Decision Making for Business and Finance - PDF

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DECISION MAKING FOR
BUSINESS AND FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Meaning of Net present value, Accounting rate of return and Payback period..........................1
Advice to business procurement committee...............................................................................2
Other non-financial factors consider prior in order to make final decision with respect to
production process......................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................5

INTRODUCTION
Decision making for the business and its finance is very essential as it helps the
organisation to keep eye on their operations so that the financial health of the business can be
identified. Financial decision is basically a process that is helping to identify the liabilities and
equity of the stockholder's and not only this, it helps to establish the financial goals that company
wants to achieve(Collier, 2015). Present study is based on the company Mere Green Limited that
is a Birmingham based organisation and is manufacturing different products with the help of
moulded plastics and other components. Report will include the meaning of the terms net present
value, Accounting rate of return and payback period. Report will further advice about different
business activities that is whether business should retain its old machines or by new one and
report also discusses about two other financial calculations that might inform the decision. At the
end report will explain about the non-functional factors that business have to give priority for
making financial decision with respect to production process.
Meaning of Net present value, Accounting rate of return and Payback period
Net present value:-
The difference between the present value of cash inflows of the organisation with the
present value of cash outflows for a specific period is generally refereed as NPV that is net
present value. In order to analyse the profitability of a specific project that Mere Green Limited
have to carry for its profit is analysed by Net present value.
The net present value of the project may come positive or negative. If the result is
positive that means the earning from the respective project is exceeding the anticipated costs and
this is considered as profitable to the firm. In case the NPV value is negative than the result from
current project is net loss(Sirinanda And et.al., 2018). During the calculation of NPV, the project
that is having either positive value or highest value is considered as profitable for the firm.
From the above data it is been analysed that the net present value of the existing machine
is £942,000 and NPV of the new machinery is £928,000.
Accounting rate of return:-
The ARR is a capital budgeting metric and basically identity's the investment's
profitability. Accounting rate of return is the expected rate of return for the investment by
making comparison with the initial investment cost. Here average revenue is divided from assets
of Mere Green Limited initial investments in order to identify the ratio that is expected for the
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lifetime of the related project. It is mainly used to compare multi project in order to identify the
rate of return from all the respective projects(Shaban, Al-Zubi and Abdallah, 2017).
From the above data it is been analysed that new machinery will have 5.5% of investment
profitability.
Payback period:-
The payback period is generally the time taken for recovering the investment cost related
to specific project. The shorter is the payback period, more attractive is the investment. This
helps the managers of Mere Green Limited to have a quick decision for the respective
investments(Cheremushkin, 2016).
From the above data its is been interpreted that the payback period with respect to new
machinery is about 3.5 years.
Advice to business procurement committee
Business either retain old machine or buy new machine:-
From the above report it is been interpreted that the Net present value of the existing
machine is £942,000 and that of new machine is £928,000. So, the Net present value of the
existing machine is having higher positive value and Mere Green Limited have to retain its new
machinery for its profitability.
If comparison is done with respect to the Payback period, it is been interpreted that the
organisation have to new machine is taking more time as compared with that of existing machine
and it will be profitable for Mere Green Limited to retain its existing machinery(Balabanov And
et.al., 2017).
Accounting rate of return of new machine is 5.5% that is higher than the existing
machine, so it will be beneficial to the organisation to retain its existing machine(Accounting
rate of return, 2019). By comparing the net profit value, payback period and Accounting rate of
return, it is concluded that Mere Green Limited have to retain its existing machine as it will be
more beneficial for the company.
Reservations regarding the decision:-
Reservation is required to have effective decision and for the same, Mere Green Limited
have to work on the capital reserve and surplus. Capital reserve are the funds that the company
intend to use for a specific purpose or in near future. It helps the organisation as it strengthen its
financial position and also helps to provide extra working capital requirements(Wang, Hwang,
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and Chung, 2016). On the other hand surplus is a period during which income exceed
expenditure. It is essential for the business as it impact the growth and investment of the firm.
Two other financial calculations:-
 IRR(Internal rate of return):- It is also a metric that is been used in capital budgeting in
order to identify the profitability of the investment. Here, Net present value of all cash
flows are equal to zero(Dhavale and Sarkis, 2018).
 Profitability index:- It is an index that determines the respective relationship between the
costs and benefits of proposed benefits from the respective project. As the profitability
index related to a project increases, the financial attractiveness with respect to project
also increases(de Souza Rangel, de Souza Santos and Savoia, 2016).
Other non-financial factors consider prior in order to make final decision with respect to
production process
There are different non-factors that helps in making final decision with respect to
production process:-
 Mere Green Limited have to Meet future and current legislation requirements
 Mere Green Limited have to match the industry standards and good practices.
 Company have to improve the moral of the working staff(Furlanetto, Ravazzolo and
Sarferaz, 2017).
 The relationship between the suppliers and customers have to build strong in the firm
 Company must be able to deal with the future threats so that the production process is
effective.
CONCLUSION
From the above report it is been concluded that the net present value of the existing
machine is £942,000 and NPV of the new machinery is £928,000 and Mere Green Limited have
to retain its new machinery for its profitability as NPV is high for existing one. It is also been
concluded from the above report that ARR and pay back period is less for existing machine than
new one so, organisation have to retain its existing machine. Report also concludes that Mere
Green Limited have to work on the capital reserve and surplus as reservation is required to have
effective decision. Report concludes that IRR and Profitability index can also be used to in order
to interpret which machine have to be taken into consideration. Finally, report concludes that
there are different non-factors with respect to production process of the business.
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REFERENCES
Books and Journals
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Balabanov, M.S. And et.al., 2017, November. Method for calculating the payback period of
FACTS devices in the metallurgical industry. In 2017 Dynamics of Systems, Mechanisms
and Machines (Dynamics) (pp. 1-6). IEEE.
Cheremushkin, S.V., 2016. Generalized Method of Determining the Payback Period for both
Conventional and Non-conventional Cash Flows: Ready-to-Use Excel Formulas and UDF.
Available at SSRN 1982827.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision
making. John Wiley & Sons.
de Souza Rangel, A., de Souza Santos, J.C. and Savoia, J.R.F., 2016. Modified profitability index
and internal rate of return. Journal of International Business and Economics. 4(2). pp.13-
18.
Dhavale, D.G. and Sarkis, J., 2018. Stochastic internal rate of return on investments in
sustainable assets generating carbon credits. Computers & Operations Research. 89.
pp.324-336.
Furlanetto, F., Ravazzolo, F. and Sarferaz, S., 2017. Identification of financial factors in
economic fluctuations. The Economic Journal. 129(617). pp.311-337.
Shaban, O.S., Al-Zubi, Z. and Abdallah, A.A., 2017. The Extent of Using Capital Budgeting
Techniques in Evaluating Manager¡¯ s Investments Projects Decisions (A Case Study on
Jordanian Industrial Companies). International Journal of Economics and Finance. 9(12).
pp.175-179.
Sirinanda, K.G. And et.al., 2018. Strategic underground mine access design to maximise the Net
Present Value. In Advances in Applied Strategic Mine Planning (pp. 607-624). Springer,
Cham.
Wang, C.H., Hwang, J.T. and Chung, C.P., 2016. Do short-term international capital inflows
drive China's asset markets?. The Quarterly Review of Economics and Finance. 60.
pp.115-124.
Online
Accounting rate of return. 2019. [Online]. Available. Through<https://cleartax.in/s/arr>
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