Analyzing Investment Appraisal & Business Decision Making Factors

This report delves into the critical aspects of business decision-making, emphasizing the role of investment appraisal techniques such as Net Present Value (NPV) and payback period. It analyzes the feasibility of investment projects, providing a comparative computation of NPV and payback periods for two projects, highlighting the importance of selecting projects with higher NPV despite potentially longer payback periods. The report also examines the influence of financial factors like inflation, market conditions, and foreign exchange rates, alongside non-financial factors such as political, technological, and social considerations, on business decisions, underscoring the need for a holistic approach to decision-making that considers both monetary and qualitative aspects for long-term business success. This student contributed assignment is available on Desklib, a platform providing study tools for students.

BUSINESS DECISION
MAKING

Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY..................................................................................................................................1
Investment Appraisal Techniques................................................................................................1
Identifying the feasibility of investment Projects........................................................................2
Financial and non financial factor...............................................................................................4
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Business decision making can be defined as that managerial action or activity which is being
undertaken by organization in order to identify best possible practice. Present report will lay
emphasis on the financial and non-financial factors and their implication on stakeholders and
decision making process.
MAIN BODY
Success and growth could be achieved when the decisions taken by the management are
sound and effective. Decision making is an essential part of the management on which all teh
operations of the business enterprise are dependent. Numbers of decisions are required to be
taken by the management for carrying out the business operations (Turner and Coote, 2018).
Managers are required to analyse all the factors that could impact the decisions affecting the
overall business. The decisions should be taken considering the long term benefit and
sustainability of the business. Managers use for making major capital expenditures use
investments appraisal techniques.
Investment Appraisal Techniques
There are different investment appraisal techniques used by the management for decision
making.
Payback period
It is basically that time which can be needed by business in order to have full recovery
related to the cost of investment. The leaders and managers needs to be involved in having deep
analysis about the payback period. The shorter the payback period, the more better it is and also
firm can gain success through it (Anwar, Mustafa and Tanzo, 2018). There are various
advantages and disadvantages of the payback period and NPV which can affect the business
decision making. It includes the following:
Advantages
The payback period calculation is really easy and also it takes less amount of time to
calculate it. This method is most considerable one to see the success related to project and make
better decision. It has been analysed that less errors are made during the calculation of payback
period.
Disadvantages
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One of the most serious disadvantages of payback period is also that it does not take into
account time value of money.
NPV
Business organization makes use of NPV to analyse the process related and linked with
capital budgeting (Khemakhem and Boujelbene, 2018). The calculation of net present value is
really easy and also it takes less amount of time
Advantages
The organization only invests in that aspect which provides them with positive NPV (Huy,
2017). It helps in having an idea about the reliability and validity of business.
Disadvantages
This method requires high amount of guess work related to the organizations cost of capital
Identifying the feasibility of investment Projects
Computation of NPV
Project A
Year Cash inflows PV factor @ 11%
Discounted cash
inflows
1 28000 0.901 25225.23
2 32000 0.812 25972
3 35000 0.731 25592
4 55000 0.659 36230
5 78000 0.593 46289
Total discounted cash
inflow 159308
Initial investment 100000
NPV (Total
discounted cash
inflows - initial
59308
2

investment)
Computation of NPV
Project B
Year Cash inflows
PV
factor @
11%
Discounted
cash inflows
1 31000 0.901 27927.93
2 38000 0.812 30842
3 43000 0.731 31441
4 64000 0.659 42159
5 89000 0.593 52817
Total discounted cash inflow 185187
Initial investment 120000
NPV (Total discounted cash
inflows - initial investment) 65187
Payback Period
Computation of Payback period
Project A Project B
Year
Cash
inflows
Cumulative cash
inflows
Cash
inflows
Cumulative cash
inflows
1 28000 28000 31000 31000
2 32000 60000 38000 69000
3

3 35000 95000 43000 112000
4 55000 150000 64000 176000
5 78000 228000 89000 265000
Initial
investment 100000 120000
Payback
period 3 3
0.1 0.2
Payback
period
3 year and 1
month
3 year and 2
months
NPV Payback period
Project 1 £59308 3 year and 1 month
Project 2 £65187 3 year and 2 months
Interpretation
From the above analysis it could be identified that the business should adopt for the
Laundrette project B rather than Software project A. The outcomes of the analysis shows that
NPV of the Project B is higher as compared with project A though the payback period is 3 year
and 2 months but the benefits derived from this investment is higher. Choosing project B will be
more beneficial for the enterprise and also it will be recovering the cost of project in adequate
span of time. Laundrette project will be profitable as well as recover the initial cost of investment
within adequate time.
Financial and non financial factor
Financial and non financial factors have equal importance in the decision making process.
Financial factors are related with the monetary resources of the company and non financial
factors relate to the efficiency and management of business.
Financial Factors
 Inflation – It increases the prices of products due to increase in cost of products. Increase
in prices of the product may not be accepted.
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 Market – It has direct influence over the share prices of company that affects the
valuation of company.
 Foreign Exchange rate – It is considerable financial factor for companies having
operations overseas it affects the costs and revenues of firm. At the end of every year
company is required to book foreign exchange profit or loss.
Non Financial Factors
 Political factor – It influences the trade of business and compliance with different
regulatory requirements such as tariffs and other trade barriers.
 Technological factors – Companies are required to continuously bring new innovation
and invention to the market for being competitive in the market else it may be mover out
of competition.
 Social factors – Companies not considering social factors face issues in society (Batra
and Verma, 2018). On the other companies practicing CSR activities get greater market
acceptance that helps in increasing revenues.
CONCLUSION
From the above research it could be concluded that effective business decision making is
very essential for the business enterprise in achieving the desired objectives. The investment
appraisal techniques enable the company in evaluating the best option from different projects.
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REFERENCES
Books and Journals
Turner, M.J. and Coote, L.V., 2018. Incentives and monitoring: impact on the financial and non-
financial orientation of capital budgeting. Meditari Accountancy Research.
Anwar, S.R., Mustafa, R. and Tanzo, T.T., 2018. Indonesian Journal of Business Finance and
Accounting.
Khemakhem, S. and Boujelbene, Y., 2018. Predicting credit risk on the basis of financial and
non-financial variables and data mining. Review of Accounting and Finance.
Huy, P.Q., 2017. The factors impact the accountability in Vietnamese public sector accounting–
empirical study at administrative units.
Batra, R. and Verma, S., 2018. Non-financial criteria in project appraisal methodologies:
empirical evidence from Indian companies. International Journal of Accounting and
Finance.8(1). pp.80-102.
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