and 26 days which shows that both of the projects have almost same payback
period and it would not make much of a difference to choose either on the basis of payback
period. Project A is calculated to have a net present value of £36,714.21 while Project B is
calculated to have a net present value of £30,763.18 which means that Project A offers higher
profitability and hence, should be chosen by the managers of the company. However, it should
not be ignored by the managers that both the projects neither had same initial investment nor had
the same inflows which does not make them really comparable for capital rationing. Also, these
calculations have been based on the future estimations of cash inflows and future is uncertain.
Further, it is also a challenge to arrive at accurate discount rate which can result in calculation
based on incorrect risk premium (Fávero and Belfiore, 2019).
There are various other factors as well that play a huge role in decision-making process
of the businesses such as industry benchmark, key performance indicators, brand value, social
responsibilities of the companies, strategic objectives, vision, mission and values of the
company, past years' trends as well as market trends, budgets, cost structure, legislative structure,
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staff morale, relationship with suppliers and customers, intellectual property of the business, etc.
All these factors are directly and indirectly related to various stakeholders of the company and
has impact on their decision-making as well. For example, in the scenario, investment in either
project A or B would include financial as well non-financial implications on other stakeholders
of the company. It is possible that investment will disrupt cash flow of the company initially
blocking the funds for suppliers and changing the operational course for employees (Bratasanu,
2018). This will also lead them to evaluate benefits and threats they will be receiving from the
changes which will drive their decision-making process further.
Conclusion
Above essay is focussed on analysing decision-making process of the business and the
factors that are able to influence it. It has been elucidated above that both financial and non-
financial factors play an important role in making final decision. It can be deduced from the
essay that making a correct decision is critical to keep the organisation on correct path to growth
and development.
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References
Books and Journal
Black, K., 2019. Business statistics: for contemporary decision making. John Wiley & Sons.
Bratasanu, V., 2018. Leadership Decision-Making Processes in the Context of Data Driven
Tools. Quality-Access to Success, 19.
Fávero, L.P. and Belfiore, P., 2019. Data science for business and decision making. Academic
Press.
Gerbl, M., McIvor, R. and Humphreys, P., 2016. Making the business process outsourcing
decision: why distance matters. International Journal of Operations & Production
Management.
Tseng, M.L., Chiu, A.S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
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