Business Decision Making: NPV and Payback Period Analysis Report

This report provides a detailed analysis of business decision-making, focusing on the application of Net Present Value (NPV) and payback period methods. The report evaluates two potential investment projects for XYZ Plc: a laundrette project and a new software investment. It includes the calculation of payback periods and NPV for both projects, along with an analysis of the advantages and disadvantages of each method. The payback period calculations determine the time required for each project to recover its initial investment, while the NPV calculations assess the profitability of each project by considering the time value of money. The report also discusses financial and non-financial factors influencing decision-making, such as employee motivation, market regulations, and stakeholder relationships. Based on the analysis, the report concludes that the software project is more favorable due to its shorter payback period and higher NPV, offering valuable insights for financial management and investment appraisal.

Business Decisions
Making

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Calculation of payback period............................................................................................3
2. Calculation of Net Present Value (NPV)............................................................................4
3. Analysis..............................................................................................................................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
The making of decisions is a regular activity for every human being. Decision-making is also a
practice and a mechanism when it relates to corporate organisations. Successful and productive
decisions make businesses prosper and bad ones result in losses. Hence, a most crucial practice
in any organization is corporate decision making process (Weygandt, Kimmel and Aly, 2018).
This report contains detailed analysis of XYZ Plc who has a future plan in investing in laundrette
project or to make investment in new software. The top level management has to take a decision
which is more beneficial for organisation. The following report contains calculation of NPV and
Payback period along with its various advantages and disadvantages.
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
Project
PV @ 11% DCF
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: This is considered a study approach with exploitable weaknesses and
conditions for its use, because it does not enable present value of money, risk, financing or other
important factors such as economic cost. While it is possible to correct duration asset value by
applying a rolling average cost of capital depreciation, it is generally known that this approach
should not be used particularly for business decisions (Baker, 2018).

 Advantages: The key advantage of payback strategy, due to its effectiveness. This is a
easy way to evaluate multiple projects and afterwards pick one that has shortest payback
time. There are many practical and theoretical drawbacks to payback too. Easy to
calculate and involve less data, managers can easily evaluate length of job payback. This
enables companies to make quick choices that are truly necessary for asset-stricken
companies.
 Disadvantages: The greatest disadvantage to payback strategy is that it doesn't
understand time value to money. Cash flows received from earlier years of a project have
a greater weight than remaining profits in later years. If a project has a tight payback
period, it means that it is not successful. If anticipated gains stop or are substantially
decreased at repayment date, a project will never yield a benefit and would be an
unacceptable investment in any way.
Net Present Value (NPV): This method may be a very helpful way in order to determine
viability of a customer investment or a new one (Singh, Pereira and Singh, 2018). Just like other
financing approaches for their finances, it is not a final solution for companies. This has a few
unique advantages and disadvantages which do not make it ideal for certain investment
decisions.
 Advantages: The NPV method also tells us that how much income will be created by an
investment for business or investor, and how much in capital. Investment returns are
projected to have no impact on net present value in future as there will be more secure
free cash flow in previous periods.
 Disadvantages: It requires certain information on company's capital cost. Having
excessively low capital costs would lead to insufficient expenditure. To assume
that capital costs are rising will lead in missing so many promising ventures. However,
when comparing two ventures of similar size, the NPV method is not successful. Given
that NPV method comprises of a dollar response, NPV performance scale is largely
dictated by data distance.
Financial and non financial factors:
There are many monetary and non-monetary factors that affect stake holders decision-making
processes. Monetary factors include motivation of employee, market rules standards &
regulations in company activities, relationships with distributors or customers. Following

consideration of such factors, XYZ Plc executives will make strategic decisions that also
influence decision-making process of stakeholder (Ramadani and et.al, 2018). Financial factors
involve project return evaluation, duration of recovery, initial cost, profitability etc. Investment
assessment approach lets stakeholders calculate return on investment and what benefits they gain
from it if they invest in it.
In above computation, it is assessed that payback period is 4.87 for Laundrette Project
and 3.90 years for software project. Project A is more favorable as compared to Project B for
XYZ Plc, based on evaluation of this method. Lower duration of recovery is beneficial
for company as company recovers its initial cost in minimal time. Project A has a NPV of
59308.25 and for Project B NPV is 65186.76. Project B is more suitable for XYZ Plc as per this
investment budgeting method as it has higher NPV that is good for any portfolio.
CONCLUSION
From the above assessment it can be concluded that there are various techniques and tools
are available that help companies to opt for the best options in order to generate more earning
and improve their financial performance. Payback period and Net present value are one the best
techniques which are adopted by top level of management to choose best investment. This
assessment also includes various advantages and disadvantages of these methods.

REFERENCES
Books and Journals
Weygandt, J.J., Kimmel, P.D., and Aly, I.M., 2018. Managerial Accounting: Tools for Business
Decision-making. John Wiley & Sons.
Baker, A.J., 2018. Business decision making. Routledge.
Singh, S.K., Pereira, V. and Singh, P., 2018. Big data, knowledge co-creation and decision
making in fashion industry. International Journal of Information Management, 42, pp.90-101.
Ramadani, V. and et.al, 2018. Impact of geomarketing and location determinants on business
development and decision making. Competitiveness Review: An International Business Journal.