Business Decision Making

This essay discusses the process of business decision making, focusing on the calculation of NPV and payback period method. It also explores the use of financial and non-financial factors in decision making. The case study revolves around Genesis and Dreams Ltd, a construction company in the UK.

Business Decision
Making

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Calculation of NPV and Payback period method and discussion of all the financial and non-
financial factors that aids decision making..................................................................................1
CONCLUSION................................................................................................................................4
REFRENCES...................................................................................................................................5

INTRODUCTION
Business decision making is the process of analysing the actual situation and performance
of business and then formulating decisions for betterment of it. While planning to meet all the
long as well as short term goals it is very important for the entities to make sure that they are able
to form effective decisions (Bratasanu, 2018). Present essay is based upon business decision
making of Genesis and Dreams Ltd which is planning to invest in a project from the alternatives
available to it. This discussion covers various topics such as calculation of NPV, payback period
method along with use of financial and non-financial factors in decision making.
MAIN BODY
Calculation of NPV and Payback period method and discussion of all the financial and non-
financial factors that aids decision making
Genesis and Dreams Ltd is a construction company which is mainly established in United
Kingdom. The managers of the entity are seeking for diversification in the resources that are
used by the organisation. For this purpose, the company has planned to select one of the two
proposed projects that are motor software and hardware project. In order to analyse the
suitability of both of them two main investment appraisal techniques are used that are NPV and
payback period (Chang, 2018). Calculation of them is as follows:
The investment for project A is 70000 and for B it is 84000. Cost of capital for the
projects is 14%.
Payback period method is the capital budgeting technique which is used by the entities
for the purpose of determining the time period which will be taken by a project to recover the
amount of initial investment. As Genesis and Dreams Ltd is willing to make investment in one of
the projects so it is very important for it to make sure that it uses this technique systematically.
Calculation of it for both the projects is as follows:
Formula: Completed years + unrecovered cost at the start of year / cash flow during the
year
Payback period for Project A
Years
Cash
inflow
Cumulative
cash inflow
1 18000 18000
2 16000 34000
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3 19000 53000
4 22000 75000
5 37000 112000
Payback period = 3 + 17000 / 22000
= 3 + 0.77
= 3.77 years
Payback period for Project B:
Years
Cash
inflow
Cumulative
cash inflow
1 21000 21000
2 27000 48000
3 30000 78000
4 32000 110000
5 32000 142000
Payback period = 3 + 6000 / 32000
= 3 + 0.19
= 3.19
Net present value is also a capital budgeting technique which is used to determine the
present value of the project so that best suitable decision for betterment of business could be
formulated. As there are two different options available to Genesis and Dreams Ltd for making
investment so by using this method the managers will be able to choose the best suitable
alternative (da Costa Gomes and do Valle, 2020). The calculation of it for both the projects is as
follows:
Formula: Discounted cash inflow – cost of project
NPV for Project A
Years
Cash
inflow
PV factor
@14%
Discounted
cash
inflow
1 18000 0.877 15786
2 16000 0.77 12320
3 19000 0.675 12825
4 22000 0.592 13024
5 37000 0.519 19203
Total discounted cash inflow 73158
NPV = 73158 – 70000
= 3158
2

NPV for Project B
Years
Cash
inflow
PV factor
@14%
Discounted
cash
inflow
1 21000 0.877 18417
2 27000 0.77 20790
3 30000 0.675 20250
4 32000 0.592 18944
5 32000 0.519 16608
Total discounted cash inflow 95009
NPV = 95009 – 84000
= 11009
On the basis of above calculations, it has been analysed that payback period of first
project is higher than another one therefore the entity should select Project B because it will be
able to recover the amount of investment quickly. On the other hand, NPV of project B is higher
than project A that demonstrates that B is more profitable for the business. It has been
recommended to Genesis and Dreams Ltd that it should select the second option and invest in the
hardware project as it is more profitable.
There are various types of financial as well as non-financial factors that are focused by
businesses while making decision of investing in a project. Discussion of all of them is as
follows:
All the key elements that are related to finance are the financial factors that can help the
businesses to formulate effective decisions. Some of the major elements are as follows:
Interest rate is the main factor that aid the financial decision making. If the project which
is selected by the organisation will provide higher returns in future then it can help to enhance
liquidity. It is the main reason due to which this factor aid decision making.
Revenue is another financial factor that aid decision making because if the value of it is high
then it can help the managers to make decisions to spend more on the operations. If it will be low
then it will be very difficult for a business entity to spend money on the betterment of business
(Leshchenko and Yelizieva, 2020).
All the factors that are not related to finance are non-financial factors. There are various
types of them that are facilitating business decision making. Discussion of them is as follows:
Ethics are one of the main non-financial factors that are required to be focused by
businesses to sustain in the market. If the operations will be executed in unethical manner then it
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will create bad market image and result in decreased profits. By keeping ethics in mind business
form decisions so that market image could be maintained.
Legal policies, rules and regulations are other non-financial factors that are related to
business decision making because if all of them will be focused by entities then it can help to
carry out operations under policies set by government.
CONCLUSION
From the above essay it has been concluded that for all the businesses it is very important
to be focused with business decision making as it can help to meet all the desired goals and
objectives. There are various types of financial and non-financial factors which are required to be
focused by all the entities. Some of them are capital budgeting techniques like NPV and payback
period. Apart from this, some other factors are interest rate, profitability, ethics, legal
implications etc.
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REFRENCES
Books and Journals:
Bratasanu, V., 2018. Leadership Decision-Making Processes in the Context of Data Driven
Tools. Quality-Access to Success. 19.
Chang, B. J., 2018. Agile Business Intelligence: Combining Big Data and Business Intelligence
to Responsive Decision Model. Journal of Internet Technology. 19(6). pp.1699-1706.
da Costa Gomes, M. and do Valle, M. R., 2020. Business Decision-making in Finance:
Epistemological and Paradigmatic Aspects/A Tomada de Decisao Empresarial em
Financas: Aspectos Epistemologicos e Paradigmaticos. Administração: Ensino e
Pesquisa–RAEP. 21(1). pp.90-110.
Leshchenko, Y. and Yelizieva, A., 2020. System Model for Decision Making Support in
Logistics and Quality Management Business Processes of Manufacture Enterprise.
In Data-Centric Business and Applications (pp. 93-113). Springer, Cham.
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