Various Approach to Business Decision Making Processes - X Plc

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1. Calculation of payback period in projects A & B.

For project A ( Technological project )

Initial investment => 20000

Payback period => Years before recovery + UN-recovered cost at start of year/ cash flow during year x 12 months

=> 2 years + (2000/12000)* 12 months

=> 2 years + (0.17* 12) months

=> 2 years + 2 months

Hence, cost of 20000 pounds for project A will be recovered in 2 years and 2 months.

For project B ( Mechanical project )

Initial investment = 30000

Payback period => 2 years + (5000/17000)*12 months

=> 2 years + (0.29*12) months

=> 2 years + 3.52 months

Hence, the cost of 30000 pounds for project B will be recovered in 2 years and 3 months.

2. Computation of Net present value.

For project A (Technological project)

Initial investment=> 20000

NPV=> Discounted cash flow – Initial investment

=> ( 46678 – 20000 ) pounds

=> £26678

For project B (Mechanical project)

Initial investment => 30000

NPV => ( 59758 – 30000 ) Pounds

=> £29758

3. Analysis.

Advantages and disadvantages of payback period method & Net present value method:-

Payback period method- This is defined as one of the key technique of investment appraisal. Under it, estimated time is calculated in order to recover investment amount. To compute payback period of various project, there is a particular formula which is as follows:

When cash flows are equal:

Payback period => Initial investment/ cash flow

When cash flows are unequal:

Payback period => Year before recovery + UN-recovered cost at start of year/ cash flow during year x 12 months

Advantages:

• Easy and simple method- This method is very easy and simple to use. It is so because this does not include any complex calculation. To compute payback period only value of cash flow and investment is required (Schaper, 2016). Like in the calculation of payback period of project of X plc information about cash flow and investment is included.
• Ranking of projects- In addition, it is useful for companies for arranging projects in a rank as per the efficiency of projects. Due to this it becomes easier for managers to take correct decisions about making investment.

Disadvantages:

• Ignores annual cash flow- Payback period method consider only those cash flows till that investment amount recovered. After that, it does not focus on rest of cash flows which is a huge issue (Strauss, Kristandl and Quinn, 2015).
• Overlooks capital cost- Under this method, capital cost is ignored which makes produced results wrong and unrealistic. It considers only cash flows and investment amount.

Net present value- It can be defined as a type of method of investment appraisal in which current value of projects is evaluated. In order to compute net present value of project, amount of initial investment is deducted from discounted cash flow.

Advantages:

• One of the key benefit of this technique is that under it cost of capital factor and risk factor is considered which makes results more reliable (Kuziemsky, 2016).
• As well as this technique is based on a basic idea that futuristic value of dollar is worth less in compare to value of dollar in present time.

Disadvantages:

• One of the key issue of NPV model is that it needs some assumption regards to cost of capital of project.
• In addition, this method is not useful for making comparison of two projects whose size is different from each other.

4. Practical implications.

On the basis of above calculation of two projects of X plc this can be find out that both projects have some strengths and weaknesses. In accordance of payback period method, this can be analysed that project A ''s cost can be recovered within two years & two months and project B 's cost in two years & 3 months. This shows that project A is better. While in the net present value method, this can be find out that project A 's present value is of 26678 pounds and B 's is of 29758 pounds. Under this method, project B seems better. So overall company should expand in project B.

CONCLUSION

On the basis of above project report it can be concluded that accurate business decisions are necessary for success of companies. Report covers about calculation of payback period and NPV as per the given data of two project A and B. On the basis of calculated data, this can be concluded that project B is better. As well as in the end part of report, benefits and drawbacks of both investment appraisal techniques is concluded.

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REFERENCES

Gubler, J .R., Kalmoe, N. P. and Wood, D .A., 2015. Them’s fightin’words: The effects of violent rhetoric on ethical decision making in business. Journal of business ethics. 130(3). pp.705-716.

Schaper, M. ed., 2016. Making ecopreneurs: Developing sustainable entrepreneurship. CRC Press.

Strauss, E., Kristandl, G. and Quinn, M., 2015. The effects of cloud technology on management accounting and decision-making. Management and Financial Accounting Report. 10(6).

Kuziemsky, C., 2016, January. Decision-making in healthcare as a complex adaptive system. In Healthcare management forum (Vol. 29, No. 1, pp. 4-7). Sage CA: Los Angeles, CA: SAGE Publications.

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