Importance of Business Decision Making with NPV and Payback Methods

This essay examines the critical role of business decision-making, focusing on the application of Net Present Value (NPV) and payback period methods alongside financial and non-financial factors. The context is a small to medium-sized hospitality business, XYZ Plc, considering investment in outsourced services like laundrette and hotel software. The essay explains the NPV method, its benefits, and drawbacks, along with the payback period method. It then calculates NPV and payback periods for two hypothetical projects, concluding which investment would be more beneficial. Additionally, the essay discusses the significance of financial factors such as net profit, return on investment, and interest rates, and non-financial factors like employee contributions, in influencing business decisions. The conclusion emphasizes the importance of project viability analysis and the use of NPV and payback methods in making effective investment decisions.

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................................................................................................................................5

ESSAY TOPIC
“Importance of decision making for the business taking help of NPV method as well as
payback period method in addition with various financial and non-financial factors”
INTRODUCTION
Business decision making is an activity in which top authority of an organisation are
involved with the purpose of achieving desired goals and objectives within pre-determined time
frame (Anderson and Burchell, 2019). In such process, managers mainly emphasis on financial
as well as non-financial factors that can impacts the profitability and productivity of an
organisation. The present essay discusses the importance of these factors during decision making
process. In addition with this, the essay also explains the investment appraisal techniques which
includes net present value and payback period method.
ESSAY BODY
XYZ Plc is small and medium sized organisation which deals in providing hospitality
services to the people of United Kingdom. Such hotel outsourced their different services which
includes laundrette and hotel software technique due to not having adequate amount of funds to
undertake on their own (Gorshkov, Murgul and Oliynyk, 2016). To achieve growth and
expansion, the managers of XYZ Plc decided to invest in either of these outsourced hotel
services. For this, it is important for the management to consider and analyse both the proposals
with using method of NPV and Payback method. In this context, the initial investment the
company going to make to undertake software is £100,000 whereas investment made for
undertaking Laundrette is £120,000 on return rate of 11%.
Net present value with its benefits and drawbacks
Net Present value is considered as an effective method which is used to compared cash
inflow with cash outflow over a particular period of time, It is most useful in making planning
regarding capital budgeting and investment planning so as expect the profit after the completion
of project. The advantage of using such method received by an organisation is that it makes easy
for management to identify the opportunity cost of the alternate project. On the other hand, it
has a disadvantage too such as it needed professional knowledge and most useful for
organisations operated at large scale (Hopkinson, 2017).
The NPV for both the project of XYZ plc is given below:
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With this it can be identified that project B is more effective for the hotel. It has been
analysed from the above calculation that NPV for Project A is £59308 against the investment of
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£100000. Whereas the NPV of Project B is £65186 against the initial investment of £120000.
Thus, it can be easily concluded that adoption of Project B will be more beneficial for XYZ Ltd.
Payback period with its benefits and drawbacks
It makes easy for the management of XYZ Ltd. to identify the actual time taken for getting
return on their investment with the help of using Payback period method. Using of such kind of
method is easy due to simple calculation due to which small and medium sized organisations can
easily adopt such method whereas it has disadvantage too such as it ignores tie value of money
which impacts mostly to the decision of an organisation (Maxwell, 2016).
The payback period for both the project of XYZ plc is calculated as under:
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)
= 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
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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
Non-Financial factors plays an important role in influencing the stability of the government
within United Kingdom, effective management and contribution of employees. Getting
maximum support from management in terms of framing an effective policies and also gets help
from employees to implement such policies in an effective manner increases the possibilities of
an organisation to achieve its desired goals and objectives (Mola and et. al, 2020).
Financial factors are those factors which impacts the decision making regarding achieving
financial stability of an organisation. It includes net profit, return on investment, cash flow
statement etc. which are prepared on timely basis so as to identify the true and fair financial
position of business. These factors contains crucial information about daily business transactions
which makes easy for management to make decision considering the financial position of an
organisation. These factors also includes interest rates and taxation policies which hugely
impacts the decision-making process of business. To undertake the project XYZ Ltd. need to
take loan from bank due to charging low rate of interest (Raghunath and Devi, 2018).
CONCLUSION
From the above discussion, it has been concluded that an organisation need to first analyse
the viability and relevancy of their project options in order to make easy for their management to
make an effective decision regarding the investment made for getting maximum return in near
future. In order to make an effective decision, the method of NPV and payback period both are
beneficial. As per above analysis, it is identified that NPV Project B is most suitable in
comparison with Project B due to getting maximum return on investment in near future.
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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.
Gorshkov, A., Murgul, V. and Oliynyk, O., 2016. Forecasted Payback Period in the Case of
Energy-Efficient Activities. In MATEC Web of Conferences (Vol. 53, p. 01045). EDP
Sciences.
Hopkinson, M., 2017. Net Present value and risk modelling for projects. Routledge.
Maxwell, A., 2016. Investment decision-making by business angels. In Handbook of Research
on Business Angels. Edward Elgar Publishing..
Mola, L. and et. al., 2020. Business intelligence system design and its consequences for
knowledge sharing, collaboration, and decision-making: an exploratory study.
In Information Diffusion Management and Knowledge Sharing: Breakthroughs in
Research and Practice (pp. 382-402). IGI Global.
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.
Weygandt, J. J. and et.al., 2018. Managerial Accounting: Tools for Business Decision-making.
John Wiley & Sons.
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