Assessing Investment Appraisal for Business Decision Making Report

This report examines the process of business decision-making, focusing on investment appraisal techniques used by XYZ Plc, a luxurious accommodation provider. The assignment analyzes two proposed projects, a software upgrade and a laundrette service, to determine which maximizes productivity and profitability. It explores the application of investment appraisal tools like Payback Period, Net Present Value (NPV), Average Rate of Return (ARR), and Internal Rate of Return (IRR) to evaluate the financial viability of each project. The report calculates and compares the Payback Period and NPV for both projects, concluding that the laundrette project offers a higher NPV and is, therefore, the more financially beneficial option. The report also discusses the importance of considering both financial and non-financial factors, such as expenses, risk tolerance, customer satisfaction, and industry standards, in making informed business decisions. Ultimately, the report highlights how investment appraisal tools facilitate the optimal allocation of financial resources and aid in achieving organizational objectives.

Business Decision Making

TABLE OF CONTENTS
Assessing how investment appraisal and financial as well as non-financial factors aid in
decision making...........................................................................................................................3
REFERENCES................................................................................................................................7

Assessing how investment appraisal and financial as well as non-financial factors aid in decision
making
Business decision making is the process of selecting the best course of action out of
several alternatives available. At the time of decision making, manager is required to consider
business goals and objectives so that competitive advantage can be gained. This assignment is
based on the case scenario of XYZ Plc which offers customers with luxurious accommodation
services. As per the scenario, company offers services in UK and other parts of Europe as well.
Now, with the motive to take competitive advantage firm is planning to invest money in the two
proposed projects such as software and laundrette. However, company is facing issues in
identifying the project which maximizes both organization’s productivity and profitability.
In order to resolve project selection issue, manager of XYZ Plc is undertaking
investment appraisal tools or methods. Payback method, NPV, ARR and IRR are recognized as
the most effectual methods which helps company in determining the level to which specific
project is good in financial terms. The rationale behind this, investment appraisal tools helps in
identifying and evaluating the attractiveness of capital project. Thus, by evaluating financial
viability manager of XYZ Plc can take appropriate decision in relation to the selection or
rejection of project.
Payback period provides deeper insight about the length of time which business unit will
take for attaining break-even level. Hence, it entails time within which firm will recoup amount
expended at initial level. Referring this aspect, firm can do further planning about profitability
and other aspects (Häcker and Ernst, 2017). On the critical note, this method offers results for
decision making without taking into account time value of money concept which in turn has
greater importance in the present times.
Further, NPV method highlights profitability associated with proposed investment plan
and thereby helps in making selection of appropriate project. Moreover, by considering time
value of money concept it presents difference between present value of cash inflows and
outflows (Shaffie and Jaaman, 2016). Thus, business unit should select project which has higher
NPV over other proposals available.

Payback period assessment
Year Project A –
Software
Project
Cumulative
figures
Project B –
Laundrette
Project
Cumulative
cash flows
1 28000 28000 31000 31000
2 32000 60000 38000 69000
3 35000 95000 43000 112000
4 55000 150000 64000 176000
5 78000 228000 89000 265000
3.1 years 3.1 years
Payback period
3 + 5000 /
55000
=3 + 0.1
=3.1 years
3 + 8000 /
64000
= 3 + 0.1
= 3.1 years
Evaluation of net present value
Year Project
A –
Softwar
e
Project
Discountin
g factor @
11%
Presen
t value
of cash
flows
Project B
–
Laundrett
e Project
Presen
t value
of cash
flows
1 28000 0.901 25225 31000 27928
2 32000 0.812 25972 38000 30842
3 35000 0.731 25592 43000 31441
4 55000 0.659 36230 64000 42159
5 78000 0.593 46289 89000 52817
Discounted
cash flows 159308 185187

Less: initial
investment 100000 120000
NPV 59308 65187
In accordance with capital budgeting tools project with high NPV and less payback
period is beneficial for the firm. Outcome of investment appraisal exhibits that in the case of
both software and laundrette project XYZ Plc will recover initial investment within the period of
3 years and 1 month. In other words, company will be on break even position if it invests fund in
software or laundrette project. However, NPV associated with both the projects are different
such as £59308 (A) and £65187 (B) respectively. On the basis of this aspect, project B will prove
to be more fruitful for the firm. Moreover, by applying 11% PV factor it has identified that
present value of inflows are higher in the case of project B after the deduction of all the outflows.
Considering this, it can be entailed that after the period of 5 years XYZ Plc will get better returns
by investing funds in Laundrette services.
Financial and non-financial that helps in business decision making are as follows:
Monetary factors
In this, there are numerous factors which need to be considered by hotel chain while
making evaluation and selection of appropriate project. Moreover, profitability maximization is
the main objective of firm when it plans to invest funds in new project. Hence, at the timer of
appraising project manager of XYZ Plc should evaluate aspects pertaining to expenses, risk
tolerance level, budget, working capital requirements and profit which are the most important
aspect. Moreover, hospitality chain also requires high amount for carrying out daily operations
effectually. In addition to this, company should also focus on identifying the extent to which it
can be monetary expenses and risk related to the proposed investment. Further, emphasis needs
to be placed on gain or profits that will be generated by the company after 5 years or specific
time period. Thus, by keeping in mind such aspects manager of hotel chain can take suitable or
profitable business decisions.
Non-monetary factors

Under this category, in new project, firm requires team of highly competent personnel
who are able to deal with the complexities. Thus, evaluation of manpower is must when
company plans to invest funds in new project (Non-financial factors for investment appraisal,
2020). Besides this, customer satisfaction and retention cannot be assessed in monetary terms
which in turn also considered as the most important factor. Thus, manager of XYZ plc should
also assess that whether new project or investment option will offer high level of satisfaction to
the customer or not. Further, at the time of decision making, industry standards and laws as well
as legislation also needs to be evaluated by the firm.
It has been articulated from the evaluation that capital budgeting tools facilitates optimum
use of financial resources by highlighting the best option for investment purpose. Further, from
the evaluation it has found that by investing fund in laundrette project XYZ Plc can fulfill its
objectives. Besides this, it can be inferred that effectiveness of decision making is affected from
both monetary and non-monetary factors. Thus, at the time of decision making firm should keep
in mind variables that associated with proposed project either directly or indirectly.

REFERENCES
Books and Journals
Häcker, J. and Ernst, D., 2017. Investment Appraisal. In Financial Modeling (pp. 343-384).
Palgrave Macmillan, London.
Shaffie, S. S. and Jaaman, S. H., 2016. Monte Carlo on net present value for capital investment
in Malaysia. Procedia-Social and Behavioral Sciences, 219, pp.688-693.
Online
Non-financial factors for investment appraisal. 2020. Online. Available through: <
https://www.nibusinessinfo.co.uk/content/non-financial-factors-investment-appraisal >.