Business Decisions Making for X Plc

This report covers the final decision to be made by X plc as company wants to open new business. In addition different investment appraisal techniques are used to determine the most profitable investment for X Plc.

TASK 1

Year	Project A – Technological Project (£)	Cumulative	Discount factor (10%)	Present value	Project B – Mechanical Project (£)	Cumulative	Discount factor (10%)	Present value
0	(£20000)	(£30000)
1	8000	8000	0.909	7272	10000	10000	0.909	9090
2	10000	18000	0.826	8260	15000	25000	0.826	12390
3	12000	30000	0.751	9012	17000	42000	0.751	12767
4	15000	45000	0.689	10335	19000	61000	0.689	13091
5	19000	64000	0.621	11799	20000	81000	0.621	12420
Total	46678	Total	59758
£20000-£18000	£2000	£30000-£25000	£5000

 

1. Calculation of the payback period

For Project A

Payback period = 2 years + 2000/12000 * 12 months

= 2 years and 2 months

As the most appropriate and closest value for initial investment will be in 2^nd year.

For Project B

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

= 2 years and 3 months

As the most appropriate and closest value for initial investment will be in 2^nd year.

2. Calculation of NPV

For Project A

NPV = (£ 20000) + £46,588

= £ 26,588

For Project B

NPV = (£ 30000) + £ 59,644

= £ 29, 644

 

3. Analysis

Importance of Payback period

The real time required by specific total net balances or flows to regenerate the overall amount spent through an investment is recognised as payback time (Bogner, 2014). This is noted that such a technique is considered by the management team to establish the risk related to the different project proposal. This method have number of benefits and drawback which are listed below:

Advantages:

• In context to those business firms which have uncertain business atmosphere or even business operation changes with the change in technological shift this method is useful.
• It's straightforward method to get and implement as it make possible for the administrator inside the corporation to make profitable decision. As this method need fewer information and it is comparatively easier to measure overall annual cash flows for expenditure.

Disadvantages:

• The method of Payback period do not consider the normal business condition due to which many time it leads to wrong results. As capital investment are not made by company for only one time (Cosgrove and Rijsberman, 2014). 
• There really is no guarantee that even a business proposal will be effective either with a smaller payback time. In case if the cash inflow of the proposed plan stops after the term of the loan or collapses during the repayment period.

Importance of Net present value

In particular, the disparity between the current value of currency cash flows and outflows is defined as the net present value within the same given period of time (Foster, Reilly and Dávila, 2016). It is primarily used by business owner to determine the proposal's profit margin. It is assumed that each plan which has a significant NPV in the monetary future should be undertaken by the business which will offer the particular corporation a favourable result.

Advantages:

• One of the major benefit of net present value is related with involvement of time worth of monetary resources engaged in a business. It also define the actual movement of these resources at the time of inflation and deflation.
• This support in comparing the overall ability of a proposed projects to recover the present value of investments.
• The calculation includes each of the expected cash returns and money paid and the amount of revenue for years when the actual investment was made by company.

Disadvantages:

• This approach requires further complex estimation through using quantitative statistics and column that provides multipliers for various time periods and interest rates (Quanyu, Tong and Leonard, 2013).
• Among this technique, the administrator intends to make certain assumptions regarding the current cash handling related with particular project which gives wrong results at many situations.

There are different financial and non financial factors due to which the results of NPV and payback period might gets impacted. So manager of company consider each factors, some of these are as follows:

Financial Factors:

• Investment cost
• Discounted rate
• Modified Internal rate of return.

Non financial Factors:

• Climatic issues which hamper business activity.
• Staff motivation.
• Customer satisfaction and trends in demands.

4. Practical Implications

The above discourse define the importance of different investment appraisal techniques which support in identifying the most profitable and efficient investment for company. Payback period is used in ascertaining the total time taken to recover the amount of investment
(Tseng, Chiu and Liang, 2018). Similarly Net present value of all the cash inflows which must be higher than the investment amount so company can make profitable decision. There have been two new investment plans in the sense of X plc, like Project A is £ 20000 and £ 30000 for Programme B. The average annual return rate is 10%. The return on investment for project A is 2.2 years as well as the net present value expected in the same year is £ 26588. At the other side, the current value anticipated will be £ 29644 as well as the return on investment will be 2 years 3 months. Therefore it was suggested according to the above estimate that new investment plan for plan A will become more advantageous because it has shorter time frame to regain the real investment of £ 20000.

CONCLUSION

It was stated at a the conclusion of such a report the strategic decision-making is the method that involves the variety of a potential plan of action from either the two available options in order to achieve as much profit as feasible. The current value of the investment can be estimated based on the associated rate of return while using the process of NPV. The repayment duration at the other side is being used to calculate to break even point to the amount invested on a certain project.

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