Business Decision Making: Investment Appraisal Techniques - Suffolk

This essay delves into the critical aspects of business decision-making, focusing on investment appraisal techniques such as the payback period and net present value (NPV) within the context of DD plc, a vegetarian food manufacturer in the UK. The analysis includes a computation of the payback period for two projects, smoothies (Project A) and non-dairy products (Project B), revealing Project A as slightly more profitable due to its shorter payback duration. Furthermore, the essay calculates the NPV for both projects, indicating Project B as the more favorable investment option based on its higher NPV. Beyond quantitative analysis, the report explores the influence of both financial factors (liquidity, capital structure, inflation) and non-financial factors (government policies, customer relations) on business decisions, emphasizing the need for adaptability and customer-centric strategies. It concludes that using capital budgeting tools aids in making informed decisions regarding project profitability and shareholder value, while also highlighting the importance of mitigating the impact of uncontrollable external factors for effective decision-making. Desklib provides a platform for students to access similar solved assignments and resources.

Essay

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Computation of pay back period of DD plc. ..........................................................................1
2. Calculating net present value of project A and B ..................................................................2
3. Explaining financial and non financial factors affecting business decisions .........................3
CONCLUSION................................................................................................................................4
REFERENCES ...............................................................................................................................5

INTRODUCTION
Business decision making is a process in which every organisation has to take several
decisions related to operating and financial management of an enterprise (Almeida-Filho, de
Lima Silva and Ferreira, 2021). This report contains the computation of various investment
appraisal techniques such as pay back period and net present value of two different projects of
DD plc, vegetarian food manufacturing operating in UK. There are several financial and non
financial decisions which impact the decision making process is also encompassed in this report.
MAIN BODY
1. Computation of pay back period of DD plc.
Payback period - In capital budgeting decisions , there are different method to evaluate
the projects. In traditional method, it does not consider the time value of money. This tool is used
to know the duration or time period in which an cost of an investment in recovered (Cheng and
et.al.,2021) . while evaluating projects, shorter the pay back period better it is for an organisation
whereas higher pay back period projects are not considered profitable. It is calculated by taking
initial investment and average annual inflows (Remenarić, Čevizović and Kenfelja, 2018).
Project A (smoothies) Project B (non diary )
Year Cash flow Cumulative cash
flows
Cash flow Cumulative cash flow
0 -158000 -158000 -155000 -155000
1 72000 86000 71,000 -84000
2 78000 -8000 73,000 -11000
3 82000 74000 97,000 86000
4 110000 184000 118,000 32000
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5 125000 309000 121,000 153000
Payback period (project A) = 2 year + 8000 / 82000
= 2 year + 0.097
= 2.09 years.
Payback period (project B) = 2 years + ( 155000 - 144000 ) / 97000
= 2 Years + 11000 / 97000
= 2.11 years
From the above calculation of DD plc, it can be analysed that project A is having
payback period of 2.09 years and project B is having 2.11 years. Hence, it can be concluded that
project A is receiving its cost of investment in less duration than project B. Therefore, project A
is more profitable for an enterprise.
2. Calculating net present value of project A and B
Net present value - There are another methods of investment appraisal techniques which
consider time value of money and adjust time values to present values using discounting factor.
It is useful in selecting mutually exclusive projects (Khreis and et.al., 2020). It is calculated by
taking difference of total present value of cash inflow and total present value of cash outflows.
It's value is compared with zero. If value is greater than zero, then the respective project will be
selected(Hidajat, 2020).
Project A (Smoothies) Project B (Non dairy)
Year Cash flow Discount factor
@15%
Present value Cash flow Discount
factor @15%
Present value
1 72000 0.87 62568 71,000 0.87 61699
2 78000 0.756 58968 73,000 0.76 55188
3 82000 0.66 53874 97,000 0.66 63729
4 110000 0.57 62810 118,000 0.57 67378
5 125000 0.5 62125 121,000 0.5 60137
300345 308131
2

Project A = Net present value of cash inflow – Net present value of cash outflow
= 300345 – 158000
= 142345
Project B = Net present value of cash inflow – Net present value of cash outflow
= 308131 – 155000
= 153131
The above net present values of project A is 142345 and project B is 153131. Project B is
having higher NPV than project A. Therefore, project B will be selected from the above two
projects.
3. Explaining financial and non financial factors affecting business decisions
Business decision making is a process in which an organisation is required to take
decisions for accomplishing the objectives of the company . Every organisation set standards and
then compare actual and pre determined standards(Saadaoui, 2022). Through the monitoring of
performance, deviations can be find out and top level managers can revise the plan for correcting
deviations in the performance. There are various financial as well as non financial factors which
can be elaborated as given below-
 Financial factors - Those factors which directly affect the decisions of the
organisation such as liquidity , leverage and organisation structure of the firm.
Capital structure decisions relate to deciding the proportion of debt and equity for
financing the organisation. Increasing the debt in an enterprise helps to lower the cost of capital
and increase the value of the firm (Nesticò and Maselli 2020). Hence, determining cost and value
of the firm assists in taking several financing decisions.
Liquidity is essential for running the operations of the business smoothly. Liquid assets
are those which are easily converted into cash. Maintaining optimum level of liquidity is a key
challenge for the organisation.
Inflation is defined as general rise in currency level. general rise in price of commodities
in the market impact the buying capacity of public. It affects the purchasing power of the
consumers(Nalawade and Panwar, 2021).
Non financial factors - Those factors which indirect impacts the decision making process
are discussed as given below-
3

Every country follows laws and legislation compiled by the government of particular
nation. The amendments in the policies framed by government impacts the management of an
enterprise. For instance, increase in the tariff rates reduces the trading activities which eventually
decrease the operating income of the business. an enterprise should frame the plans with a
flexible approach so that new conditions would not impact the business profitability (Verma,
2020)
Enhancing good relationships with the customers helps to boost the public relations and
increase the trust of the consumers. Besides, profitability company should also focus on the
maintaining healthy relationship with customers(Hennessy and et.al., 2018).
CONCLUSION
From the above report, it can be concluded that using capital budgeting tools helps to take
decisions regarding profitability of different project. It signifies the amount of dividend for
shareholders. The impact of financial and non financial is uncontrollable but still several
measures can be taken to minimise the impact of external factors and results in effective decision
making.
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REFERENCES
Books and Journals
Almeida-Filho, A.T.D., de Lima Silva, D.F. and Ferreira, L., 2021. Financial modelling with
multiple criteria decision making: A systematic literature review. Journal of the
Operational Research Society. 72(10). pp.2161-2179.
Cheng, G and et.al.,2021. Does energy productivity and public-private investment in energy
achieve carbon neutrality target of China?. Journal of Environmental Management. 298.
p.113464.
Hennessy, J and et.al., 2018. Towards smart thermal grids: Techno-economic feasibility of
commercial heat-to-power technologies for district heating. Applied Energy. 228.
pp.766-776.
Hidajat, T., 2020. Rural banks fraud: a story from Indonesia. Journal of Financial Crime.
Khreis, H and et.al., 2020. Traffic-related air pollution: Emissions, human exposures, and health:
An introduction. In Traffic-Related Air Pollution (pp. 1-21). Elsevier.
Nalawade, R. and Panwar, N.L., 2021. Experimental investigation on biomass fired dryer for
drying of agricultural products. International Journal of Ambient Energy. 42(15).
pp.1765-1768.
Nesticò, A. and Maselli, G., 2020. Declining discount rate estimate in the long-term economic
evaluation of environmental projects. Journal of Environmental Accounting and
Management. 8(1). pp.93-110.
Remenarić, B., Čevizović, I. and Kenfelja, I., 2018. Binomial model for measuring expected
credit losses from trade receivables in non-financial sector entities. Ekonomski
Vjesnik.31(1).pp.125-135.
Saadaoui, H., 2022. The impact of financial development on renewable energy development in
the MENA region: the role of institutional and political factors. Environmental Science
and Pollution Research. pp.1-12.
Verma, P., 2020. Promethee: a tool for multi-criteria decision analysis. In Multi-Criteria decision
analysis in management(pp. 282-309). IGI Global.
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