Business Analysis and Decision Making - ABC plc

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).

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 NPVÂ
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 periodÂ
Â
Year	Cash inflows	Cumulative cash inflows
Â	Â	Â
1	8000	8000
2	12000	20000
3	16000	36000
4	20000	56000
5	30000	86000
Initial investment	Â	40000
Payback period	Â	2
Â	Â	1.7
Payback period	Â	3 year and 7 months

PROJECT 2

Computation of NPVÂ
Year	Cash inflows	PV factor @ 12%	Discounted cash inflows
Â	Â	Â	Â
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
Â	Â	Â	Â
Total discounted cash inflow	Â	Â	84430
Initial investment	Â	Â	60000
NPV (Total discounted cash inflows - initial investment)	Â	Â	£24430

Net present value of Project 2

Computation of Payback periodÂ
Â
Year	Cash inflows	Cumulative cash inflows
Â	Â	Â
1	10000	10000
2	20000	30000
3	25000	55000
4	30000	85000
5	40000	125000
Initial investment	Â	150000
Payback period	Â	2
Â	Â	1.5
Payback period	Â	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.

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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