Essay on Business Decision Making

Calculation of payback period 

For project A:

Payback period= 3+4000/20000*12 months

= 3 years + 2.4 months

So cost of this project's cost will be recovered in 3 years and 2 months

For project B:

Payback period= 3 + 5000/30000*12 months

= 3 + 2 months

So cost of this project's cost will be recovered in 3 years and 2 months

On the basis of above calculation of payback period, company should choose project B as its time period is lower. Want to get Assignment Samples?Talk to our Experts!

Calculation of NPV:

Project A:

NPV= Discounted cash flow - initial investment

So, the NPV of project A is of 17810 pounds.

Project B:

So, the NPV of project B is of 24400 pounds.

On the basis of above calculated NPV of both projects, company should choose project B. This is so because its present value is higher.

Analysis:

Payback period- It is a type of technique that is related to computing estimated time that can occur in process of recovering cost of debt (Dumitru-Alexandru, 2016). This technique has below mentioned advantages and disadvantages such as:

Advantages:

• For managers inside the organization, this technique is simple to use it and easily understandable. Since they require less data and are comparatively easier to measure the real annual cash flow for projects.
• The payback technique is highly valuable to markets that are volatile or experience changes in technology. This ambiguity makes it difficult to forecast possible annual cash inflow and sometimes leads to incorrect results. In this aspect, payback period method helps to companies.

Drawbacks:

• No certainty is given that a venture will successfully complete either a shortened payback period. If the cash flow of the project stops or declines during the repayment duration.
• As well as this technique does not consider all cash flows in evaluation of any project. It considers value of cash flows till cost of project. After that this does not focus on rest of cash flows.

Net present value- Generally, the discrepancy between the current value of cash inflows and outflows is considered the net present value over time. The managers use it primarily to determine a specific project's profit margin (Eijdenberg, Paas and Masurel, 2017). Growing project having a positive NPV must be undertaken by the business, which will give the respective positive results.

Advantages:

• The NPV method allows corporations to take decisions. It not only assesses projects with the same size, but enables to determine whether a specific investment is profitable or profitable.
• The main benefit of using NPV is that the principle of time value for money is taken into account. Take Marketing Assignment Helpfrom professional experts!

Drawbacks:

• The complete NPV calculation is based on reducing future profits by using the required rates of return to its present value. There are, nevertheless, no recommendations on this rate assessment.
• The disadvantage of NPV is that ventures of various sizes cannot be compared. NPV is a percentage, not an actual number (Ferguson, 2014). The NPV of bigger projects would therefore necessarily be larger than a small project.

Financial and non-financial factors:

Financial factor-

• Profit- This is a key element of financial factor which is related to difference between cost and revenues. It is goal of all business entities to gain higher profit so that invested cost can be covered.
• Interest rates- It is a type of rate on which financial entities give financial assistance to needed parties. In the success of companies, this rate plays a crucial role because if this rate will be lower than it will be easier for businesses to acquire funds at lower cost. Ask for assignment help from our experts!

Non-financial factor-

• Political factor- This is related to different kinds of legislations and regulations which are set by government of a nation. Companies can be affected due to this if there is instability in political condition (Gal, Stewart and Hanne, 2013).
• Technological factor- It is linked to a factor that is related to changes in technological aspects. Due to changes, this becomes essential for companies to adopt new changes.

Practical implications:

In the above part of report, analysis of project A and B has been under NPV and payback period method. Under payback period, the value of both project is almost similar. Such as project A's cost will be recovered in 2 years and 2.4 month and project B's cost in 2 years and 2 months. While under NPV method, project A's present value is of 17810 and project B's is of 24400. This is indicating that ABC limited company should go with project B.

CONCLUSION

On the basis of above project report, this can be concluded that companies should take financial decision by making proper evaluation under different techniques. In accordance of analysis of NPV and payback period, this can be articulated that company should make invest in project B.

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