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    Business Analysis and Decision Making - ABC plc

    University: London School of Commerce

    • Unit No: 7
    • Level: Post Graduate/University
    • Pages: 8 / Words 2050
    • Paper Type: Essay
    • Course Code: BA1030
    • Downloads: 274
    Question :

    Learning Outcomes assessed:

    LO1: Generate knowledge and understanding on key decision theories and principles and interpret different approaches to business decision-making processes.

    LO3: Analyse and interpret results generated by data modelling and forecasting techniques, including those provided by specialized statistical computer software.

    LO5: Use, and develop an understanding of, relevant management science techniques.

    Assessment Criteria:

    The essay task allows the student to develop an understanding of how decisions ae made by the organisations based on the analysis of data.

    The essay allows the student to generate an understanding of how the decision-making processes works and how they can be used to plan for the future.

    In the essay the student is required to evaluate at the various techniques, with reference to a specific industry.

    TASK

    ABC plc is a computer software company which is trading in the UK and some parts of the Europe. Its strategic managers are looking to invest in a new business. They have made new business proposals and finally, selected two projects in managers’ discretion to make final decision. The initial investment required for Project A is £40,000 and for investment required for project B is £60,000. The expected rate of return is at 12%. The net cash flows for two projects can be summarized as below:

    Year

    Project A – Motor Software Project

    Project B – Hardware Project

    0

    (£40,000)

    (£60,000)

    1

    £8,000

    £10,000

    2

    £12,000

    £20,000

    3

    £16,000

    £25,000

    4

    £20,000

    £30,000

    5

    £30,000

    £40,000

    Write an essay on business decision making, covering financial and non-financial factors, and the payback period and NPV used to help decision making.

    Word count – 1000 words

    Answer :

    INTRODUCTION

    Business decision making is referred as course of action that are chosen primarily from the set of alternatives for achieving the managerial or organisational goals or objectives. Decision making is a continuous and a indispensable component for managing organisation and its business activities. The present report will provide an understanding about how NPV and payback period helps in decision-making. Further the financial and non financial data is also addressed in the report.

    TASK

    Success of company is defined by the effectiveness of business decision-making process. Organisations have a notional trend that decisions of only senior executives are considered and that the decisions can be made only by them. Decision-making helps managers and business professionals in solving the problems by examining alternatives and deciding the best and most beneficial route (Wooldridge, and Cowden, 2020). Organisations follow a step-by-step approach that is an efficient way of making informed and thoughtful decisions having the impact over short term and long term objectives of company.

    ABC plc a software company is planning to invest in new business. Company is available with two proposals to invest. The financial decisions will be taken using the capital budgeting techniques. It will enable the company to choose the best project.

    Net Present Value – It is an tool used by the experts for checking the viability of project or investments. Project is considered when the value left with the company after deducting cost of investment from discounted cash flows is positive (Weber, 2019).

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    Payback period – The technique provides the managers the time period within which the cost of investment will be recovered. Shorter the period more beneficial for the company as it will start earning profits after recovering its cost.

    PROJECT 1

    Net Present Value of Project 1

    Computation of NPV 

    Year

    Cash inflows

    PV factor @ 12%

    Discounted cash inflows

    1

    8000

    0.893

    7142.8571428572

    2

    12000

    0.797

    9566

    3

    16000

    0.712

    11388

    4

    20000

    0.636

    12710

    5

    30000

    0.567

    17023

    Total discounted cash inflow

    57831

    Initial investment

    40000

    NPV (Total discounted cash inflows - initial investment)

    £17831

    Payback period of project 1

    Computation of Payback period 

     

    Year

    Cash inflows

    Cumulative cash inflows

         

    1

    8000

    8000

    2

    12000

    20000

    3

    16000

    36000

    4

    20000

    56000

    5

    30000

    86000

    Initial investment

     

    40000

    Payback period

     

    2

       

    1.7

    Payback period

     

    3 year and 7 months

    PROJECT 2

    Computation of NPV 

    Year

    Cash inflows

    PV factor @ 12%

    Discounted cash inflows

           

    1

    10000

    0.893

    8928.5714285714

    2

    20000

    0.797

    15944

    3

    25000

    0.712

    17795

    4

    30000

    0.636

    19066

    5

    40000

    0.567

    22697

           

    Total discounted cash inflow

       

    84430

    Initial investment

       

    60000

    NPV (Total discounted cash inflows - initial investment)

     

     

    £24430

    Net present value of Project 2

    Computation of Payback period 

     

    Year

    Cash inflows

    Cumulative cash inflows

         

    1

    10000

    10000

    2

    20000

    30000

    3

    25000

    55000

    4

    30000

    85000

    5

    40000

    125000

    Initial investment

     

    150000

    Payback period

     

    2

       

    1.5

    Payback period

     

    3 year and 5 months

    Payback period of project 2

    Interpretation

    NPV

    Payback Period

    Project 1

    £17831

    3 years & 7 months

    Project 2

    £24430

    3 years & 5 months

    The above analysis of both projects shows that project 2 is more preferable in comparison to project 1. Study gives NPV of £17831 for project 1 and a payback period of 3 years and 7 months. No doubt the project is viable and can be adopted by the company as it will drive profits to the company. Company should adopt this project when it is not available with any other option. But when company is available with an other option, the feasibility of other project should also be checked. Ultimate goal of business is to make effective utilisation of the resources. Project 2 gives NPV of £ 24430 with a payback period of 3 years and 5 months. The outcome shows that project 2 will be more beneficial. Project with higher NPV are more profitable and the payback period is also shorter than project 1. Company will start making profits after reaching the break even point earlier in this project even when the cost of investment is higher. Cost of project 2 is higher than 1 but it can be seen that cash flows are higher which will enable company to generate profits more earlier after covering the cost. After the above study it could be suggested that company should adopt project 2 for business expansion.

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    Financial and Non financial factors in decision-making.

    Financial factors

    Financial factors refers to the quantitative information related to the financial figures that play and important part in decision-making. Company cannot make decision without adopting the financial factors influencing the decision-making process. The financial statements are major the major information provider on which decisions in company are based. These statements include income statement, that tells about the profitability of company. The efficiency of company in managing its operations is judged by its income statements by the profits reflected. Balance sheet is financial statements representing the financial position of company. It represents the assets and liabilities of company (Skyrius, 2018). Cash flow statements show whether company is available with sufficient funds for making investments and meeting the working capital requirements of company. Other financial factors used in decision-making are budget reports, cost reports and others. These are used by management to make decision making process to make more accurate and effective decision.

    Non Financial factors

    Non financial factors are those that can affect the decision making process. These factors have equal importance in the decision making. It includes effects of motivation, effective communication, efficiency of employees for given targets and tasks, government policies and procedures (Bals, Kirchoff and Foerstl, 2016). Companies are require to take these factors into consideration as it can badly affect the achievement of goals and objectives of company.

    CONCLUSION

    Above study shows that business decision making process should be straight and clear. It plays great importance in growth and success of company. Company has to consider both financial and non financial factors in making the decisions. Financial decisions are taken after applying different tools and techniques which gives them the base for making decisions.

    You Can Also Check More Samples From the Same Category - Business Strategy

    REFERENCES

    Wooldridge, B. and Cowden, B., 2020. Strategic Decision-Making in Business. In Oxford Research Encyclopedia of Business and Management.

    Weber, J., 2019. Understanding the millennials’ integrated ethical decision-making process: Assessing the relationship between personal values and cognitive moral reasoning. Business & Society. 58(8). pp.1671-1706.

    Skyrius, R., 2018. Business Decision Making. In 2001 Informing Science Conference (Vol. 1).

    Bals, L., Kirchoff, J.F. and Foerstl, K., 2016. Exploring the reshoring and insourcing decision making process: toward an agenda for future research. Operations Management Research. 9(3-4), pp.102-116.

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