Essay on Business Decision Making

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

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For project A:

 Payback period= 3+4000/20000*12 months

= 3 years + 2.4 months

This shows that cost of $40,000 of project will be covered in 3 years and 2.4 months.

For project B:

 Payback period= 3 + 5000/30000*12 months

= 3 + 2 months

This is indicating that the cost of $60,000 of this project will be covered in 3 years and 2 months.

In accordance with the above calculated value of the payback period, it can be assessed that project B's estimated time period is lower as compared to project A. Thus, the above company should invest in project B.

2. Calculation of NPV:

Project A:

NPV= = discounted cash flow minus initial investment

Project B:

 In accordance of above calculated value of NPV, this can be assessed that project A has net present value of 17810 and B has 24400. It shows that project B will be viable for the above company.  Thus, the above company should invest in project B.

3. Analysis:

Payback period: It is a type of methodology linked to computation of expected time that can arise in the debt recovery phase (Quinn, Strauss, and Kristandl, 2014). In the aspect of the above ABC company's project, two projects have been analysed under this technique in order to take suitable decisions. This methodology has the pros and cons listed below, like:

Pros-

• The key benefit of this technique is that it is a very simple way to compute the efficiency of projects as compared to the rest of other appraisal techniques.
• As well as another benefit of this technique is that it is a more reliable method in which companies can relay.

Cons-

• This technique does not meet all criteria for computing the efficiency of projects, such as neglecting the time value of cash inflows. Due to which it becomes difficult for companies to find out the accuracy of projects.
• Another drawback of this technique is that it does not consider the value of cash flows after receiving the amount of the initial investment.

Net present value technique: It is a type of method in which the current value of projects is analysed by making a difference between discounted cash flows and initial investment (Sutherland and Holstead, 2014). Under this technique, it is important to know that if a project's present value is higher, then it is considered a priority. In regards to the above company's two projects A and B, this technique is applied in order to evaluate projects effectively. Underneath, pros and cons of the NPV method are mentioned in such a manner:

Pros-

• The major benefit of this technique is that it considers efficiency to make comparisons between projects. It becomes possible by analyzing the current values of projects.
• Along with this method, the time value of money factor is also considered. It is so because the value of money can fluctuate in the future due to higher inflation and deflation.

Cons-

• The drawback of this method is that it is based on different assumptions, which makes outcomes more complex and less reliable.
• In addition, complexity in calculation is also a main drawback of this technique.

Financial and non-financial factors:

Financial factor-

• Profit: It is defined as the positive difference between cost and revenues. This is common goal of all companies to achieve higher profit and it is key element of financial factor.
• Interest rate: This is a type of rate on which financial entities provide financial assistance. It plays a key role in acquiring funds by companies.

Non-financial factor-

• Political factor: This is related to the political condition of a nation, which consists of regulations, government policies, and many more (Waage, 2014). It is essential for companies to comply with this factor.
• Technological factor: It is essential for companies to comply with new and advanced technologies so that they can beat their competitors.

4. Practical implications.

In accordance with the above calculations of NPV and payback period method, this can be found to mean that the company should go with project B. It is so because the payback period for project A and B is of 3 years & 2.4 months and 3 years & 2 months. It is showing that project B will be effective for ABC limited company. While in the NPV, the value of projects is different, such as project A having a present value of 17810 and project B having a value of 24400. It shows that project B should be chosen.

CONCLUSION

In accordance with the above project report, it can be concluded that corporations should choose financial projects after making proper analysis. In the report, two projects A and B have been evaluated under payback period and NPV method. On the basis of that evaluation, it can be concluded that ABC Limited Company should invest in Project B.

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