Business Decision Making: Investment Appraisal Techniques at DDK plc

This essay analyzes investment appraisal techniques for DDK plc, a textile company operating in the UK and Europe. It focuses on evaluating the feasibility of investment proposals using Net Present Value (NPV) and payback period methods. The analysis compares two projects, Project A (Belt) and Project B (Trainers), recommending that DDK plc invest in Project B due to its higher NPV (£35764.10) and shorter payback period (3.27 years) compared to Project A (NPV of £11757.78 and payback period of 3.64 years). The essay also discusses various financial factors, such as cost and risk, liquidity position, and profitability, as well as non-financial factors, including the management team, market growth potential, and customer retention, that should be considered when making financial decisions. The essay concludes that investment decision-making is a crucial process incorporating both financial and non-financial considerations.

ESSAY

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
Evaluating the feasibility of investment proposals for DDK plc...........................................3
Different factors to be considers at the time of making financial decision............................6
CONCLUSION..........................................................................................................................7
REFERENCES...........................................................................................................................8

INTRODUCTION
The business decision making process basically considered as an important part of a
business entity which assist in attaining the desired goals and objectives in a better way. This
essay is based on DDK plc which is a textile company having operations in the UK and other
parts of the Europe. This essay states about the various investment appraisal techniques
which can be used by the company in the process of undertaking investment related
decisions. In also covers various financial and non-financial factors affecting the decision.
Evaluating the feasibility of investment proposals for DDK plc
As per the situation, there are two projects in which the company is looking for the
investment and can invest in only one project. Thus, NPV and payback period investment
appraisal techniques are used for evaluating the proposals.
Net present value
The NPV approach is widely used as it involves converting the future expected cash
flows into present value from which cash outflow of the project is deducted (Harris, Hoang
and Ngan, 2017). This approach is useful in determining the productivity in respect to the
project.
Project A– Belt Project
Computation of NPV
Year Cash
inflows
PV factor @
14%
Discounted cash
inflows
1 45000 0.877 39473.68
2 45000 0.769 34626.04
3 35000 0.675 23624.00
4 70000 0.592 41445.62
5 82000 0.519 42588.23
Total discounted cash inflow 181757.58
Initial investment 170000.00
NPV (Total discounted cash inflows - 11757.58

initial investment)
Project B –Trainers Project
Computation of NPV
Year Cash
inflows
PV factor @
14%
Discounted cash
inflows
1 50000 0.877 43859.65
2 45000 0.769 34626.04
3 70000 0.675 47248.01
4 90000 0.592 53287.22
5 90000 0.519 46743.18
Total discounted cash inflow 225764.10
Initial investment 190000.00
NPV (Total discounted cash inflows -
initial investment) 35764.10
It can be interpreted from the above that the DKK plc can make an investment into
the both the project as each one is having a positive NPV. But, with the limited availability of
capital, investment can be made in one, so DKK plc should invest into project B which is
having a higher NPV of £35764.10 in comparison to project A with NPV of £11757.78.
Payback period
The PBP is another useful capital budgeting technique which is being utilized by the
management in order to determine the amount of time within which it will be able to recover
the capital initially invested by the company (Alkaraan, 2020). But this method, ignores the
cash generated after the life of the project.
Project A – Belt Project

Computation of Payback period
Year Total cash
flow
Cumulative cash
flow
0 -170000 -170000
1 45000 -125000
2 45000 -80000
3 35000 -45000
4 70000 25000
5 82000 107000
Payback
period 3.64 years
Project B –Trainers Project
Computation of Payback period
Year Total cash
flow
Cumulative cash
flow
0 -190000 -190000
1 50000 -140000
2 45000 -95000
3 70000 -25000
4 90000 65000
5 90000 155000
Payback
period 3.27 years
Based upon above calculations, it can be stated that the payback period of Project B
is 3.27 years which is smaller in contrast to the project A which is having the time frame of
3.67 years.

Therefore, it is recommended based upon the above evaluations that the company
should make an investment in project B as it is having higher NPV along with lower payback
period.
Different factors to be considers at the time of making financial decision
In the process of undertaking the business decision there are numerous factors which
is essential to be taken into account. These factors can be both financial and non-financial and
a detailed description is given below.
Financial factors:
Cost and risk involved: The cost that the project will incur is needed to be met with
the help of acquiring funds from the various sources (Akben-Selcuk, 2016). There are various
sources of funds and each having its own advantages and disadvantages and therefore, it
become essential for the finance managers to effectively analyse and compare the risk factor
with its costs.
Liquidity position: The amount of liquid funds which is being available with the
company plays an important role in the undertaking the investment decision (Almansour,
Almansour and Almansour, 2019). The amount available with the company for meeting its
short term and contingency liabilities is important as it helps in determining whether the
company is in the position to make an investment without affecting its daily business
activities.
Profitability: The profits which is being generated by the company helps in
determining whether the company would be able to effectively repay the amount it has
borrowed for making the investment and meeting with its other liabilities.
Non-financial factors
Management team: For making an investment, it essential to have a team of efficient
employees who can handle and manage the business in a better way. The employees are
required to be having relevant knowledge, skills and experience in to order to handle the
project.
Market growth potential: This factor helps in analysing the changing market
conditions in order to determine that the investment will be worth in the future or not
(Bakhshani, 2017). This is considered to an important point based on which the final decision
is being made.

Customer retention problem: Under the situation, where the large proportion of the
income of the employees is linked to the few of its customers which results into making it
difficult for the company in retaining them. This has the potential to affect the revenue of the
company. If the company fails to retain its customer based, then it will have a drastic impact
on the business.
CONCLUSION
It can be inferred from the above that investment decision making is a crucial
process which incorporates factors which are both financial and non-financial. In the given
situation, DDK plc should invest in project B because it is having greater net present value
and payback period.

REFERENCES
Books and Journals
Akben-Selcuk, E., 2016. Factors affecting firm competitiveness: Evidence from an emerging
market. International Journal of Financial Studies. 4(2). p.9.
Alkaraan, F., 2020. Strategic investment decision-making practices in large manufacturing
companies. Meditari Accountancy Research.
Almansour, B., Almansour, Y. and Almansour, A., 2019. Small and medium size enterprise:
Access the financial and non-financial factors. Management Science Letters. 9(5).
pp.687-694.
Bakhshani, S., 2017. The Relationship between Non-financial Factors, Capital Structure and
the Performance of the Listed Companies on the Stock Exchange. International
Journal of Economics and Financial Issues. 7(3). p.542.
Harris, E., Hoang, T. and Ngan, G., 2017. Accounting for capital investment appraisal: Time
for a radical change?. In The Routledge Companion to Accounting Information
Systems (pp. 173-189). Routledge.