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    Various Approach For Business Decision Making

    University: University of Suffolk

    • Unit No: 4
    • Level: Post Graduate/University
    • Pages: 5 / Words 1313
    • Paper Type: Essay
    • Course Code: MGMT90141
    • Downloads: 467
    Question :

    This assessment will cover following questions:

    • Evaluate in-depth understanding on key decision theories and principles and interpret various approach to business decision making processes.
    • X plc operates in vehicle parts sector. Analyse and interpret results generated by data modelling and forecasting techniques, including those provided by specialised statistical computer software.
    • Implement and demonstrate an understanding of, relevant management science techniques in the X Plc.
    Answer :

    INTRODUCTION

    In the aspect of business entities, it is necessary to take suitable decisions in an effective manner. The term business decision-making can be defined as course of action that is related to choosing a suitable alternative to achieve overall goals (Black, 2019). In order to take correct financial decisions there are different range of techniques such as payback period method, net present value etc. The project report is based on a company, X plc which operates in vehicle parts sector. Company is going to invest in new projects which are technological or mechanical. For this purpose of assessing effectiveness of both projects, two investment appraisal techniques has been applied.

    MAIN BODY

    1. Calculation of payback period.

    For project A (Technological project)

    Year Cash flow (Amount in £) Cumulative cash flow (Amount in £)
    0 -20000 -
    1 8000 8000
    2 10000 18000
    3 12000 30000
    4 15000 45000
    5 19000 64000

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

    = 2 years + (2000/12000) x 12 months

    = 2 years + 0.17 x 12 months

    = 2 years + 2 months

    So, cost of this project will be recovered within 2 years and 2 months.

    For project B (Mechanical project)

    Year Cash flow (Amount in £) Cumulative cash flow (Amount in £)
    0 -30000 -
    1 10000 10000
    2 15000 25000
    3 17000 42000
    4 19000 61000
    5 20000 81000

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

    = 2 years + 0.29 x 12 months

    = 2 years + 3.52 months

    So, cost of this project will be recovered within 2 years and 3 months.

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    2. Calculation of NPV.

    For project A (Technological project)

    Year Cash flow (Amount in £) Present value factor @ 10% Discounted cash flow
    0 -20000 - -
    1 8000 0.909 7272
    2 10000 0.826 8260
    3 12000 0.751 9012
    4 15000 0.689 10335
    5 19000 0.621 11799
    Total = 46678

    NPV= Discounted cash flow – Initial investment

    = £(46678 – 20000)

    = £26678

    For project B (Mechanical project)

    Year Cash flow (Amount in £) Present value factor @ 10% Discounted cash flow
    0 -30000 - -
    1 10000 0.909 9090
    2 15000 0.826 12390
    3 17000 0.751 12767
    4 19000 0.689 13091
    5 20000 0.621 12420
    Total = 59758

    NPV = £(59758 – 30000)

    = £29758

    3. Analysis.

    Benefits and drawbacks of payback period & NPV:-

    Payback period- This can be defined as a type of technique which is related to assessing projected time period in order to recover debt amount. It has below mentioned benefits and drawbacks such as:

    Benefits-

    • Useful in case of uncertainty- This technique is beneficial in the case of uncertain conditions. By help of it, this becomes easier for business entities to become aware about estimated volume of time to recover debt amount (Baker, 2018). Such as in the above calculations, projected time has been computed for both of projects.
    • Simple to use- Another benefit of this technique is that it is very simple to use and calculate. It is so because under this method no additional data is included during calculation. Like in the above calculation of payback period, only data of cash flow has been included.

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    Drawbacks-

    • Does not cover all cash flows- The payback period method consists cash flow till time of investment amount recovered. After that, this technique does not focus on rest of cash flows which is a huge drawback. Like in the above calculation cash flow till 2 years has been used.
    • Not realistic- This technique of investment appraisal is not realistic in nature as it focuses on cash flows and rest of factors are ignored such as time value of money.

    Net present value- It is a type of technique which is used in capital budgeting in order to analyse the profitability of project (Alkaraan, 2015). This is computed by making variation between discounted cash flow and initial investment. Herein, underneath its benefits and drawbacks are mentioned in such way:

    Benefits-

    • Comprehensive tool- This is one of the comprehensive tool as it consider all cash in and outflows. It indicates that this focuses on entire aspects of investment.
    • Time value of money- In addition, under it time value of money factor is also considered in a detailed manner which makes its result more reliable and useful.

    Drawbacks-

    • Discounting rate- Main issue of net present value technique is that under this rate of return needed to be determined. In the case when higher rate of return is assumed then it computes negative NPV.
    • Various assumptions- Along with, NPV makes different types of assumptions in the context of in and out flows (Schlegel, Frank and Britzelmaier, 2016). Due to this, produced outcomes become unrealistic and wrong.

    4. Practical implications.

    In the above part of report payback period and NPV techniques have been applied in order to evaluate effectiveness of two projects which are technological (A) and mechanical (B) project. Both projects have different amount of initial investment that is of £20000 and £30000. In the aspect of payback period, it can be find out that cost of project A will recovered in 2 years and 2 months. While project B's cost will be covered in 2 years and 3 months. Hence, project A seems better in compare to project B.

    In the aspect of NPV method, it can be find out that project A & B have net present value of £26678 and £29758. It indicates that project B is better in compare to project A.

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    CONCLUSION

    On the basis of above project report, it has been concluded that business decision-making is one of the critical process that is based on vital range of techniques. Under the report two techniques are applied which are NPV and payback period. In accordance of NPV method, it can be articulated that project B is better while in the aspect of the payback period this may be concluded that project A is better. Though, in this method outcomes are almost similar for both of projects. So overall, it can be concluded that the company should go with project B.

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