Business Decision Making: A&B Plc, NPV, Payback Period Analysis

This essay delves into the critical aspects of business decision-making, focusing on the application of Net Present Value (NPV) and payback period methods for evaluating investment opportunities within a case study of A&B Plc, a UK-based hotel chain. The essay examines the benefits and drawbacks of both NPV and payback period techniques, demonstrating how these methods assist in strategic financial planning. It further explores the influence of financial factors, such as taxes, depreciation, and interest rates, and non-financial factors, including supplier relationships and brand value, on the overall decision-making process. Through the analysis of these elements, the essay underscores the importance of a comprehensive approach to investment appraisal and its impact on organizational profitability and long-term success. The conclusion emphasizes the significance of thorough analysis before undertaking investments and the role of strategic managers in making informed decisions.

BUSINESS DECISION
MAKING

Table of Contents
ESSAY TOPIC................................................................................................................................4
INTRODUCTION...........................................................................................................................4
ESSAY BODY.................................................................................................................................4
Net present value with its benefits and drawbacks.....................................................................4
Payback period with its benefits and drawbacks.........................................................................6
Financial and non-financial factors.............................................................................................7
CONCLUSION................................................................................................................................8
REFRENCES...................................................................................................................................9

ESSAY TOPIC
“ Understanding over decision making in a business with the help of NPV method and
payback period method. Also different financial and non-financial factors”
INTRODUCTION
Business decision making is the an important part that exists within an organization for
making survival possible with the competitiveness of market with longer time period. Business
organization is engaged within various projects that is deriving towards making growth possible
with success. This makes selection possible to get maximum profit and effective results. The
essay is based over a case study of A&B Plc in which strategic management decides over
investment of funds to be done with software or Laundrette that has been outsourced previously.
Essay discuss investment with appraisal techniques which is benefiting drawbacks.
ESSAY BODY
A&B Plc this is an UK based hotel chain that is currently being operating within UK and
other parts of Europe also. In present hotel outsourced of different services that has been
including laundrette and hotel software because of insufficient amount with resources. Further
strategic manager decides over minimizing business cost that is undertaking either services. In
order to make a better decision, managers should use two kinds of investment that has made
appraisal techniques like NPV and payback period method. As per this scenario, initial
investment of hotel decides for undertaking software is £100,000 and is same for Laundrette wit
discount rate of £120,000
Net present value with its benefits and drawbacks
Net present value: If a business-like hospitality such as A&B plc is willing over investing
an new project within the method that is being used to make order for executing investment over
decision making. In this method various kinds of difference is there over presented value of cash
influx and cash outlay (Alam and Dornberger, 2019). The advantages of net present value
method for A&B Plc is that such factors is considered for presenting value of factors in which
real income is to be calculated along with all the factors like inflation and other types. This
method has helped hotel business in taking appropriate decision that boosts profit making and it
makes utilization of money in a way that it is being saved. Further with the help of NPV risk
factor can also be included in calculation by which hotel business can get clear picture about

their decision regarding new project. The disadvantages of the methods for A&B Plc includes
that such method is sensitive in nature because of discount rate that is there within the market
this makes fluctuation in calculating NPV. This impacts profitability in negative manner. It
emphasis over short term projects with long term project that makes unstable aspects to take
place (Lytras, Raghavan and Damiani, 2017). Before project hotel business is required for
establishing research and method ignores various aspects to draw profit.
The NPV for both the project of A&B plc is given below:
Project A(Dishwashing)
Investment: £120000
Year Cash flow (In £) Calculation of
discounted cash flow
Discounted cash flow
(In £)
1 30000 30000/(1+14%)1 26315.79
2 35000 35000/(1+14%)2 26931.36
3 40000 40000/(1+14%)3 26998.86
4 60000 60000/(1+14%)4 35524.82
5 90000 90000/(1+14%)5 46,743.18
Total discounted cash flow 162514
Hence,
NPV: £ (162514-120000)
= £ 42514
Project B(Software)
Investment: £150000
Year Cash flow (In £) Calculation of
discounted cash flow
Discounted cash flow
(In £)
1 40000 40000/(1+14%)1 35087.72
2 45000 45000/(1+14%)2 34626.04
3 50000 50000/(1+14%)3 33748.57

4 75000 75000/(1+14%)4 44,406.02
5 80000 80000/(1+14%)5 41549.49
Total discounted cash flow 189417.8
Hence,
NPV: £ (189417.8-150000)
= £ 39,417.8
The calculation is based over the identification of project A, NPV is £59308 against the
initial investment that is made £100000. NPV project B is against initial investment of £120000.
It can be seen that project B is more effective for hotel.
Payback period with its benefits and drawbacks
Payback period: Payback is the time when cash outlay is being recovered that is invested at
initial stage of project (Akter and et. al., 2019). It helps hotel business by calculating break-even
point to recover cost. Minimum period is more advantageous to attract investment and earn
profit. The advantages of the payback period for the A&B Plc is that it is simple method with
less complexity and in this method risk is considered to be used by hotel for taking decision.
Further the disadvantages of this method for A&B Plc is that the present value factor is not
considered due to which the accuracy in results cannot be attained. One time investment is not an
practical concept. Thus it is not appropriate for an project.
The payback period for both the project of A&Bplc is given below:
Initial investment - £150,000
Project B(Software)
Investment: £150000
Year Cash flow (In £) Cumulative cash flow
1 40000 40000
2 45000 85000
3 50000 135000
4 75000 210000
5 80000 290000
Year before recovery: 3rd year
Amount to be recover: £ (150000-135000)

= £15000
Next years’ cash flow: 75000
Hence,
= 2+0.2
= 2.2 years or 2 years and 2 months
Year before recovery + Amount to be recovered/Next years’ cash flow
Recovered amount in 3 years - £95,000
Difference amount - £5,000
Payback period = 3 + (5000 / 55000 * 11)
= 3 + 1
= 3 years 1 month
Investment: £120000
Year Cash flow (In £) Cumulative cash flow
1 30000 30000
2 35000 65000
3 40000 105000
4 60000 165000
5 90000 255000
Year before recovery: 3rd year
Amount to be recover: £ (120000-105000)
= £15000
Next years’ cash flow: 60000
Hence,
Payback period: 2+15000/60000
= 2+0.25
Both projects is having similar payback still project B is better.
Financial and non-financial factors
Financial factors: In the business various factors are there which exists and directly
impacts the income statement that is expenses, incomes and cost of goods to be sold. Also other
factors like operating expenses, taxes, interest, depreciation and various other are there (Ballou,
Heitger and Stoel, 2018). While taking various decision it is crucial for the organisation that they
take into consideration the impact of various financial statements and factors which influences

decision making as with this they can ensure that decision so taken does not have any adverse
impact on the overall performance of the organisation (Kiendrebeogo and Minea, 2017). The
financial factor such as tax has significant impact on the organisation as it is compulsory
payment that has to be made by the company and this affect the availability of the funds with
them. Due to this they have to consider the amount of tax while planning for the procurement of
the funds (Liu, 2019). Another financial factor is depreciation, this is non cash expense but it
decrease the profit of the company and its is reflected in the financial statements due to which
the investors decisions may gets. Interest is another financial factors which has to be taken into
consideration as after evaluating the interest rate they can determine the cost of borrowing and
accordingly they can plan the combination of the sources of procuring the funds (Madura, 2020).
Non-financial factors: Some non financial factors that is existing within a business and has
direct relation through income statement. Such factors includes relationship with suppliers and
customers, morale teachings, dealing with business threats, brand value and goodwill. The
business has to analyse various non financial factors as they also influence the decisions taken by
the businesses for example: the standards within the industry in context of the facilitates to be
offered to the employees has direct impact on the overall performance of the organisation as well
as on their productivity (Ahmed and Manab, 2016). The level of technology adopted within the
organisation affect the decision making as with change in technology as per the need of the
business the organisation has to incorporate the changes within the operations. This affects the
planning of the business done by them for both long and short term (Sohrabi, 2017). Further the
relationship with the suppliers and customers affect the operations of the organisation. With the
changes in the taste and preferences of the customers and terms with the suppliers the
profitability as well as operation gets influenced due to which new plans have to be formulated
so that they can manage its impact (Chandra, 2020).
CONCLUSION
From the above essay it can be marked out that analysis of each option before beginning
investment is very important. This may generate profit within an organization. As per present
case study it is important to have strategic manager of A&B Plc to make better investment
decision for investment using various methods like NPV and Payback period for investing within
the software that helps in making more profit to an organization.

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