Business Decision Making Assignment Solution (GC01815)
Table of Contents
1.0 Introduction.
2.0 Calculation of the payback period.
3.0 Calculation of NPV.
4.0 Evaluate and analyze the calculated results and make the final decision.
5.0 Conclusion.
References.
1.0 Introduction
Applying appropriate methods is essential for making an effective decision for any investment project (Will 2017). This paper calculates and analyzes two investment projects for XYZ plc using two different methods: payback period and net present value. This paper also analyzes how different financial and non-financial factors affect stakeholders and the investment decision-making process.
2.0 Calculation of the payback period
Project A-Software Project
| Year | Cash flows (£) | Balance (£) |
| 0 | (£100,000) | (£100,000) |
| Year 1 | £28,000 | -£72,000
(-£100,000+£28,000) |
| Year 2 | £32,000 | -£40,000
(-£72,000+£32,000) |
| Year 3 | £35,000 | -£5,000
(-£40,000+£35,000) |
| Year 4 | £55,000 | £50,000
(-£5,000+£55,000) |
| Year 5 | £78,000 | £128,000
£50,000+£78,000 |
= 3 years and 1.09 months
Project B- Launderette Project
| Year | Cash flows | Balance |
| 0 |
(£120,000) |
(120,000) |
| Year 1 | £31,000 | -£89,000
(-£120,000+£31,000) |
| Year 2 | £38,000 | -£51,000
(-£89,000+£38,000) |
| Year 3 | £43,000 | -£8,000
(-£51,000+£43,000) |
| Year 4 | £64,000 | £56,000
(-£8,000+£64,000) |
| Year 5 | £89,000 | £145,000
£56,000+£89,000 |
3.0 Calculation of NPV
Project A-Software Project
| Year | Cash flow
£ |
Discount factors (11%) | Present value
£ |
| 0 | (£100,000) | 1.00 | (£100,000) |
| Year 1 | £28,000 | 0.901 | £25228 |
| Year 2 | £32,000 | 0.812 | £25984 |
| Year 3 | £35,000 | 0.731 | £25585 |
| Year 4 | £55,000 | 0.659 | £36245 |
| Year 5 | £78,000 | 0.593 | £46254 |
| Present value | £159296 | ||
| Net present value | £159296 – £100,000
= £59296 |
Project B- Laundrette Project
| Year | Cash flow
£ |
Discount factors (11%) | Present value
£ |
| 0 | (£120,000) | 1.00 | (£120,000) |
| Year 1 | £31,000 | 0.901 | £27931 |
| Year 2 | £38,000 | 0.812 | £30856 |
| Year 3 | £43,000 | 0.731 | £31433 |
| Year 4 | £64,000 | 0.659 | £42176 |
| Year 5 | £89,000 | 0.593 | £52777 |
| Present value | £185173
|
||
| Net present value | £185173– £120,000
= £65173 |
4.0 Evaluate and analyze the calculated results and make the final decision
Benefits and drawbacks of the payback period and NPV
Rees (2015) said the Payback period refers to the time which takes the cash flows of income from a specific project to cover the initial investments. When a company has to make a choice, they will choose the project with the shortest payback period. This method is simple to use and easy to understand. It also helps the manager to take a quick decision (Knight, 2017). It is also helpful for uncertain situations. As an investment analysis method payback period is one of the easiest techniques (Cohen and James, 2016). However, this method avoids the time value of money and does not consider the normal business situations that are important for making effective investment decisions (Rees, 2015). Among the projects, the project that has a lower payback value will be considered as a good one (Rees, 2015). In terms of XYZ plc, both projects are showing positive payback periods. However, as Project A (3 years and 1.09 months) is showing a lower payback period than Project B (3 years and 1.5 months), Project A has a higher priority to be accepted.
According to Rees (2015), NPV is used for cash flow budgeting and investment planning to find the profitability of projects. It is the best method for cash flows budgeting and the company’s various projects. The key advantages of the NPV method are assumptions of reinvestment, acceptance of conventional cash flow patterns, a good measure of profitability, etc. However, this technique does not focus on sunk cost, size of the project, and optimistic projections (Dave, 2016). Amy (2014) stated that there are two types of NPV methods- positive and negative. If the project has a positive NPV, it means the project is acceptable for the company. In contrast, if a project shows a negative NPV, it is not an acceptable project for a business company. In the case of XYZ plc, as both projects show positive NPV, it has options to choose anyone. However, as Project B is showing a higher NPV (£65173) than Project A (£59296), Project B can be given more priority. On the other hand, as Project A needs lower investment (100,000) than Project B (120,000), Project A can be considered by XYZ plc if it has capital shortages.
Financial and non-financial factors and their implication on stakeholders and decision-making process
Both financial and non-financial factors have implications on the stakeholder’s engagement and decision-making process in an investment project. Different financial factors such as cost of sales, depreciation, interest, estimating cash flow values, taxes, and conventional deterministic cash flow have significant implications on the stakeholders and decision-making project of investment (Knight, 2017). Thus, XYZ plc must keep these financial factors under consideration before making the final decision for the investment project. However, not only considerations of financial factors are not fair enough to make the final decision, but it is also needed to consider non-financial factors. According to Rees (2015), a number of non-financial factors including social responsibility information, corporate governance, organization, funding, size, transparency, and company reputation have significant implications on the stakeholder’s engagement and decision-making process in an investment project.
Thus, XYZ plc must consider these factors before investing in Project A or Project B. Additionally, as Dave (2016) guidelines, XYZ plc considers and analyzes its management, compliance, market environment, policies, industry rivalry, human capital risk, the growth potential for product, markets and customers before investing in a particular project because these issues may affect the success and performance of the project. According to Rees (2015), employee relationships, organizational structure and culture, customer relationships and enactment as non-financial factors may have implications on the stakeholders and decision-making process of XYZ plc’s investment project.
5.0 Conclusion
In summary, The PBP and NPV can be used for the given project. Both methods have benefits and drawbacks that are briefly explained here. Thus, XYZ plc should apply both methods in the practical fields to come to a final decision. It also shows there are the practical implication of both methods on the stakeholders and the process of decision making.
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