Business Decision Making

This study explores the process of business decision making, focusing on the assessment of project effectiveness through the calculation of payback period and net present value (NPV). It also discusses the financial and non-financial factors that influence decision making. Find study material and solved assignments on Desklib.

Business Decision Making

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Payback period.........................................................................................................................1
2. Net Present Value (NPV).........................................................................................................2
3. Financial and Non- Financial Factors......................................................................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business decision making is the process that helps managers to assess the effectiveness of
any project, whether or not this will be beneficial to the organization in the potential (Bennun
And et.al., 2018). Throughout this study, A&B plc seems to have two separate projects they'll
spend on improving their performance, or system effectiveness. This assessment covers the
prediction of the NPV or Payback period and analyzes the financial and non - financial
components that enhance all the process of making decisions.
MAIN BODY
1. Payback period
It is amongst the most efficient forms of capital budgeting that entities use to analyse
different proposed ideas on their recovery period (Creemers, 2018). The whole method helps to
very quickly measure which project will recover its initial investment sooner and them managers
have to make their investment decisions accordingly. The lower the payback date is
advantageous and the greater one is refused, so A&B plc managers are using this method to
determine the right choices and the equation refer to below alongside their formula.
Formula:
Payback Period = Year before full recovery + unrecoverable cost / cash flow during the year
Year Project A Cumulative Cash flow Project B Cumulative cash flow
Year 0 -120,000 - -150,000 -
Year 1 £30,000 £30,000 £40,000 £40,000
Year 2 £35,000 £65,000 £45,000 £85,000
Year 3 £40,000 £105,000 £50,000 £135,000
Year 4 £60,000 £165,000 £75,000 £210,000
Year 5 £90,000 £255,000 £80,000 £290,000
Calculation:
Project A = 3 + £15,000 / £60,000
= 3 + 0.25
= 3.25 years
Project B = 3 + £15,000 / £75,000
= 3 + 0.2
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= 3.2 years
With the help of above calculation, it has been analysed that project B will be more
favourable for the organization because it helps in recovering initial investment faster. Payback
period of Project A is 3.25 years and Project B is 3.2 years. Both are almost similar, so managers
find the way to select best option from both.
2. Net Present Value (NPV)
This is the capital budgeting approach which would be utilized to evaluate the feasibility of
a project. The potential value of every project offers the managers the impression that they ought
to and should not participate in a given project (Gorshkov and et.al., 2018). Positive or higher
value of NPV is chosen and a different hand, adverse or lower NPV is denied as it will not be
very beneficial compared to another alternative. Enterprise administrators made their choices to
optimize their return value accordingly. Estimation of both A&B plc ventures as described
below:
Project A:
Year Project A PV Factor DCF
Year 0 -120,000 1 -120,000
Year 1 £30,000 0.87719298 £26,315.79
Year 2 £35,000 0.76946753 £26,931.36
Year 3 £40,000 0.67497152 £26,998.86
Year 4 £60,000 0.59208028 £35,524.82
Year 5 £90,000 0.51936866 £46,743.18
Net Present Value £ 42514.01
Project B:
Year Project B PV Factor DCF
Year 0 -150,000 1 -150,000
Year 1 £40,000 0.87719298 £35,087.72
Year 2 £45,000 0.76946753 £34,626.04
Year 3 £50,000 0.67497152 £33,748.58
Year 4 £75,000 0.59208028 £44,406.02
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Year 5 £80,000 0.51936866 £41,549.49
Net Present Value £39,417.85
From the above calculation of NPV which is based on two different projects that is A & B.
As per the analysis, project A will be more beneficial because it has positive or higher NPV
value in comparison to project B. So, it is recommended to the managers of A&B Plc to invest in
Project A for better returns.
With the help of overall analysis, it has been observed that A&B Plc should invest in
Project A because it has higher NPV which is beneficial for the organization to spend on
software development (Baker, 2018). Company able to recover their initial investment within
3.25 years and it further helps in maximising overall efficiency as well as operational
effectiveness.
3. Financial and Non- Financial Factors
There are so many monetary or non - monetary considerations that executives weigh to
optimize net profits or productivity in making management decisions. Some of them discussed
below:
Financial factors:
 Ratio analysis: These are the metrics that the corporation uses to measure the success of
a business in terms of competitiveness, productivity, liquidity, flexibility etc (Tseng, Chiu
and Liang, 2018). Depending on the performance or conclusions, more administrators
will take management decisions.
 Investment appraisal technique: This method is often used to investigate the suitability
of the various projects. It involves the several methods such as payback period, NPV,
IRR, and PI, ARR etc. which could help maximize financial performance and profits by
making key business decisions.
 Risk analysis: it's also the methodologies used to analyse the entity risk and then further
it can impact the organization's productivity and profit margin. Management teams will
use that factor to make successful methods in the corporate decision making process.
Non-financial factors:
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 Good management team: Top management should focus on developing a cohesive
management team that specifically impacts the health of the organization. Educating the
new employer on the company's inner processes from a daily basis perspective is easier
and ensures organizational stability if main workers stick with the company.
 Diversification of human capital risk: It can be comparably damaging when a corporate
entity relies on a particular customer, employee, or manufacturer (Skyrius, 2018). For eg,
if a particular buyer earns more than double the income of an company; the company
seems more like an employee of the enterprise than a seller. If a client due to whatever
reason decides to stop using company's products that poses a significant danger.
 Potential growth for customer, product and market: Prospective customer would like
to see an aggressive marketing plan for growth affecting customer base advancement,
regions and potentially even products. Because they get to see how it will affect sales and
the bottom line.
CONCLUSION
From the above discussion, it has been concluded that business decision making helps the
managers to make effective choices. There tend to be a range of investment appraisal methods
that enables the firm to select the right opportunities for enhancing its profits by proper project
spending. The net present benefit or payback period is the most useful approach adopted by
managers in determining the financial feasibility of a project. It has several financial benefits that
administrators would need to consider before introducing it.
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REFERENCES
Books & Journals
Baker, A. J., 2018. Business decision making. Routledge.
Bennun, L. And et.al., 2018. The value of the IUCN red list for business decision‐
making. Conservation Letters. 11(1). p.e12353.
Creemers, S., 2018. Moments and distribution of the net present value of a serial
project. European Journal of Operational Research, 267(3), pp.835-848.
Gorshkov, A.S. and et.al., 2018. Payback period of investments in energy saving. Magazine of
Civil Engineering, (2).
Skyrius, R., 2018. Business Decision Making. In 2001 Informing Science Conference (Vol. 1).
Tseng, M. L., Chiu, A. S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
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