Business Decision Making Essay: Project Selection and Analysis

This essay analyzes business decision-making processes, focusing on project appraisal techniques used by X plc, a vehicle parts company. The essay evaluates two potential investment projects using the payback period and net present value (NPV) methods. Calculations and analyses are provided for both projects, leading to a recommendation on which project to invest in. The essay highlights the advantages and disadvantages of each technique, emphasizing the importance of considering the time value of money. Financial factors like return on investment and opportunity cost, along with non-financial factors such as employee morale and legislative requirements, are also discussed. The practical implications of management decisions and the importance of considering shareholder preferences are also included. The essay concludes by recommending project B, which has a higher NPV, as the more profitable investment for X plc.

Running head: BUSINESS DECISION MAKING
Business decision making
Name of the student
Name of the university
Student ID
Author note

1BUSINESS DECISION MAKING
Introduction
X plc that is engaged in dealing with vehicle parts conduct its business in parts of
Europe and UK. At present the management of the entity is looking for investing in the new
business and selected 2 projects to continue with one among those. The task will evaluate 2
projects with various investment appraisal techniques such as payback period and net present
value. Based on the outcomes the task will recommend the best one to be considered for
investment (Brailsford, Churilov and Dangerfield 2014).
1. Calculation of payback period
Project A
Calculation –
Year Cash flow Cumulative cash flow
0 -£ 20,000.00 -£ 20,000.00
1 £ 8,000.00 -£ 12,000.00
2 £ 10,000.00 -£ 2,000.00
3 £ 12,000.00 £ 10,000.00
4 £ 15,000.00 £ 25,000.00
5 £ 19,000.00 £ 44,000.00
Payback period in years =2+(ABS(D15)/C16)

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Payback period = 2+(ABS(2000)/12000) = 2.17 years
Project B
Calculation has been made as follows –
Year Cash flow Cumulative cash flow
0 -£ 30,000.00 -£ 30,000.00
1 £ 10,000.00 -£ 20,000.00
2 £ 15,000.00 -£ 5,000.00
3 £ 17,000.00 £ 12,000.00
4 £ 19,000.00 £ 31,000.00
5 £ 20,000.00 £ 51,000.00
Payback period in years =2+(ABS(D34)/C35)
Payback period = 2+(ABS(5000)/17000) = 2.29 years
2. Computation of NPV
Project A

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Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial investment
(a) -£ 20,000.00
Cash inflows (a)
£
8,000.00
£
10,000.0
0
£
12,000.
00
£
15,000.
00
£
19,000.
00
Discount arte @
10% (b) 1
0.909090
909
0.82644
628
0.75131
48
0.68301
346
0.62092
132
Discounted cash
flow (a*b) -20000 7272.73 8264.46 9015.78
10245.2
0
11797.5
1
NPV $26,595.67
Project B
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial investment
(a)
-£
30,000.0
0
Cash inflows (a)
£
10,000.00
£
15,000.0
0
£
17,000.0
0
£
19,000.
00
£
20,000.
00
Discount arte @
10% (b) 1 0.909090909
0.82644
628
0.75131
48
0.68301
346
0.62092
132

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Discounted cash
flow(a*b) -30000 9090.91
12396.6
9
12772.3
5
12977.2
6
12418.4
3
NPV
$29,655.
64
3. Analysis
Payback period
It is the time that is expected to be taken by the project to regain the amount of initial
investment through generating the cash flows from the investment. Estimates for the cash flows
are generally quite accurate for the near periods as compared to the cash flows for the distant
future period on account of operational as well as economic uncertainties. Hence, projects with
shorter payback period are generally preferred over the projects with longer payback period.
Payback period can be used for identifying the inherent risk as the same considers initial inflows
and disregard cash flows after the time where initial investment is regained (Gorshkov et al.
2014).
Advantages associated with this technique are (i) Simple method – this technique is
simple as against the techniques used by number of entities that is not only biased but also
difficult in computing. Conversely, payback period takes into account the number of years for
regaining the initial investment which is easy as well simple in understanding (ii) offers quick
analysis – it helps in determining the project that can generate faster returns with available
resources. Managers of the organization use this technique for quick analysis in context of the
projects with shorter payback period and small investments (Lin, Chang and Chung 2015).

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Disadvantages associated with this technique are (i) TVM (time value of money) – it
disregards TVM that is the discounted cash flows are not considered which is considered as
crucial while taking investment related decisions as money received today differs from the value
of money if the same is received tomorrow (ii) Cash flow after payback period – Generally cash
flow of any project with long-term can be irregular and may generate earning even after
regaining the initial investment amount. However, under this technique projects with long
payback period are generally overlooked (Gorshkov et al. 2018).
Net present value (NPV)
It represents changes in the net worth of any organization that will be resulted from
accepting of any project over the lifetime of the same. It is equal to the present value of any
project’ net cash flows including both inflows as well as outflows. This technique is considered
as most reliable among all the techniques used for analysing investment appraisal as the same is
dependent upon the technique of discounted cash flows. Project is accepted if the NPV of any
project is positive and rejected if the same resulted into negative amount (Kovačić and Bogataj
2017).
Advantages associated with this technique are (i) TVM – major advantage of this
technique is that it accounts for the basic idea that the money received today differs from the
value of money if the same is received tomorrow. In each of the period under concern cash flows
are discounted by other period of the capital cost (ii) generation of profit – this technique also
represents whether the project will generate profit for the entity or not and if yes then how much
in context of dollars (iii) capital cost – it accounts for the capital cost and inherent risk while
making the estimations in context of future period. Cash flows estimated for the future period is

6BUSINESS DECISION MAKING
less certain as compared to near period and hence, the future cash flows have less impact on
NPV as compared to near period cash flows (Leyman and Vanhoucke 2017)
Disadvantages associated with this technique are (i) forecasting error – for forecasting the
cash flows associated with the project through NPV the entity makes number of assumption
through applying incomplete information. For instance, forecast for 2 years can be accurate
however forecast for 10 years may not be accurate as the same involves guesswork (ii) it requires
estimating the discount rate of the project that is the percentage used for converting the future
cash flows into present value. Discount rate is dependent on the interest rate and project’s risk.
Hence, small changes in the interest rate will change the NPV of the project and which in turn
may make the decision vague (Žižlavský 2014).
From the above it can be suggested that though the payback period for project A is lower
as compared to project B, as the NPV is more for Project B, the same shall be chosen over
project A. NPV has been taken as decisive factor as it is more reliable as compared to payback
period techniques as the same ignores TVM.
Financial and non-financial factors
Financial factors taken into account for making decisions involves – (i) return on
investment as the same has direct impact on the business profitability (ii) opportunity cost as
while making the choice for any one project opportunity for making another is lost (iii) impact
on resources as while the business profit is computed from the probable decision overall impact
on the sales, accounting, information technology, production and human resources are also taken
into account (Tjader et al. 2014)

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Non-financial factors taken into account for making decisions involves – (i) achieving
requirements associated with current as well as future legislation (ii) enhancing the morale of the
employees that will make the recruitment as well as retaining the employees easier (iii)
estimating and dealing with the future threats including providing protection to intellectual
property against the potential competition (iv) developing business capabilities including
business skills as well as experiencing in the new areas or enhancing the system of management
(Carvalho, Meier and Wang 2016).
4. Practical implication of management decision
Managerial decision making is generally featured by incomplete information, time
constraint and complexity and hence, there is rarely any single right answer. The managers shall
weigh possible consequences for each of the decision and consider the fact that generally there
are multiple shareholders with different preferences and conflicting needs (Brailsford, Churilov
and Dangerfield 2014).
Conclusion
From above interpretation it is concluded that for X Ltd if the management chose project
B over project A, it will be able to earn additional profit amounting to $(29,655.64 – 26,595.67)
= $3,059.96. Additional profit will in turn enhance the net worth of the entity as well as wealth
of the shareholders. Hence, it is recommended that X Plc shall invest in project B

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References
Brailsford, S., Churilov, L. and Dangerfield, B. eds., 2014. Discrete-event simulation and system
dynamics for management decision making. Chichester: Wiley.
Carvalho, L.S., Meier, S. and Wang, S.W., 2016. Poverty and economic decision-making:
Evidence from changes in financial resources at payday. American Economic Review, 106(2),
pp.260-84.
Gorshkov, A.S., Rymkevich, P.P., Nemova, D.V. and Vatin, N.I., 2014. Method of calculating
the payback period of investment for renovation of building facades. Stroitel'stvo Unikal'nyh
Zdanij i Sooruzenij, (2), p.82.
Gorshkov, A.S., Vatin, N.I., Rymkevich, P.P. and Kydrevich, O.O., 2018. Payback period of
investments in energy saving. Magazine of Civil Engineering, 78(2).
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consumption in repeated reverse logistics. Technological and economic development of
economy, 23(6), pp.877-894.
Leyman, P. and Vanhoucke, M., 2017. Capital-and resource-constrained project scheduling with
net present value optimization. European Journal of Operational Research, 256(3), pp.757-776.
Lin, W.M., Chang, K.C. and Chung, K.M., 2015. Payback period for residential solar water
heaters in Taiwan. Renewable and Sustainable Energy Reviews, 41, pp.901-906.
Tjader, Y., May, J.H., Shang, J., Vargas, L.G. and Gao, N., 2014. Firm-level outsourcing
decision making: A balanced scorecard-based analytic network process model. International
Journal of Production Economics, 147, pp.614-623.

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Žižlavský, O., 2014. Net present value approach: method for economic assessment of innovation
projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.