Business Decision Making Report: NPV, Sampling, IRR

This report delves into the realm of business decision-making, providing a comprehensive analysis of various financial and analytical tools. Section A focuses on Net Present Value (NPV), calculating its value for a project and advising on its financial viability, along with other crucial factors. Section B explores the differences between probability and non-probability sampling, detailing five specific sampling methods applicable to a study, along with their respective advantages and disadvantages. The report also addresses the importance and limitations of the payback period, and concludes with an in-depth analysis of the Internal Rate of Return (IRR), offering insights into project profitability and investment decisions. The report aims to provide valuable insights into the tools and techniques used in effective business decision making.

Business decision-making

TABLE OF CONTENTS
INTRODIUCION ...........................................................................................................................1
SECTION A.....................................................................................................................................1
QUESTION 1...................................................................................................................................1
a) Net present value (NPV)....................................................................................................1
b) Advise the management on financial viability..................................................................2
c) Other factors that need to be considered............................................................................2
SECTION B.....................................................................................................................................2
QUESTION 2...................................................................................................................................2
a) Presenting the difference between probability sampling and non-probability sampling...2
b) describing 5 sampling method that could be used for the study........................................3
c) Advantages and disadvantages of each sampling technique used above...........................4
QUESTION 5...................................................................................................................................5
I) Explaining the importance and limitation of payback period.............................................5
II) Internal rate of return (IRR)..............................................................................................6
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODIUCION
Business decision-making is the step by step process that allow the professionals to solve
every type of problem and also creates different alternative in order to choose the best options.
Similarly, the present report will also highlight the importance of different tools for a researcher
as well as business in order to make effectual decision accordingly. The study is based upon
different scenarios such that under section A, report will calculate the values for Net Present
values (NPV) and suggest the best project that helps a business in their future investment.
Further, under section B, the report will describe the key differences between probability and
non-probability, along with this it also suggests five sampling methods that is suitable for the
scenario. Moreover, it is also describes the importance of pay back period and its limitations,
then it suggests the best project through which company should be continue to work with.
SECTION A
QUESTION 1
a) Net present value (NPV)
NPV is the difference between the present value of a cash inflows and outflows over a
particular period. So, it is relied upon the time value of money concept and considered as best
way to compare the similar investment alternatives.
Year cash inflows cash outflows Profit
PV factor
@15%
Discounted
cash inflows
1 45000 58000 -13000 0.87 -11310
2 56000 62000 -6000 0.756 -4536
3 72000 61000 11000 0.658 7238
4 102000 62000 40000 0.572 22880
5 115000 70000 45000 0.497 22365
6 132000 78000 54000 0.432 23328
Total
discounted cash
59965
1

inflow
Initial
investment 80000
NPV (Total
discounted
cash inflows -
initial
investment) -20035
b) Advise the management on financial viability
In accordance with the above table, it has been interpreted that there is no financial
viability of the project because the NPV value is negative which in turn reflected the project is
not sound. Also, the present value of cost actually exceeds the present value of revenue at
defined discount rate. Also, as per the initial investment, ABC Ltd should not proceed with
further new project because it might lead to decrease the investment option. Hence, the project is
not likely to generate the greatest profit and that is why, it should not be used by the quoted
business.
c) Other factors that need to be considered
It is suggested to the management of ABC Ltd to control over their expenses that helps to
decrease the cash outflow in order to manage the overall performance of the company.
Moreover, company can also control the expenses by increase the price of its offering as well as
use low price expenditure that helps to minimize the expenses (Knoke, Gosling and Paul, 2020).
in addition to this, the negative value of NPV clearly indicate that the project is not successful
and that is why, company should proceed with some further alternatives that helps to improve
the overall the brand image of a company.
SECTION B
QUESTION 2
a) Presenting the difference between probability sampling and non-probability sampling
Probability sampling: It is a technique which is used by the researcher in order to select
the samples from the range of population by using method of probability. Under this, each
2

member from the population have an equal chance of being selected. Therefore, it can be stated
that it will always involve some sort of random or probabilistic process to select participants. It
is different from non-probabilistic sampling because its main goal is to obtain a sample that is
representative of population so that effectual results can be drawn. However, this method is also
chosen in order to draw the results from quantitative study in which statistical analysis can be
presented (Difference between probability and non-probability sampling, 2020). Thus,
probability sampling is less appropriate for qualitative studies because it leads to generalize the
results to larger population. It has three different types such as stratified, systematic and random
cluster sampling through which the results can be generated. For example, a study has conducted
of 100 population and under probability sampling, each person would have being chosen like
odds of 1 out of 100.
Non-probability sampling: Another type of sampling in which investigator selects
samples based upon subjective judgment of a researcher instead of random selection. Thus, the
member of entire population do not have an equal chance of being selected. For example, of the
professor is invited to attend a meeting in a university, while other professors of another colleges
are not selected under non-probability sampling (Kohler, Kreuter and Stuart, 2019). Such
sampling is not beneficial for quantitative study because researcher chooses the member on the
basis of their judgment. It has been examined that the results drawn by using this method are
biased because of using subjective method. In this, hypothesis generated whereas in probability
sampling, hypothesis is tested to drawn valid conclusion. Only analytical inferences is used
while using non-probability sampling method.
b) describing 5 sampling method that could be used for the study
In order to determine the customers’ satisfaction on provision of services in the Central
London, there are five different sampling method used because of large population (2.5 million
customers).
 Simple random sampling: It is a type of probability sampling in which every member
of the population has an equal chance of selection. Through this method, M7J Plc
determine the views of their customers by being selected participants on random basis.
This in turn assist to answer the research questions (Berndt, 2020).
 Cluster sampling: Another sampling strategy that can be used by MJ Plc which involves
dividing the population into subgroups. However, each subgroup must have similar
3

characteristic to whole sample. Through this, a subgroup can be selected to share their
views regarding satisfaction.
 Convenience sampling: Third strategy that is also suitable for the present study because
it includes the individual who can be the most accessible to the researcher. As there is a
large population and that is why, who are most accessible can be selected that assist to
share their views quickly.
 Voluntary response sampling: It is another method through which MJ Plc can drawn
their results and it is somewhat similar to convenience sampling, as it is also based upon
accessibility (Lamm and Lamm, 2019). However, through this method, scholar choosing
the participants and also contact them, but sometime this might drawn biased results.
 Purposive sampling: Another suitable sampling (type of non-probability) which is
based upon judgment of researcher that involves researcher using their expertise. This is
used to accomplish the defined aim of the study and mostly used in qualitative study. In
the context of present study, MJ Plc may also use this method in order to examine the
views of customers.
c) Advantages and disadvantages of each sampling technique used above
Type of
sampling
Advantages Disadvantages
Simple
random
sampling
The sampling is easy to use and also
provide accurate representation of the
results. It is also generated results in
unbiased manner (Wiśniowski and et.al.,
2020). The scope of the sampling is high
and organization can used it as per their
convenience.
In some circumstances, time, cost
and bias might be occurred. The
accurate measure of large population
can be obtained when a full list of
entire population can be studies.
Cluster
sampling
It is less expensive and also able to
present the results immediately.
Researcher consumes less time because it
becomes economical to observe the unit
of groups as compared to population.
It requires different multiple
research point in order to reduce the
sampling errors. Also, there is high
risk of obtaining one sided data from
each cluster that affect the decision.
4

Convenience
sampling
This sampling is cheap, efficient as well
as simple to implement as compared to
other methods.
The lack of clear generalization
reduce the chances of using the
method frequently.
Voluntary
response
sampling
This sampling method is not time-
consuming and can be implemented
easily. It is also affordable method for the
researcher to generate the action.
Opting this as a sampling method,
might increases the chances of bias
because researcher make little effort
to control sample (Rivera, 2019).
Purposive
sampling
The method is extremely time saving and
cost effective for researcher. Along with
this, scholar also create generalization
from data. Further, it helps to attain
maximum level of variation under this
method.
The sampling might lead to increase
the chances of bias and it becomes
challenging to define the
representative nature of a sample.
QUESTION 5
I) Explaining the importance and limitation of payback period
The payback period is the time required to recover the initial cost of an investment such
that it is number of years through which company get back the initial investment. It is important
part of the capital budgeting because it is an effective measure of an investment risk. Also,
companies generally preferred those project which have the shortest pay back tenure as
compared to longer period which helps to minimize the chances of risk (Ermasova, Guzman and
Ceka, 2021). The method is used by the company while making small investment and there is no
complex calculations associated with the project. Through this, company is also able to
determine the reliability of a project and arrange other resources to manage the finance due to
long time required to get the amount back.
Limitation:
 It completely ignores the time value of money concept whereas other methods of capital
budgeting are completely relied upon the same. As a result, cash flows received during
early years of a project get a higher weight as compared to cash flow received in later
one (Burgos, Kittler and Walsh, 2020).
5

 The payback period also fails to consider inflows of cash which occur beyond the
payback period. Therefore, it fails to compare the overall profitability of one project as
compared to another.
 Also, the payback period does not consider other factors like risk, financing which also
plays an important role in certain investment. That is why, it also helps the investor to
identify the tenure of collecting the investment money, nothing more than this.
 It is completely lay emphasis on the liquidity and completely ignore the profitability and
that is why, there is no guarantee that the invested amount will be profitable for the firm
or not (Graham and Sathye, 2017).
 Being simple and cost effective of its applicability, the payback method does not
consider normal business scenarios. Therefore, capital investment is not just one-time
investments, whereas such projects are used for further investment in following years
too.
 Payback period puts a lot of weight on the cash flow in short-term and that is why, the
entire evaluation will be weighted towards the short term gains that might causes
opposite impact (Sarwary, 2020).
 Moreover, the payback period also ignore the capital wastage and economic life by
limiting consideration upon the project's gross earnings and as a result, it makes changes
in the overall project in opposite manner.
 Sometimes, capital budgeting is also misleading the decision and this in turn leads a
business to takes a wrong decision in near future.
II) Internal rate of return (IRR)
IRR is the metric which is used in financial analysis that helps to estimate the
profitability of a potential investment and the calculation of IRR actually relied upon the formula
of NPV. Also, it is the annual rate of growth that a company wants to generate through the initial
investment.
For project A
NPV1 @ 16% discounted rate
Year
cash
inflows
Cash
outflows Profit
PV factor
@16%
Discounted cash
inflows
6

1 35000 25000 10000 0.86 8620.69
2 40000 25000 15000 0.74 11147.44
3 50000 25000 25000 0.64 16016.44
4 55000 30000 25000 0.55 13807.28
Discounte
d profit 49591.8524603376
Initial
investmen
t 50000
NPV
(total
discounte
d profit –
initial
investme
nt) -408.14
NPV 2 @ 20% discounted rate
Year cash inflows Cash outflows Profit
PV factor
@20%
Discount
ed cash
inflows
1 35000 25000 10000 0.83 8330.00
2 40000 25000 15000 0.69 10410.00
3 50000 25000 25000 0.58 14475.00
4 55000 30000 25000 0.48 12050.00
7

Discounted
Profit 45265
Initial
investment 50000
NPV (total
discounted
profit –
initial
investment) -4735
IRR = R (1) + NPV (1)/ NPV (1) – NPV (2) * [R(1) – R (2))
Here, R(1) = 16%
R (2) = 20%
NPV (1) = -408.14
NPV (2) = -4735
By applying the formula
IRR = 16 + (-408.14) / (-408.14 + 4735) * (20-16)
IRR = 16 + (-0.09) * 4
IRR = 15.62%
For Project B
NPV 1 @ 16% discounted rate
Year cash inflows Cash outflows Profit
PV factor
@16%
Discounted
cash flows
1 30000 15000 15000 0.86
12931.0344
827586
2 35000 30000 5000 0.74
3715.81450
65398
8

3 50000 25000 25000 0.64
16016.4418
385338
4 75000 30000 45000 0.55
24853.0994
046214
Discounted
profit 57516.39
Initial
investment 50000
NPV (total
discounted
profit –
initial
investment) 7516.39
NPV 2 @ 25% discounted rate
Year cash inflows Cash outflows Profit
PV factor
@16%
Discounted
cash flows
1 30000 15000 15000 0.80 12000
2 35000 30000 5000 0.64 3200
3 50000 25000 25000 0.51 12750
4 75000 30000 45000 0.41 18450
Discounted
profit 46400
Initial 50000
9

investment
NPV (total
discounted
profit –
initial
investment) -3600
IRR = R (1) + NPV (1)/ NPV (1) – NPV (2) * [R(1) – R (2))
Here, R (1) = 16%
R (2) = 25%
NPV (1) = 7516.39
NPV (2) = -3600
By put all values in the formula,
IRR = 16 + 7516.39 / (7516.39 + 3600) * (25 – 16)
IRR = 16 + 7516.39 / 11116.39 * 9
IRR = 16 + (0.67) * 9
IRR = 16 + 6.08
IRR = 22.08%
Interpretation: Through the above, it has been interpreted that project A has a 15.62%
of rate of return within a 4 years. Whereas, project B gives 22.08% of rate of return within a
defined tenure. Therefore, it is suggested to go ahead with project B because it has a higher rate
of return as compared to project A. Thus, high the IRR, higher will be return and low IRR might
lower down the risk within a define project. That is why, it is suggested to use project B as it has
higher IRR that assist J&J to gain high return as compared to project A and also helps to sustain
the brand image at global level.
CONCLUSION
By summing up above report, it has been concluded through different scenarios that
company should not proceed with negative NPV because it is not able to generate the higher
return and also decreases the profitability as well. Moreover, there are two main types of
10

sampling concluded from the study such that probability and non-probability. Also, there are
five different types of sampling has been preferred by the chosen scenario that helps to select the
customers in order to determine the customer satisfaction. Further, payback period is considered
an important part of capital budgeting and it helps to identify period in which the amount can be
recovered. Also, with the help of calculation of IRR, it has been concluded that company should
proceed with project B because it helps to generate the returns highly as compared to low IRR.
11

REFERENCES
Books and Journals
Berndt, A.E., 2020. Sampling methods. Journal of Human Lactation. 36(2). pp.224-226.
Burgos, J.A.M., Kittler, M. and Walsh, M., 2020. Bounded rationality, capital budgeting
decisions and small business. Qualitative Research in Accounting & Management.
Ermasova, N., Guzman, T. and Ceka, E., 2021. Legacy effect of soviet budgeting system on
public capital budgeting: Cases of Russia, Moldova, and Uzbekistan. International
Journal of Public Administration, pp.1-13.
Graham, P.J. and Sathye, M., 2017. Does national culture impact capital budgeting
systems?. Australasian Accounting, Business and Finance Journal. 11(2). pp.43-60.
Knoke, T., Gosling, E. and Paul, C., 2020. Use and misuse of the net present value in
environmental studies. Ecological Economics. 174. p.106664.
Kohler, U., 2019. Possible uses of nonprobability sampling for the social sciences. Survey
Methods: Insights from the Field, pp.1-12.
Kohler, U., Kreuter, F. and Stuart, E. A., 2019. Nonprobability sampling and causal
analysis. Annual review of statistics and its application. 6. pp.149-172.
Lamm, A.J. and Lamm, K.W., 2019. Using non-probability sampling methods in agricultural
and extension education research. Journal of International Agricultural and Extension
Education. 26(1). pp.52-59.
Rivera, J.D., 2019. When attaining the best sample is out of reach: Nonprobability alternatives
when engaging in public administration research. Journal of Public Affairs
Education. 25(3). pp.314-342.
Sarwary, Z., 2020. Strategy and capital budgeting techniques: the moderating role of
entrepreneurial structure. International Journal of Managerial and Financial
Accounting. 12(1). pp.48-70.
Wiśniowski, A. and et.al., 2020. Integrating probability and nonprobability samples for survey
inference. Journal of Survey Statistics and Methodology. 8(1). pp.120-147.
Online
Difference between probability and non-probability sampling. 2020. [Online]. Available
through: <https://keydifferences.com/difference-between-probability-and-non-
probability-sampling.html>.
12