Analysis of Business Decision Making: NPV, Payback, Financial Factors

This essay delves into the critical aspects of business decision-making, emphasizing the importance of strategic choices for organizational success. It examines the application of the Net Present Value (NPV) and payback period methods in evaluating investment opportunities, highlighting their respective benefits and drawbacks. The essay uses a case study of XYZ Ltd., a hotel chain, to illustrate these concepts, comparing the viability of a software project versus a laundrette project. It meticulously calculates the NPV and payback periods for both projects, demonstrating how these metrics inform investment decisions. Furthermore, the essay explores the influence of both financial factors, such as interest rates and taxation, and non-financial factors, like management support and regulatory changes, on business outcomes. The conclusion underscores the necessity of a comprehensive approach to decision-making, incorporating both quantitative analysis and qualitative considerations to ensure long-term organizational growth and stability.

Essay on business decision
making

Contents
ESSAY TOPIC................................................................................................................................1
INTRODUCTION...........................................................................................................................1
ESSAY BODY................................................................................................................................1
Net present value with its benefits and drawbacks......................................................................1
Payback period with its benefits and drawbacks.........................................................................3
Financial and non-financial factors.............................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................6

ESSAY TOPIC
“An understanding of the decision making for the business with the help of NPV method
and payback period method along with various financial and non-financial factors”
INTRODUCTION
Business decision making is compulsorily required for business organisation to achieve its
pre-determined mission and vision. For this, various projects need to undertake with having lots
of options to opt according to the suitability of business (Anderson and Burchell, 2019). The
present essay outlines the importance of Net present value and Payback period method used to
make an effective investment decision. The essay also discusses the financial as well as non-
financial factors that plays an important role for the growth of business.
ESSAY BODY
XYZ Ltd. is budgeted hotel chain currently offers services to the UK and other parts of
Europe. Due to having limited resources, company outsourced some kind of services such as
Laundrette and hotel system software (Berger and Bouwman, 2017).. Now, the strategic manager
of XYZ Plc is deciding to make investment in either a software or a laundrette project. Among
these two options, the managers has been called to make final decision on the basis of their
outcome receive by company in future period of time. Initial investment needed for Project A
i.e. Software is £100,000 whereas the same for Project B is £120,000 having discount rate of
11%.
Net present value with its benefits and drawbacks
The differentiation between present value of cash outflows and inflows over a time period
is known as Net Present Value. It put more focus on such concept that states the amount earned
by organisation at present is far much more than the amount earned by them in future time period
(Cunningham and et. al., 2018). It directs the management to calculate return on investment
(ROI) by considering time value factor. Such method contains various benefits which includes
that It drives organisation to focus on converting its income generated through its project int
present value of money. It is imply based on the time value of money. As every method has
disadvantages too which must also consider by the management of XYZ Plc. Before using such
method. NPV contains drawbacks which includes that it prohibit Hotel to examine the rate of
return expected from the desired project (Karadag, 2015). It also brings difficulties for an
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organisation to answer the different level of amount required to invest for pre-determined
project. Which could increases expenses of business.
The NPV for both the project of XYZ plc is given below:
PROJECT A: Software
Year Net cash
flow (A)
PV factor
Calculation
PV factor @
11% (B)
Discounted cash
flow (A*B)
1 28,000 1/(1+0.11) 0.9009009 25225.23
2 32,000 1/(1+0.11)^2 0.81162243 25971.92
3 35,000 1/(1+0.11)^3 0.73119138 25591.7
4 55,000 1/(1+0.11)^4 0.65873097 36230.2
5 78,000 1/(1+0.11)^5 0.59345133 46289.2
Total discounted
cash flow
159308.2
Less: initial
investment (0) 100000
Net Present value 59308.25
PROJECT B: Laundrette
Year Net cash
flow (A)
PV factor
Calculation
PV factor @
11% (B)
Discounted cash
flow (A*B)
1 31,000 1/(1+0.11) 0.9009009 8928.571429
2 38,000 1/(1+0.11)^2 0.81162243 15943.87755
3 43,000 1/(1+0.11)^3 0.73119138 17794.5062
4 64,000 1/(1+0.11)^4 0.65873097 19065.54235
5 89,000 1/(1+0.11)^5 0.59345133 22697.07423
Total discounted
cash flow
185186.8
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Less: initial
investment (0) 120000
Net Present
value
65186.76
On the basis of this calculation it is identified that for project A, NPV is £59308 against initial
investment of £100000 while NPV id project B is £65186 against initial investment of £120000.
With this it can be identified that project B is more effective for the hotel.
Payback period with its benefits and drawbacks
Payback period method is the time when initial investment for the project equals to the
amount earned after execution of such project. It makes easy for an organisation to examine the
time period under which all initial cash outlay has been recovered. It has some benefits that
motivates XYZ Plc. To use such method. Its benefits includes ease of analysing investment risk
which could damage the objectives of an organisation (Raghunath and Devi, 2018). It makes
easy for the management to make proper decisions to tackle future risk. Along with this, it also
helps in forecasting situations for shorter period that makes employees ready to face with more
efficiency. It contains several drawbacks as well such as it clearly ignores the time value of
money and also avoids timing of cash inflows within payback period (Schmidt, Malaschewski
and Mörtl, 2015).
The payback period for both the project of XYZ plc is given below:
PROJECT A: Software
Year Net cash flow Cumulative Cash Flow
1 28,000 28000
2 32,000 60000
3 35,000 95000
4 55,000 150000
5 78,000 228000
Initial investment - £100,000
Recovered amount in 3 years - £95,000
Difference amount - £5,000
Payback period = 3 + (5000 / 55000 * 11)
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= 3 + 1
= 3 years 1 month
PROJECT B: Laundrette
Year Net cash flow Cumulative Cash Flow
1 31,000 31000
2 38,000 69000
3 43,000 112000
4 64,000 176000
5 89,000 265000
Initial investment - £120,000
Recovered amount in 3 years - £112,000
Difference amount - £8,000
= 3 + (8000 / 64000 * 11)
= 3 + 1.375
= 3 years 1.4 months
Both the project has similar payback period but project B is better.
Financial and non-financial factors
Financial factors affects most to the financial stability of an organisation which are related
with the economic environment of business. These factors includes fluctuations in government in
context of interest rates on loans, taxation policy etc. In the present scenario, the company can
opt bank loan as sources of raising funds as it charges comparatively low to other sources of
funding options (Weygandt and et.al., 2018).
Non-financial factors are related with elements that are connected with management
support, changing rules and regulations etc. Fluctuations in legislation laws due to Brexit drives
management to make suitable decision for the betterment of employees as well as an
organisation. Undertaking Project-B is much better than Project-A due to lesser payback period.
CONCLUSION
It is summarised from the above essay that before execution of any project, strategic
management must required to make an effective decision in order to ensure better results in
future time period. There are different options available for the management to opt suitable one
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which can be possible through examining each option by identifying their advantages and
drawbacks. Along with this, it also required to understand the importance of financial and non-
financial factors that helps an organisation to execute its business operations more smoothly.
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REFERENCES
Books and Journals
Anderson, S.E. and Burchell, J.M., 2019. The Effects of Spirituality and Moral Intensity on
Ethical Business Decisions: A Cross-Sectional Study. Journal of Business Ethics,
pp.1-13.
Berger, A.N. and Bouwman, C.H., 2017. Bank liquidity creation, monetary policy, and financial
crises. Journal of Financial Stability, 30, pp.139-155.
Cunningham, B., and et. al., 2018. Accounting: Information for Business Decisions. Cengage
AU.
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A
strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40.
Raghunath, K.M.K. and Devi, S.T., 2018. Effectiveness of Risk Assessment Models in Business
Decisions: Reinforcing Knowledge. International Journal of Sociotechnology and
Knowledge Development (IJSKD), 10(2), pp.35-53.
Schmidt, D.M., Malaschewski, O. and Mörtl, M., 2015. Decision-making process for product
planning of product-service systems. Procedia CIRP, 30, pp.468-473.
Weygandt, J. J. and et.al., 2018. Managerial Accounting: Tools for Business Decision-making.
John Wiley & Sons.
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