Business Decision Making: Payback Period and NPV Analysis for XYZ plc

This report analyzes the business decision-making process for XYZ plc, focusing on two potential investment projects. It calculates the payback period and net present value (NPV) for each project (Software and Laundrette), providing a detailed financial analysis. The report compares the financial factors, including the advantages and disadvantages of both methods. It also evaluates non-financial factors, such as team participation and employee motivation, which influence decision-making. Based on the analysis, the report recommends the project with the higher NPV (Project B) to maximize operational efficiency and profitability. The report concludes by emphasizing the importance of investment appraisal strategies in business decision-making.

Business Decision Making

INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
1. Calculation of Payback Period.................................................................................................1
2. Calculation of Net Present Value............................................................................................1
3. Analysis...................................................................................................................................2
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Business decision making is the process which help the managers to evaluate the each
project performance and in future it is beneficial for the organization or not (Baker, 2018). In this
report, XYZ plc has two projects where they can invest to maximise their profitability or overall
performance. This assessment cover the calculation of MPV or Payback period and furthest
evaluates the financial or non financial factors which aid in decision making process.
MAIN BODY
1. Calculation of Payback Period
Year Project A
(Software)
Cumulative
cash flow
Project B
(Laundrette)
Cumulative cash
flow
Year 0 £ 100,000 - £ 120,000 -
Year 1 £ 28,000 £ 28,000 £ 31,000 £ 31,000
Year 2 £ 32,000 £ 60,000 £ 38,000 £ 69,000
Year 3 £ 35,000 £ 95,000 £ 43,000 £ 112,000
Year 4 £ 55,000 £ 150,000 £ 64,000 £ 176,000
Year 5 £ 78,000 £ 228,000 £ 89,000 £ 265,000
Formula:
Payback period = Year before full recovery + unrecoverable cost / cash flow during the year
Project A = 3 + £ 5000 / £ 55000
= 3 + 0.90
= 3.90 year
Project B = 4 + £ 56000 / £ 64000
= 4 +0.87
= 4.87 year
2. Calculation of Net Present Value
Year Software Project
(£)
Present
Value @
11%
Discounted
Cash Flow
0 - 100,000 1 -100,000
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1 28,000 0.900901 25,225.23
2 32,000 0.811622 25,971.92
3 35,000 0.731191 25,591.7
4 55,000 0.658731 36,230.2
5 78,000 0.593451 46,289.2
Net Present Value £ 59,308.25
Year Laundrette
Project (£)
Present
Value @
11%
Discounted
Cash Flow
0 - 120,000 1 -120000
1 31,000 0.900901 27,927.93
2 38,000 0.811622 30,841.65
3 43,000 0.731191 31,441.23
4 64,000 0.658731 42,158.78
5 89,000 0.593451 52,817.17
Net Present Value £ 65,186.76
3. Analysis
Financial factors:
Payback Period: It is among the correct forms of capital budgeting, that lets the
company make choices pertaining to their expenditure. This approach determines the duration of
the investment's recovery (Bennun And et.al., 2018). This lets managers pick the most
appropriate one which takes less time to recover the cost from the client. The shorter payback
time is preferred as compared to the return of another project. It has several benefits as well as
drawbacks which required analysing by the managers of XYZ plc and it discussed below:
 Benefits: The main benefit of this strategy is its effectiveness which helps the managers
to evaluate the recovery period of invested capital. It is a simple way to compare many
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initiatives and then choose one who has the shortest payback period. There are other
practical and philosophical drawbacks to the payback too. Simple to calculate and
involve less data, supervisors can accurately evaluate the length of the job payback. This
allows companies to make quick choices that are truly necessary for energy-stricken
business owners.
 Drawbacks: The major downside to the payback period method is that it doesn't
understand the time value of capital. Investment returns received from earlier years of a
project have a greater weight than preserved later-life profits. Since a project has a rigid
payback period, this means that it is not productive. If the anticipated returns end or are
substantially decreased at the payoff date, a project will never yield a benefit and would
be an unacceptable investment in any way.
Net Present Value (NPV): It is also the approach of capital budgeting that is used for
determining the feasibility of any plan (Skyrius, 2018). It is the current value of any projects
which gives the managers the impression why they should or should not invest in it. Positive
NPV picked because the company is more efficient or advantageous on the other side negative
NPV refused because investment is not competitive for the enterprise.
 Benefits: The NPV method also tells the organizations that how much income will be
created by an investing into particular project and how much in capital. Investment gains
are projected to have no impact on the net present value in the future as there will be
more reliable cash flows in previous times.
 Drawbacks: It requires some conjecture on the company's equity expense. Having
relatively low capital costs would lead to insufficient investment. To believe that the cost
of capital are too high which would result in overlooking of all good proposals However,
when comparing two projects of similar scale, the NPV method is not efficient if initial
investment is different. Provided that the NPV solution consists of a dollar response, the
NPV performance value is largely dictated by the data distance.
Above calculation of payback period or net present value (NPV) represent the value which
helps the managers of XYZ plc to make their decisions after evaluating the findings. Such as
Project A is more favourable in relation to Project B and the other side, in context of NPV,
Project B is more favourable to invest. Company’s managers should invest in Project B because
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of higher NPV which maximise the operational efficiency as well as effectiveness. It will further
improve the profitability of the business operations.
Non financial factors:
In context of the organization where managers have to make decisions to maximise the
productivity as well as profitability of their operations (Tseng, Chiu and Liang, 2018). There are
several non financial factors which identified by the managers of XYZ plc which aid in decision
making process such as participation of team mates which helps in providing creative or
innovative ideas to get success in the business operations. On the other side, motivate employees
in order to retain them to maximise the overall performance because every time when company
hire new employee, they have to provide them essential training which is costly for them. So
make sure to retain their staff members to minimise their training cost and these factors should
consider into decision making process to improve operational efficiency or effectiveness.
CONCLUSION
On the basis of above discussion it has been observed that business decision making process
is essential for the organization. There seem to be a variety of investment appraisal strategies that
help the company find the right way to increase its earnings. Net present benefit or payback
cycle is the most accessible strategy that administrators follow in order to determine the
operational viability of a project. It has many benefits or drawbacks that administrators would
need to determine before they recommend it.
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REFERENCES
Books & Journals
Baker, A. J., 2018. Business decision making. Routledge.
Bennun, L. And et.al., 2018. The value of the IUCN red list for business decision‐
making. Conservation Letters. 11(1). p.e12353.
Skyrius, R., 2018. Business Decision Making. In 2001 Informing Science Conference (Vol. 1).
Tseng, M. L., Chiu, A. S. and Liang, D., 2018. Sustainable consumption and production in
business decision-making models.
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