Business Decision Making: NPV, Payback Period, and Factors Analysis

This essay provides an in-depth analysis of business decision-making, focusing on the application of Net Present Value (NPV) and payback period methods for investment appraisal. The essay uses a case study of XYZ Plc., a UK-based hotel chain, to illustrate how these techniques are employed to evaluate potential investments in either software or a laundrette service. It details the benefits and drawbacks of both NPV and payback period, including their sensitivity to discount rates and their consideration of risk. Furthermore, the essay explores the importance of financial and non-financial factors, such as expenses, incomes, supplier relationships, employee morale, and brand goodwill, in making informed business decisions. By comparing the outcomes of the NPV and payback period calculations for the software and laundrette projects, the essay demonstrates how these methods can guide strategic managers in choosing the most profitable investment. The conclusion emphasizes the significance of comprehensive analysis before making investment decisions to maximize returns and minimize potential losses.

Essay on business decision
making

Contents
ESSAY TOPIC................................................................................................................................1
INTRODUCTION...........................................................................................................................1
ESSAY BODY................................................................................................................................1
Net present value with its benefits and drawbacks......................................................................1
Payback period with its benefits and drawbacks.........................................................................3
Financial and non-financial factors.............................................................................................5
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

ESSAY TOPIC
“An understanding of the decision making for the business with the help of NPV method
and payback period method along with various financial and non-financial factors”
INTRODUCTION
Business decision making is must for every organisation to survive in competitive market
world for longer period of time. As business organisation engaged in various projects which
drives them to achieve growth and success but analysing various options and select best one
helps them in getting maximum profitable result (Anderson and Burchell, 2019). The present
essay is based on the case study of XYZ Plc whose strategic management decides whether to
invest funds in undertaking software or Laundrette that they previous outsourced. The essay
discusses different investment appraisal techniques along with their benefits and drawbacks.
ESSAY BODY
XYZ Plc. is UK based hotel chain currently operating its business operations in UK and
other parts of Europe. At present, the hotel outsourced different services including laundrette and
hotel software due to insufficient amount of resources but now their strategic managers decides
to minimise business cost by undertaking either one of these services. To make a better profitable
decision, the managers uses two investment appraisal technique such as NPV and Payback
period method. In the current scenario, initial investment the hotel decides to make for
undertaking software is £100,000 whereas same for Laundrette is £120,000 with £120,000
discount rate f return.
Net present value with its benefits and drawbacks
Net present value: If a business-like hospitality business such as XYZ plc is willing to
invest in a new project then this method is used by them in order to execute investment
decisions. Net present value is the difference between present value of cash influx and present
value of cash outlay (Raghunath and Devi, 2018). This factor is having prominent role in
investment planning and to recognise profitability of the proposed project. This method is having
several benefits and drawbacks as well which are enumerated as under:
Advantages
 This factor considers present value factor by which real income can be calculated along
with all the other factors such as inflation and other.
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 This is a helpful method for hotel business in taking appropriate and profitable decision
regarding investment in new project so if net present value is in negative this portrays
that investment is not profitable and hence money can be saved by business.
 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 (Leyman and
Vanhoucke, M., 2016).
Disadvantages
 This method is highly sensitive to discount rate prevailing in the market by which high
fluctuation can be seen in calculating NPV. This may have negative impact on decision
taken by hotel business as this may be negatively impacts profitability.
 This is only emphasised on short term project as in long term project there are so many
instable aspects which may take place (Weygandt and et.al., 2018).
 Before go for a project hotel business is required to establish research on that and this
method ignores this aspect by which accurate profit cannot be drawn out.
The NPV for both the project of XYZ plc is given below:
PROJECT A: Software
Year Net cash
flow (A)
PV factor
Calculation
PV factor @
11% (B)
Discounted cash
flow (A*B)
1 28,000 1/(1+0.11) 0.9009009 25225.23
2 32,000 1/(1+0.11)^2 0.81162243 25971.92
3 35,000 1/(1+0.11)^3 0.73119138 25591.7
4 55,000 1/(1+0.11)^4 0.65873097 36230.2
5 78,000 1/(1+0.11)^5 0.59345133 46289.2
Total discounted
cash flow
159308.2
Less: initial
investment (0) 100000
Net Present value 59308.25
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PROJECT B: Laundrette
Year Net cash
flow (A)
PV factor
Calculation
PV factor @
11% (B)
Discounted cash
flow (A*B)
1 31,000 1/(1+0.11) 0.9009009 8928.571429
2 38,000 1/(1+0.11)^2 0.81162243 15943.87755
3 43,000 1/(1+0.11)^3 0.73119138 17794.5062
4 64,000 1/(1+0.11)^4 0.65873097 19065.54235
5 89,000 1/(1+0.11)^5 0.59345133 22697.07423
Total discounted
cash flow
185186.8
Less: initial
investment (0) 120000
Net Present
value
65186.76
On the basis of this calculation it is identified that for project A, NPV is £59308 against
initial investment of £100000 while NPV id project B is £65186 against initial investment of
£120000. With this it can be identified that project B is more effective for the hotel.
Payback period with its benefits and drawbacks
Payback period: Payback is the time taken by proposed project to recover the initial cash
outlay which was incurred in project initiation. This is helpful for hotel business in calculate the
time duration taken by the project to reach out its break-even point that is to recover incurred
cost. The minimum payback period is the most advantageous as it attracts the hotel business to
invest in most profitable project so as to earn profit and to get high sustainability. This method is
having several advantages and disadvantages which are discussed as under:
Advantages
 This is a very simple method with least complications.
 This method considers risk as well so hotel business can use this method in order to take
decision for new project.
Disadvantages
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 This method doesn’t consider present value factor by which accurate results cannot be
drawn out.
 This is not a practical concept as one time investment is not sufficient for a project,
regular investments are needed so this is not proven to be giving accurate results (Yang,
2018).
The payback period for both the project of XYZ plc is given below:
PROJECT A: Software
Year Net cash flow Cumulative Cash Flow
1 28,000 28000
2 32,000 60000
3 35,000 95000
4 55,000 150000
5 78,000 228000
Initial investment - £100,000
Recovered amount in 3 years - £95,000
Difference amount - £5,000
Payback period = 3 + (5000 / 55000 * 11)
= 3 + 1
= 3 years 1 month
PROJECT B: Laundrette
Year Net cash flow Cumulative Cash Flow
1 31,000 31000
2 38,000 69000
3 43,000 112000
4 64,000 176000
5 89,000 265000
Initial investment - £120,000
Recovered amount in 3 years - £112,000
Difference amount - £8,000
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= 3 + (8000 / 64000 * 11)
= 3 + 1.375
= 3 years 1.4 months
Both the project has similar payback period but project B is better.
Financial and non-financial factors
Financial factors: In a business like hotel business there are some factors which are
having direct impact over income statements of them, such as expenses, incomes, and cost of
goods sold, operating expenses, taxes, interests, depreciation and many more (Hassan, 2019)
Non-financial factors: There are some factors of hotel business which are not having direct
relation with income statement but plays vital role in organisational performance, these factors
are known as non-financial factors. These factors include relationship with suppliers and
customers, morale of employees, business threats, brand goodwill and many more (Basheer,
Ahmed and Manab, 2016).
CONCLUSION
It can be concluded from the above essay that it is important to analyse each option
before thinking to start making investment as it may bring either profits to company or loss in
return. In the present case study, it is important for strategic manager of XYZ Plc to make a
better investment decision using different methods such as NPV and Payback period method in
order to decide either investing in undertaking software will be more proitbale to company or
undertaking Laundrette.
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REFERENCES
Books and Journals
Ahmed, I. and Manab, N.A., 2016. Influence of enterprise risk management success factors on
firm financial and non-financial performance: A proposed model. International Journal of
Economics and Financial Issues. 6(3).
Anderson, S.E. and Burchell, J.M., 2019. The Effects of Spirituality and Moral Intensity on
Ethical Business Decisions: A Cross-Sectional Study. Journal of Business Ethics,
pp.1-13.
Basheer, M., Ahmad, A. and Hassan, S., 2019. Impact of economic and financial factors on tax
revenue: Evidence from the Middle East countries. Accounting. 5(2). pp.53-60.
Leyman, P. and Vanhoucke, M., 2016. Payment models and net present value optimization for
resource-constrained project scheduling. Computers & Industrial Engineering, 91, pp.139-
153.
Raghunath, K.M.K. and Devi, S.T., 2018. Effectiveness of Risk Assessment Models in Business
Decisions: Reinforcing Knowledge. International Journal of Sociotechnology and
Knowledge Development (IJSKD), 10(2), pp.35-53.
Weygandt, J. J. and et.al., 2018. Managerial Accounting: Tools for Business Decision-making.
John Wiley & Sons.
Yang, M.H., 2018. Payback period investigation of the organic Rankine cycle with mixed
working fluids to recover waste heat from the exhaust gas of a large marine diesel
engine. Energy Conversion and Management, 162, pp.189-202.
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