Business Decision Making Report: NPV and Payback Period Analysis

This report provides a comprehensive analysis of business decision-making processes, focusing on the evaluation of investment projects. The report begins with an introduction to decision-making and its importance in achieving organizational goals, specifically for XYZ plc. The main body includes the calculation of payback periods and Net Present Value (NPV) for two hypothetical projects, A and B. The report then delves into an analysis of these methods, discussing their advantages and disadvantages, and identifies both financial and non-financial factors influencing decision-making. Financial considerations such as investment benefits, turnaround time, initial cost, and profitability are examined. The report concludes with a summary of findings, recommending the most suitable project for investment based on the financial analysis. The report references various academic sources to support its findings.

Business Decision Making

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
1. Calculation of payback period.............................................................................................................3
2. Calculation of Net Present Value (NPV).............................................................................................4
3. Analysis...............................................................................................................................................5
CONCLUSION...........................................................................................................................................7
REFERENCES............................................................................................................................................8

INTRODUCTION
A decision making can be described as a plan of action intentionally selected from a
course of action for achieving aims or goals of corporation or management. The decision-making
process is a continual and important sector of the management of the organisation or company.
Decision-making refers to a manager’s role preparing, coordinating, directing and managing.
Decision taking is necessary if the institutional aims/strategic goals are to be accomplished
within the same specified timeframe and money (Park, El Sawy and Fiss, 2017). Once a decision
is taken by administrators it may contribute to some problems between the organizations. This
report is mainly based on the XYZ plc that will prepare a future plan for the investment in the
particular project A or B. In this report contains various investing method in which calculate
NPV and payback period. Moreover, identify financial and non financial factors that are utilized
into decision making procedure.
MAIN BODY
1. Calculation of payback period
Year Project A Cumulative
cash flow
Project B Cumulativ
e 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 + £ 5,000 / £ 55,000
= 3 + 0.90
= 3.90 year
Project B = 4 + £ 56,000 / £ 64,000
= 4 +0.87
= 4.87
2. Calculation of Net Present Value (NPV)
Year Software Project PV @ 11% DCF
Year 0 -£ 100,000 1 -£ 100,000
Year 1 £ 28,000 0.900901 £ 25,225.23
Year 2 £ 32,000 0.811622 £ 25,971.92
Year 3 £ 35,000 0.731191 £ 25,591.7
Year 4 £ 55,000 0.658731 £ 36,230.2
Year 5 £ 78,000 0.593451 £ 46,289.2
NPV £ 59,308.25
Year Laundrette PV @ 11% DCF

Project
Year 0 -£ 120,000 1 -£ 120,000
Year 1 £ 31,000 0.900901 £ 27,927.93
Year 2 £ 38,000 0.811622 £ 30,841.65
Year 3 £ 43,000 0.731191 £ 31,441.23
Year 4 £ 64,000 0.658731 £ 42,158.78
Year 5 £ 89,000 0.593451 £ 52,817.17
NPV £ 65,186.76
3. Analysis
Advantages and Disadvantages of NPV and Pay Back period
Payback period: It is called a investment method with easy to exploit limitations and
requirements for using it, since it does not allow for current return of assets, threat, funding or
other significant considerations including such financial impact. Although the duration of the
asset value can be corrected by implementing a running total return on capital devaluation, it is
usually recognized that this method should not be used especially for business decision making
Advantages: There may be endless possibilities for investment and numerous ventures,
based on the location of company currently operated. If as a boss who had twenty different
thoughts to work at and evaluate, it would be hard to find out which one to concentrate on. When
they have to pick upwards of one project, it could be even more so. When they're using the
payback period process, they’ll get a complete sense of how the ventures perform so they can
pick the correct ones (Jassem, Azmi and Zakaria, 2018).
Disadvantages: Together with the reality that the payback period ratings focus solely on
the immediate amount of business, it is obviously a targeted financial planning strategy that is
quick term. This will function well for any company looking to spend, pay back, and improve as
quickly as they can. Even so, if the company is looking for a more lengthy-term strategy to
company expenditure, there are some significant limitations in the payback time process. It isn't
all about how quickly they can still get money directly.
Net Present value: The Net Present Value (NPV) approach can be a really useful tool to
evaluate the feasibility of a business spending, or a new venture inside a organization. And like
many management of money, it isn't the conclusion-all, be-all answer — it needs to carry few
other different advantages and disadvantages that might not make it profitable for the some
investment strategies.
Advantages: The main benefits are that the NPV approach needs focus into account the
return on equity and the ambiguity needed in creating economic projections. In particular,
working capital forecasts 10 years down the road are necessarily worse now than the cash flows

expected next year. Cash flows that are more expected in the potential would have much less
effect on the net current value than more stable retained earnings that exist in previous times.
Disadvantages: It needs some details on the cost of capital increases. Having relatively
low cost of capital can result in inadequate investment. Thinking the cost of capital is growing
would lead to too many exciting project missing. The NPV approach, however, is not effective
when connecting different 2 analogous-size projects. Considering that the NPV approach
consists of a dollar answer, the output level of NPV is determined primarily by data range (Gao,
Wei and Wei, 2018).
Financial and Non financial factors
There are several financial and nonfinancial drivers that impact the decision-making
frameworks of the investors. Financial considerations involve job satisfaction, normal market
laws & legislation in business practices, connections with suppliers or clients. Upon considering
these considerations, executives of XYZ Plc must make an informed decision which will also
affect stakeholder decision-making processes (Popovič and et. al, 2018). Financial considerations
include estimation of the investment benefit, turnaround time, initial cost, profitability etc.
Investment evaluation approach allows interested parties to measure capital gains and also what
advantages they obtain from that if they spend in it.
In the above estimation, it is calculated that the payback period for Laundrette Project is
4.87 and for software project is 3.90 years. Project A is more desirable than Project B for XYZ
Plc, assessment of the effectiveness of this process. Lower healing process is advantageous for
the client because the client recovers the initial costs in a limited amount of time. Project A has a
59308.25 NPV, which are 65186.76 for Project B NPV. According to this project financial
planning process, Project B is more appropriate for XYZ Plc since it has greater NPV that is
ideal for any investment.
CONCLUSION
As per the above report it has been concluded that decision-making is an all-
encompassing role of administrators who strive to achieve organisation objectives. The other
approach that you take in business may mean a particular question and that certain measures can

impact any organization's corporate objective. There are carry out all the results of different
project and apply investment method to invest into right project.

REFERENCES
Books and Journal
Park, Y., El Sawy, O. A. and Fiss, P., 2017. The role of business intelligence and communication
technologies in organizational agility: a configurational approach. Journal of the
association for information systems. 18(9). p.1.
Jassem, S., Azmi, A. and Zakaria, Z., 2018. Impact of Sustainability Balanced Scorecard Types
on Environmental Investment Decision-Making. Sustainability. 10(2). p.541.
Gao, H., Lu, M., Wei, G. and Wei, Y., 2018. Some novel Pythagorean fuzzy interaction
aggregation operators in multiple attribute decision making. Fundamenta
Informaticae. 159(4). pp.385-428.
Popovič, A., and et. al, 2018. The impact of big data analytics on firms’ high value business
performance. Information Systems Frontiers. 20(2). pp.209-222.