Business Decision Making: Investment Appraisal and Financial Factors

This essay delves into the critical aspects of business decision-making, examining the decision-making process and the application of investment appraisal techniques. It begins with an introduction to decision-making as a core management function, emphasizing its significance for organizational success. The essay then presents a case study of ABC plc, exploring two investment options: a Motor Software Project and a Hardware Project. The feasibility of each project is assessed using the payback period and net present value (NPV) techniques. The NPV calculations and payback period computations are provided for both projects, leading to recommendations based on the analysis. The essay concludes by discussing the influence of both financial and non-financial factors on the decision-making process, highlighting the importance of considering a wide range of elements. References to relevant academic literature are included.

BUSINESS DECISION-
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
The decision making is the process of making logical choices from the available options.
It is an integral part of the management but has high importance. The growth and success of
company is dependent on the decision it takes for the organisation. Effective management
decision making involves consideration of all the factors that can influence the decisions. Present
study is about the decision-making process and the use of investment appraisals techniques in
making more accurate decisions.
TASK
Decision making requires the management to take sound and rational decisions. There are
number of decisions taken by the management making it an critical and important part of
organisation. Decisions are taken at various levels of organisation for achieving the
organisational goals and objectives (Klačmer Čalopa, 2017). Decision-making is defined as
process of making choices by identifying decisions, by gathering informations and by assessing
the alternative resolutions. Step-by-step by approach helps organisations in making more
deliberate and informed decisions through organizing relevant informations & defining the
alternatives.
ABC plc is planning to make investment in new business for expansion. Company after
checking variety of alternatives is available with the two alternatives that are Project A of Motor
Software Project and Project B of Hardware project. Company expects return of 12% from the
above projects. The feasibility of both the projects is assessed using the investment appraisal
techniques. It gives the management with results on the basis of which it can decide whether to
make investments or not in given projects. They also enable to make comparisons between the
projects.
Payback Period
The payback period is an investment appraisal technique that is used by analysts and
experts to check the viability of project. It tells the period within which the project will be
reaching its break even point and make profits.
Net Present Value
Net present value says projects is profitable if NPV of project is positive. It is calculated
using the concept of time value of money. It shows the present value of future cash flows. NPV
1

is derived after deducting the initial investment from aggregate cash flows from project after
discounting (Zamani, Maeen and Haghparast, 2017).
PROJECT B - Motor Software project.
Net Present Value of Project B
Computation of NPV
Year Cash inflows
PV factor @
12% Discounted cash inflows
1 8000 0.893 7142.8571428572
2 12000 0.797 9566
3 16000 0.712 11388
4 20000 0.636 12710
5 30000 0.567 17023
Total discounted
cash inflow 57831
Initial investment 40000
NPV (Total
discounted cash
inflows - initial
investment) £17831
Payback period of project B
Computation of Payback period
Year Cash inflows Cumulative cash inflows
1 8000 8000
2 12000 20000
3 16000 36000
4 20000 56000
5 30000 86000
Initial 40000
2

investment
Payback
period 2
1.7
Payback
period 3 year and 7 months
PROJECT B – Hardware Project
Net present value of Project B
Computation of NPV
Year Cash inflows
PV factor @
12%
Discounted
cash inflows
1 10000 0.893
8928.57142857
14
2 20000 0.797 15944
3 25000 0.712 17795
4 30000 0.636 19066
5 40000 0.567 22697
Total discounted
cash inflow 84430
Initial investment 60000
NPV (Total
discounted cash
inflows - initial
investment) £24430
Payback period of project B
Computation of Payback period
Year Cash inflows
Cumulative cash
inflows
1 10000 10000
3

2 20000 30000
3 25000 55000
4 30000 85000
5 40000 125000
Initial investment 150000
Payback period 2
1.5
Payback period 3 year and 5 months
Recommendations
NPV Payback Period
Project A £17831 3 years & 7 months
Project B £24430 3 years & 5 months
The above analysis is performed to check the more profitable project. Company is
available with two options to invest either in the Motor Software project (A) or Hardware Project
(B). NPV of project A is £17831 and of project B is £24430. Concept of NPV says that project
is considered profitable if the net present value of project is positive. In the given alternatives
NPV of both projects is positive, that shows that both the projects are profitable. But the one
having higher profits should be selected as higher the NPV more is the profitability. This
technique gives information about choosing project B.
The investment decision is checked applying other technique that is pay back period.
Payback period shows the time within which company will be recovering its costs. Pay back
period of Project A is 3 years and 7 months and payback of project B is 3 years and 7 months.
Shorter the pay back period more beneficial for the company. Payback period of both the
projects is not high. Payback of project A is more even when the investment is low. Project B
involves higher investment but the payback period is less from project A. This shows project will
start generating profits earlier than A. therefore company should adopt project B of Hardware
having shorter payback period.
Financial and Non Financial factors influencing decision-making process
Financial factors
The financial factors includes the facts and figures of business operations. They are
related with the revenues, costs and profits. These are to be considered by the management in
4

heir decision-making process. They enable the management to check the performance of
company, funds available and to make estimates about future (Wang and Byrd, 2017). Financial
statements statements provide an important financial base for organisation to make the
decisions.
Non Financial Factors
Non financial factors are not concerned with the quantitative aspects of decisions. These
factors include marketing strategies need and demands for the products, efficiency of the
workforce, government rules and regulations. These factors can strongly influence the business
and business decisions, therefore the management have to take into account before making
coming at any decision (He, Wang and Akula, 2017).
CONCLUSION
From the above research conclusions are drawn that business making is an essential part
of management. Every business proceeds on the decisions taken by them. Managers are required
to gather informations for making more informed decisions considering both financial and non
financial factors.
5

REFERENCES
Books and Journals
Klačmer Čalopa, M., 2017. Business owner and manager’s attitudes towards financial decision-
making and strategic planning: Evidence from Croatian SMEs. Management: journal of
contemporary management issues. 22(1). pp.103-116.
Zamani, M., Maeen, M. and Haghparast, M., 2017. Implementation of business intelligence to
increase the effectiveness of decision making process of managers in companies providing
payment services. The Journal of Internet Banking and Commerce. pp.1-24.
Wang, Y. and Byrd, T.A., 2017. Business analytics-enabled decision-making effectiveness
through knowledge absorptive capacity in health care. Journal of Knowledge
Management.
He, W., Wang, F.K. and Akula, V., 2017. Managing extracted knowledge from big social media
data for business decision making. Journal of Knowledge Management.
6