Importance of Decision-Making Process and Investment Appraisal Techniques in Business

This essay explores the importance of decision-making process and investment appraisal techniques in business. It discusses the role of financial and non-financial factors in decision making and provides an understanding of various investment appraisal techniques such as net present value and payback period.

INDIVIDUAL ESSAY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
ESSAY ............................................................................................................................................1
Decision-making process ............................................................................................................1
Investment Appraisal techniques.................................................................................................1
Financial and Non financial factors in decision making of business. .........................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Decision-making can be defined as process of choices that is concerned with identifying
the right decisions, by gathering informations and assessing the alternative solutions. It is
concerned with making the most effective decisions that are essential for organisation's growth.
The growth and success of the company depends on the decisions it takes. The study is based on
the importance of decision-making process. The decision-making also involves using various
techniques such as investment appraisal techniques for identifying the feasibility of project. The
benefits and limitations of investment techniques will also be explained in the report.
ESSAY
Decision-making process
Decision making is an integral part of business organisation. Management has the key
function of taking a sound, rational and important decisions for the benefit of organisation. It is
an important process as it defines both managerial and organisational activities. Decision are
taken after analysing the circumstances, collecting all the important information related to the
activities to be taken (Wooldridge and Cowden, 2020). The decisions are to be taken at every
management level for ensuring the growth and success of organisation. It refers to making choice
between the most significant alternatives.
Investment Appraisal techniques.
The investment appraisal technique is used by organisations for identifying the feasibility
of projects before making investments in projects. Techniques used in investment appraisals is
Net Present Value, IRR, payback period, and ARR.
Net Present Value
Net present value can be defined as the method in which present value of cash flows is
measured by discounting them at the required rate of return or the discounting rate generated by
project. It involves identifying whether the cash flows will be sufficient for covering the cost of
investments.
Advantages
 The investment technique considers time value of money for checking the feasibility of
projects.
 It is an easy and comprehensive method used for assessing the present value (Weber,
2019).
1

 It is used in management decision-making for identifying the profitability of project.
Disadvantages
 It is difficult to calculate the discounting rate.
 The cash flows do not consider the other influential factors.
Project A Project B
Computation of NPV Computation of NPV
Year
Cash
inflows
PV factor
@ 12%
Discounte
d cash
inflows Year
Cash
inflows
PV factor
@ 12%
Discounte
d cash
inflows
1 8000 0.893
7142.8571
428572 1 10000 0.893
8928.5714
285714
2 12000 0.797 9566 2 20000 0.797 15944
3 16000 0.712 11388 3 25000 0.712 17795
4 20000 0.636 12710 4 30000 0.636 19066
5 30000 0.567 17023 5 40000 0.567 22697
Total discounted cash inflow 57831 Total discounted cash inflow 84430
Initial investment 40000 Initial investment 60000
NPV (Total discounted cash
inflows - initial investment) 17831
NPV (Total discounted cash
inflows - initial investment) 24430
Payback period
The payback period method is an investment appraisal techniques used by organisations
for identifying the feasibility of projects. The project is considered profitable if the payback
period is shorter and as company will be earning the profits after recovering its cost of project
(Skyrius, 2018). It is defined as the time length within which the initial cost of the project will
be recovered by company.
Advantages
 It is easier to calculate and interpret the payback period.
 Profitability of the project could be identified by this method. It makes comparison of two projects easier.
Disadvantages
2

 This method do not take into account the concept of time value.
 Cash flows generated after the payback period are not considered.
Project A Project B
Computation of Payback period Computation of Payback period
Year Cash inflows
Cumulative
cash inflows Year Cash inflows
Cumulative
cash inflows
1 8000 8000 1 10000 10000
2 12000 20000 2 20000 30000
3 16000 36000 3 25000 55000
4 20000 56000 4 30000 85000
5 30000 86000 5 40000 125000
Initial investment 150000 Initial investment 150000
Payback period 2 Payback period 2
1.7 1.5
Payback period
3 year and 7
months Payback period
3 year and 5
months
Interpretation
The payback period and NPV are used for analysing the probability of project. Company
is proposing to make investments in new business project that is A the motor software and B of
hardware project. Be analysing the projects using NPV it could be interpreted that both the
projects are having positive NPV but the project with higher NPV is Hardware project B with
NPV of 24430. Project with higher positive NPV brings more profits to business from cash
flows. The payback period method helps the business check the time in which cost will be
recovered. Payback period of projects are around 3 years but, project B is having lower payback
period of 3 years & 5 months. It could be interpreted that project will be generating profits earlier
than project A. The investment techniques shows the Project B to be more profitable than A as it
is having shorter payback period and higher NPV.
Financial and Non financial factors in decision making of business.
The financial and non financial factors are important for management in decision making.
Financial factors include the quantitative factors stated in income statements, balance sheet or
3

cash flow statement. They tell the financial health and position of company so that decision are
made taking them and their influence. On the other hand non financial factors include corporate
governance, management of company and external forces like political, social or environmental
factors. They have great influence over working of organisations , therefore management cannot
ignore these factors while making any management decisions (Bals, Kirchoff and Foerstl,
2016). Businesses frame their strategies, policies and regulations considering both factors for
achieving the goals and objectives of business.
CONCLUSION
The above research has provided understanding about the importance of decisions in any
organisation. There are various investment appraisal techniques like net present value and
payback period which helps in identifying the profitability of project. Apart from these it is also
required to consider the financial factors like funds availability or financial position and non
financial factors like CSR, governance and external influential factors.
4

REFERENCES
Books and Journals
Wooldridge, B. and Cowden, B., 2020. Strategic Decision-Making in Business. In Oxford
Research Encyclopedia of Business and Management.
Weber, J., 2019. Understanding the millennials’ integrated ethical decision-making process:
Assessing the relationship between personal values and cognitive moral
reasoning. Business & Society. 58(8). pp.1671-1706.
Skyrius, R., 2018. Business Decision Making. In 2001 Informing Science Conference (Vol. 1).
Bals, L., Kirchoff, J.F. and Foerstl, K., 2016. Exploring the reshoring and insourcing decision
making process: toward an agenda for future research. Operations Management
Research. 9(3-4), pp.102-116.
5