Essay on Business Decision Making

This essay discusses the importance of business decision making and evaluates two projects using the payback period and net present value methods. It concludes that project B should be chosen.

ESSAY ON BUSINESS
DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Calculation of payback period in project A & B:...................................................................3
2. Calculation of NPV:................................................................................................................4
3. Analysis:..................................................................................................................................5
4. Practical implications..............................................................................................................6
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................8

INTRODUCTION
Enterprises must take important investment choices so that they can achieve greater
returns. There are different kinds of methods, including net present value, internal rates of return
and much more, to carry out an efficient study of finance programs (He, Wang and Akula, 2017).
The report is based on ABC plc that is a computer software corporation. Company is planning to
spend in two new ventures. The study evaluated both proposals by help of various techniques
and carried out a critical review.
MAIN BODY
1. Calculation of payback period in project A & B:
For project A:
Years Cash flow Cumulative cash flow
0 (40000) -
1 8000 8000
2 12000 20000
3 16000 36000
4 20000 56000
5 30000 86000
Payback period= 3+4000/20000*12 months
= 3 years + 2.4 months
This shows that cost of 40000 of project will be covered in 3 years and 2.4 months.
For project B:
Year Cash flow Cumulative cash flow
0 (60000) -
1 10000 10000
2 20000 30000
3 25000 55000
4 30000 85000

5 40000 125000
Payback period= 3 + 5000/30000*12 months
= 3 + 2 months
This is indicating that cost of 60000 of this project will be covered in 3 years and 2 months.
In accordance of above calculated value of payback period, this can be assessed that project B's
estimated time period is lower as compare to project A. Thus, above company should make
invest in project B.
2. Calculation of NPV:
Project A:
NPV= Discounted cash flow – initial investment
Year Cash
flow PV
FACTOR DCF
0 -40000 1 -40000
1 8000 0.893 7144
2 12000 0.797 9564
3 16000 0.712 11392
4 20000 0.635 12700
5 30000 0.567 17010
17810
Project B:
Year Cash
flow PV
FACTOR DCF
0 -60000 1 -60000
1 10000 0.893 8930
2 20000 0.797 15940
3 25000 0.712 17800
4 30000 0.635 19050
5 40000 0.567 22680
24400

In accordance of above calculated value of NPV, this can be assessed that project A has net
present value of 17810 and B has 24400. It shows that project B will be viable for above
company. Thus, above company should make invest in project B.
3. Analysis:
Payback period- It is a type of methodology linked to computation of expected time which can
arise in debt recovery phase (Quinn, Strauss and Kristandl, 2014). In the aspect of above ABC
company's project, two projects have been analysed under this technique in order to take suitable
decision. This methodology has the pros and cons listed below, like:
Pros-
 The key benefit of this technique is that it is very simple way to compute efficiency of
projects as compare to rest of other appraisal techniques.
 As well as another benefit of this technique is that it is more reliable method in which
companies can relay.
Cons-
 This technique does not meet all criteria of computing efficiency of projects such as it
neglects the time value of cash inflows. Due to which it becomes difficult for companies
to find out accuracy of projects.
 Another drawback of this technique is that it does not consider value of cash flows after
end of receiving amount of initial investment.
Net present value technique- It is a type of method in that current value of projects is analysed by
making difference between discounted cash flows and initial investment (Sutherland and
Holstead, 2014). Under this technique, this is important to know that if projects' present value is
higher then it is considered on priority. In regards with above company's two projects A and B,
this technique is applied in order to evaluate projects effectively. Underneath, pros and cons of
NPV method are mentioned in such manner:
Pros-
 The major benefit of this technique is that it considers efficiency to make comparison
between projects. It becomes possible by analysing current values of projects.

 Along with in this method, time value of money factor is also considered. It is so because
value of money can be fluctuate in future due to higher inflation and deflation.
Cons-
 Drawback of this method is that it is based on different assumptions which makes
outcomes more complex and less reliable.
 In addition, complexity in calculation is also a main drawback of this technique.
Financial and non-financial factors:
Financial factor-
 Profit- It is defined as positive difference between cost and revenues. This is common
goal of all companies to achieve higher profit and it is key element of financial factor.
 Interest rate- This is a type of rate on which financial entities provides financial
assistance. It plays a key role in acquiring funds by companies.
Non-financial factor-
 Political factor- This is related to political condition of nation which consists regulations,
government policies and many more (Waage, 2014). It is essential for companies to
comply with this factor.
 Technological factor- It is essential for companies to comply with new and advanced
technologies so that they can beat to their competitors.
4. Practical implications.
In accordance of above calculations of NPV and payback period method, this can be find
out that company should go with project B. It is so because the payback period for project A and
B is of 3 years & 2.4 months and 3 years & 2 months. It is showing that project B will be
effective for ABC limited company. While in the NPV, value of projects is different such as
project A has present value of 17810 and project B has value of 24400. It shows that project B
should be chosen.

CONCLUSION
In accordance of above project report, this can be concluded that corporations should
choose financial projects after making proper analysis. In the report, two projects A and B have
been evaluated under payback period and NPV method. On the basis of that evaluation, this can
be concluded that ABC limited company should invest in project B.

REFERENCES
Books and journal:
He, W., Wang, F. K. and Akula, V., 2017. Managing extracted knowledge from big social media
data for business decision making. Journal of Knowledge Management.
Sutherland, L. A. and Holstead, K. L., 2014. Future-proofing the farm: On-farm wind turbine
development in farm business decision-making. Land use policy. 36. pp.102-112.
Waage, S., 2014. New business decision-making aids in an era of complexity, scrutiny, and
uncertainty: tools for identifying, assessing, and valuing ecosystem services.
In Handbook on the Economics of Ecosystem Services and Biodiversity. Edward Elgar
Publishing.
Quinn, M., Strauss, E. and Kristandl, G., 2014. The effects of cloud technology on management
accounting and business decision-making. Financial Management. 10(6). pp.1-12.

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