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    Business Development Plan for X Plc

    University: Griffith University

    • Unit No: 2
    • Level: Undergraduate/College
    • Pages: 10 / Words 2549
    • Paper Type: Essay
    • Course Code: BUS 1041
    • Downloads: 452
    Question :

    This assessment will cover following questions:

    • Role of financial and non- financial factors in decision making in X plc company.
    • How decision making helps financially to an organisation.
    Answer :

    ESSAY TOPIC

    “An analysis on payback period, net present value, and financial and non financial factors and how they aid in decision making”

    ESSAY BODY

    Introduction

    X Plc is a vehicle parts manufacturing company which operates in the region of United Kingdom and few parts of Europe. This organisation is planning to invest in a new business, for which they have finalised two distinctive projects. These projects are analysed in order to aid X Plc in decision making by the help of NPV, Payback period and other financial and non financial factors (Fry, 2019).

    Main body

    Net present value is the time value of money which a project can facilitate with to an organisation (Chen, Treviño and Humphrey, 2019). This the difference between the predicted cash inflows and outflows which assists in computing the future profitability and viability of a project (Hopkinson, 2017). For the case of X plc, two projects which are Project A “Technological project” and Project B “Mechanical project” are compared by determining NPV of both the projects.

    Formula of NPV:

    (Cash flows) / ( 1 + r)t

    Calculation of NPV:

    PROJECT A: TECHNOLOGICAL PROJECT

    Formula

    Calculation

    Result

    Net cash flow for year 1

    (Cash flows) / ( 1 + r)t

    (8000) / (1+10%)1

    7272.727273

    Net cash flow for year 2

    (Cash flows) / ( 1 + r)t

    (10000) / (1+10%)2

    8264.46281

    Net cash flow for year 3

    (Cash flows) / ( 1 + r)t

    (12000) / (1+10%)3

    9015.777611

    Net cash flow for year 4

    (Cash flows) / ( 1 + r)t

    (15000) / (1+10%)4

    10245.20183

    Net cash flow for year 5

    (Cash flows) / ( 1 + r)t

    (19000) / (1+10%)5

    11797.50514

    Sum of net cash flows

    46595.67466

    Less: initial investment

    20000

    NPV

    26595.67466

     

    PROJECT B: MECHANICAL PROJECT

    Formula

    Calculation

    Result

    Net cash flow for year 1

    (Cash flows) / ( 1 + r)t

    (10000) / (1+10%)1

    9090.909091

    Net cash flow for year 2

    (Cash flows) / ( 1 + r)t

    (15000) / (1+10%)2

    12396.69421

    Net cash flow for year 3

    (Cash flows) / ( 1 + r)t

    (17000) / (1+10%)3

    12772.35162

    Net cash flow for year 4

    (Cash flows) / ( 1 + r)t

    (19000) / (1+10%)4

    12977.25565

    Net cash flow for year 5

    (Cash flows) / ( 1 + r)t

    (20000) / (1+10%)5

    12418.42646

    Sum of net cash flows

    59655.63703

    Less: initial investment

    30000

    NPV

    29655.63703

     

    By computing NPV of both the projects, it has been seen that present value of project B is higher than the project A that is £29655.63 and £26595.67 respectively. Higher NPV of project B implies that the if X plc selects this project then they will be able to earn high profits against their initial investment. From the NPV determination point of view, this company is advised to make a decision in favour of mechanical project.

    Payback period is a financial measure which helps to ascertain the time period in which initial cost of a project can be recovered by the organisation (Si and et.al., 2016). This measure is a length of time period which a project takes to reach at the situation of break even; i.e., no profit and no loss. For the case of X plc, payback period is calculated so that viability and efficiency of both the projects can be determined. 

    Formula of PBP

    PROJECT A: TECHNOLOGICAL PROJECT

    Year

    Net cash flow

    Cumulative Cash Flow

    1

    8000

    8000

    2

    10000

    18000

    3

    12000

    30000

    4

    15000

    45000

    5

    19000

    64000

    The initial investment for this project is £20000. Now, £18000 is recovered in Year 2 and £2000 remains unrecovered.

    So, Payback period = 2 + (2000/12000*12)

     = 2 + 2

    = 2 years 2 months

    PROJECT B: MECHANICAL PROJECT

    Year

    Net cash flow

    Cash Flow

    1

    10000

    10000

    2

    15000

    25000

    3

    17000

    42000

    4

    19000

    61000

    5

    20000

    81000

    The initial investment for this project is £30000. Now, £25000 is recovered in Year 2 and £5000 remains unrecovered.

    So, Payback period = 2 + (5000/17000*12)

    = 2 + 3.52

    = 2 years 3.52 months

    From the above numerical analysis, it is evident that payback period of project A is 2 years and 2 months which is slightly less than payback period of project B that is 2 years and 3.52 months this implies that both the project will take approximately similar time to recover their initial investments. The only difference which can be seen is that project A is slightly efficient than project B as this project will recover initial cost faster with the matter of few days.

    Apart from NPV and PBP, there are few other financial and non financial factors as well which can aid X plc to take reliable decision for their growth and development. Some of these financial factors are Interest rates and economic growth. And some of the non financial factors include Industry stability and future legislations (Esch, Schulze and Wald, 2019).

    SWOT is the tool that help to determine associated strengths, weaknesses, opportunities and threats with project (Black, 2019). The importance of same in decision making is significant as strength help to ascertain the viability of project to grab the opportunities along with power in reduction of threats. This aid in selection of best project which is most compatible in nature at internal and external environment.

    PESTLE is the framework that includes determination of the impact of external factors over project (Baker, 2018). This aid in ascertainment of viability of project in future on the basis of associated opportunities and power of an organization to overcome threats. This help in selection of project which ascertain all positive impact from the external factors in future as they linked with amount of profitability.

    Interest rates are the costs which an organisation has to pay for the purpose of borrowing (Burgas, Arlidge and Addison, 2018). X plc is planning to invest in a new project for which they have to borrow funds from banks. In current UK economy, new businesses are favoured and provided by loans with low interest rates. As project B has higher profitability margin, this will help them to procure loans at effective rates with the guarantee of their prospect future profit margins. Economic growth is also a financial factor which influences the decision of selecting a specific project. Due to high economy growth patterns in United Kingdom, X plc can select any project but it will be more viable to select a project by which they can earn more profit and that is Project B.

    Non financial factor such as Industry stability is an important factor which can assist in process of decision making. The manufacturing industry of UK is stable in which a trend of investing in mechanical industry is observed. This implies that if X plc invests in project B that is a mechanical project then it has higher chances of growth as mechanical industry is currently growing at rapid speed in the region of United Kingdom (Mechanical and technological industry of United Kingdom, 2019). Future legislations are also a non financial factor which is related with the future governmental laws which can affect the project and its investments. UK is currently facing the issue of BREXIT due to which there are high chances of experiencing new laws regarding trade and business. In such situation, it is advised to X plc to consider project B as with this project they can at least earn high profit and will be able to cover all their investments in just the period of 2 years and 3 months.

    Conclusion

    From the above computations of net present value and payback period along with few financial and non financial factors, a conclusion is evidently developed that project B is much more effective and efficient than project A as it is able to generate more profit, is able to cover the initial cost in approximately same time as project A and other factors are in favour of mechanical project rather than a technological project. So, with this conclusion, X plc is advised to take a reliable decision in the favour of project B so that they can get higher chances of growth and development in a dynamic environment.

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