Business Decision Making: Payback Period and NPV Analysis

This document discusses the importance of decision making in business and the process of evaluating projects based on payback period and net present value (NPV) analysis. It provides a detailed explanation of how to calculate payback period and NPV, and offers insights into interpreting and analyzing the results. The document also explores the financial and non-financial factors that should be considered in decision making. Case studies and examples are included to illustrate the concepts.

MODULE NAME: BUSINESS DECISION MAKING

Table of Contents
INTRODUCTION...........................................................................................................................2
TASK...............................................................................................................................................2
Payback period:.......................................................................................................................…2
Net present value (NPV).............................................................................................................2
Interpretation and analysis...............................................................................................................2
CONCLUSION................................................................................................................................2
REFERENCES................................................................................................................................2

INTRODUCTION
A decision-making process is characterized as primarily an established schedule deliberately
produced from such a range of alternatives to achieve company or organisational objectives and
goals. Decision making is an on-going and necessary aspect of every company or corporation's
administration. Therefore decisions, are made to benefit both the activities of the organization
and the operation of the organization. The decision-making mechanism has been seen, as
equilibrium of control that keeps the business from rising diagonally and linearly. It basically
means that the decision-making process searches for a goal. The objectives are pre-set strategic
priorities, operational objectives and the vision. To achieve these goals, business will face
multiple problems in strategic, financial, communications and organizational situation so
effective and smart decision help to reach a better outcome.
The task presented is based on which Project A (Dishwashing) or Project B (Software
Development) strategic analysis to pick the best for company. Decision making shall take into
consideration financial and non - economic aspects. The estimation of payback time and NPV is
helpful in making decisions.
TASK
Payback period:
The payback period calculates how much an equity fund has to be repaid in order to repay or
regain the costs expended on a given project. The length of the payback, to put it plainly, is the
amount of time that an investment reaches a break-even point. The acceptability of a project is
deeply linked to its payback date. Higher paybacks indicate a much higher and more desirable
return on investment (Zativita and Chumaidiyah, 2019). The necessity for time to pay up
decision is the minimum year additional expense that is growing better for the firm in the
specific period.
Payback period of Project A= £120,000 – 14%
Year Project A Cumulative
cash inflows
0 -£120,000 -£120,000
1 £30,000 -£90,000
2 £35,000 -£55,000
3 £40,000 -£15,000
4 £60,000 £45,000

5 £90,000 £135,000
Payback
period = 3.25
Payback period = 3 + (15000 / 60000 * 12)
= 3 + 3 month
Payback period of Project B= 150,000 – 14%
Year Project B
Cumulative
cash inflows
0 -£150,000 -£150,000
1 £40,000 -£110,000
2 £45,000 -£65,000
3 £50,000 -£15,000
4 £75,000 £60,000
5 £80,000 £140,000
Payback period
= 3.20
Payback period = 3 + (15000 / 75000 * 12)
= 3 + 2.4 month
From the above calculation, it has been determined that company must selected project B
because it has less payback period i.e. 3 years and 2.4 month as compared to project A i.e. is 3
years and 3 months. This simply means B project will return back the company investment
within less time.
Net present value (NPV)
NPV is truly the difference seen between historical prediction of upcoming cash flows over
time and the anticipated cash expenses. Net Present value is also used to minimize the benefit of
modelling or anticipating behaviour in resource and business planning (Hopkinson, 2017).

The net gain of the current values means that a percentage of the estimated earnings-in-real
dollars of a company is equal to the potential liabilities accrued and even the existing dollars.
Business with such a positive NPV is assumed to be profitable, whereas a business with such a
smaller amount will be effective in a significant loss.
Project A= 120,000-14%
Year Caschflow Dt @ 14% PV at 14%
1 £30,000 1.14 £26,316
2 £35,000 1.2996 £26,931
3 £40,000 1.481544 £26,999
4 £60,000 1.6889602 £35,525
5 £90,000 1.9254146 £46,743
NPV = £42,514
Project B = 150,000-14%
Year Cashflow Dt @ 14% PV at 14%
1 £40,000 1.14 £35,088
2 £45,000 1.2996 £34,626
3 £50,000 1.481544 £33,749
4 £75,000 1.6889602 £44,406
5 £80,000 1.9254146 £41,549
NPV = £39,418
From mention projection Project A and Project B NPVs are 42514.01 and 39417.8. In both
possibilities, Net present value is positive, however the NPV of Project A is larger than another.
This analysis shows that proposal A will deliver more financial boost and therefore more
sustainable.
According to both NPV and Payback assessment of these projects, it's been evaluated that NPV
significant progress A is better whilst also Project B's payback method is smarter. Thus NPV is

usually suggested by management teams in this scenario as it considers the present-value of
cash-flows. Project A should therefore be regarded as being most profitable.
Financial factors
Economic factor in festal: The further individuals there have been receiving a regular income as
well as anticipating to keep receiving person, therefore more individuals there have been going
to be buying social spending. The quarterly report on employment rate also is one of the
monetary leading indicators which main sources to consumer products demand.
Exchange Rate: The exchange rate shall be mentioned using actual word for the country's
currency represented therein. The adjective USD, for instance, symbolises the US currency,
whereas EUR symbolises the euro.
Inflation Rate: Inflation is a function of the rate for which a financial system measures the total
market price of a cart of prices of goods and services within a certain amount of time. It's really
the increase in the overall price point, in which a standard currency actually selected goods and
services in previous periods. Hence economic growth, often calculated as a percentage, implies a
decline in the value of a country's currency (Kamuti and Omwenga, 2017).
Taxes Rates: There are the proportion the employee or corporate entity is paid to the
government. The federal government and several of the nations is using a social democratic
income tax structure, where the amount of money prosecuted rises as the quantity of tax liability
of the individual or entity boosts. A social democratic tax rate leads to higher number of money
obtained from tax paying citizens with higher earnings.
Non-financial factors
COVID 19: Covid-19-related interruptions have led to thousands of jobless benefits filings. The
statistics were at 20.5 billion as of April by itself, and are projected to rise as the disease
outbreak potential impact on the work force in the US decreases. According to a Reuters report
upwards of 36 million has submitted for welfare payments since March 21, which really is nearly
a tenth of the working-age population (Dhochak and Sharma 2016).
Political stability: This element has shaved the causative factors of the project founded. For
example: any undertaking that crosses a line of federal regulations will also lose its income by
trying to bring these to judge but could result throughout the entire project being closed down
(Dobrovic, 2018).

1. Payback duration: through review of all project activities; Project B was already estimated to
meet all costs more efficiently in a short time relative to Project A. While this difference is not
significant, it is just a fraction of a year. So, contrary to the payback time law; Project B is
preferred over Project A (Tulasombat, 2017).
2. NPV: The net profit of both projects is favourable; however, it has been found after review
that Project A seems to have a much greater benefit than Project B and thus should be authorized
in line with Project A legislation.
3. Growth rate: Financial factors under this requirement; rise in net income over the period to
be concluded. The comparison thus suggests that the development of Project A with less initial
investment is higher than the growth rate component of Project B; Project A should be
considered.
Non Financial factors
Several factors influence strategic decisions, based on the situation instead of the
quantitative advantages. Some specific non-financial issues are discussed below:
Dependability in growth rate: Project A's annual growth is unreliable; for example, it is
growing gradually, but it has seen rapid growth at variable levels. This is an unstable expenditure
that often suggests what achievement it will accomplish in the foreseeable term. While Project
B's success on another side is stable every year, showing long-term capital flows
(Kusumaningrum, Isbanah and Paramita, 2019).
2. The firm's growth prospects: in a continually changing world; the development of
dishwashing has limited reach; while innovation has tremendous potential growth (Turner and
Coote, 2018).
The final selection for the organization:
This has already been decided from the debate across all that Project A will be appointed;
the reason for selecting this proposal is positive NPV, which suggests the meaningful outcomes
which the plan becomes far more successful. The other factor, in comparison to Project B, has
been its growth potential over time and a stronger performance on Project A.
CONCLUSION
In conclusion, investment assessment technologies are mentioned to be successful in
identifying the optimal alternative for the corporation that will restore the costs as quickly as
possible and begin to distribute the beneficial outcomes in the end. Examination of financial and

non-financial aspects should be interpreted; all undertakings have different advantages; for
example, Project A is ideal for short-term spending, while Project B is successful in achieving
strategic targets and staying profitable in the marketplace.

REFERENCES
Books and Journals
Hopkinson, M., 2017. Net Present value and risk modelling for projects. Routledge.
Tulasombat, S., 2017. Financial Factors Affecting on Investment Decision of Organic
Agribusiness SMEs in Chiang Mai Province, Thailand. Journal of Modern Management
Science, 10(2), pp.132-141.
Dhochak, M. and Sharma, A. K., 2016. Identification and prioritization of factors affecting
venture capitalists’ investment decision-making process. Journal of Small Business and
Enterprise Development.
Kamuti, J. M. and Omwenga, J., 2017. Factors influencing investment decisions in Nairobi
Securities Exchange: A case of Dyer & Blair Investment Bank Limited. International
Academic Journal of Economics and Finance, 2(3), pp.1-15.
Kusumaningrum, T. M., Isbanah, Y. and Paramita, R.S., 2019. Factors Affecting Investment
Decisions: Studies on Young Investors. International Journal of Academic Research in
Accounting, Finance and Management Sciences, 9(3), pp.10-16.
Turner, M. J. and Coote, L. V., 2018. Incentives and monitoring: impact on the financial and
non-financial orientation of capital budgeting. Meditari Accountancy Research.
Zativita, F. I. and Chumaidiyah, E., 2019, May. Feasibility analysis of Rumah Tempe Zanada
establishment in Bandung using net present value, internal rate of return, and payback
period. In IOP Conference Series: Materials Science and Engineering (Vol. 505, No. 1, p.
012007). IOP Publishing.