Business Decision Making Essay Answer

Introduction

Business enterprises commonly employ a complex decision-making process that entails the careful evaluation of multiple elements, encompassing financial considerations as well as non-monetary aspects. The process of capital budgeting is of utmost importance as it involves the evaluation and selection of projects, as well as the analysis of potential long-term investments. The ability to make prudent capital budgeting decisions is of utmost importance for firms in order to efficiently allocate resources and achieve their long-term goals.

Discussion

PP plc is a major European cake producer with a focus on the British market. Due to current resource constraints, they have had to acquire eggless and vegan cakes from elsewhere in their product range. The strategic management group at PP plc is currently debating whether or not to engage in a venture aimed at the creation of eggless or vegan cakes. Two concepts were selected from the pool of potential new business ventures based on the managerial discretion displayed during the selection process (Agung & Zuhri, 2023).

The Net Present Value (NPV) approach is utilized to determine the present value of a project's anticipated cash inflows and losses by factoring in the time worth of money. This method is referred to as the discounted cash flow method. A positive net present value (NPV) indicates that the project has a good chance of making money, whereas a negative NPV indicates that the project has a good chance of losing money (Dai et al., 2022)

It is possible to assert that Project B possesses a greater Net Present Value (NPV) than Project A, regardless of what transpires in the future. Due to the fact that it takes into consideration the concept of the time worth of money as well as the 9% discount rate, this fact shows that Project B is a superior investment choice than Option A.

The NPV of both the projects are as follows:-

Table 1: NPV of the projects

Among the several capital budgeting methods available, the payback period is one of the simplest. How long it takes for a project to earn back its initial investment is measured by this indicator. This method is frequently used by start-ups and companies operating on a tight budget. However, it disregards the importance of compounding interest (Malenko, 2019).

To determine how long, often measured in years, it will take to recoup one's initial investment; one must first perform the calculation that gives rise to the payback time. Therefore, the point at which an investment becomes profitable is determined. Because businesses typically favour PBPs that are shorter, the payback period of a particular safety investment can be a factor in selecting whether or not to move forward with a safety project. Payback times can also be abbreviated as "payback periods." PBP does not consider how profitable something is and does not take into account any potential benefits that may arise after the allotted amount of time has passed. This is an essential fact to keep in mind. In addition, the concept does not take into consideration the fluctuating worth of money over time or the expenses associated with lost opportunities. To calculate the PBP, divide the cost of making investments in safety by the total amount of rewards that are received on an annual basis. The payback period is as follows:-

Table 2: Payback period

The process of making a decision is heavily influenced by a number of aspects that are not economical. When it comes to drawing conclusions about the future opportunities available to a company, there are a number of different elements that need to be taken into consideration, with the availability of financial resources being only one of those factors. It is possible that non-financial factors, such as the current state of the market, the preferences of customers, and the impact on the environment, will not be the only factors that decide the trajectory of a business enterprise. Similarly, the executives may take into consideration the skills and resources that are already available within the company. These may include the number of available skilled workers as well as the quantity of space that is available for production. In the given situation, if the company has a bigger quantity of resources committed to one project in comparison to another, it may be more beneficial for the corporation to invest in the former of the two projects (Le, 2021).

Conclusion

Significant financial measures that help to decision-making processes include the payback period as well as the net present value (NPV). However, it is necessary to take into account additional non-financial variables, such as the trends in the market, the preferences of customers, the effect on the environment, as well as the competencies and assets held internally. PP plc is in charge of making sure that vegan cakes and eggless cakes that have been fortified with vitamins and minerals have low payback periods and provide positive net present values (NPVs). However, the net present value (NPV) for the standard smoothies demonstrates a higher value, which indicates a trend toward stronger returns. In the end, it is necessary that the government participate in a full analysis of relevant aspects in order to identify the ideal course of action with regard to job selection. This can be accomplished by conducting an analysis.

References

Dai, H., Li, N., Wang, Y., & Zhao, X. (2022, March). The Analysis of Three Main Investment Criteria: NPV IRR and Payback Period. In 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022) (pp. 185-189). Atlantis Press.

Le, S. (2021, December). The applications of NPV in different types of markets. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 1054-1059). Atlantis Press.

Agung, T. S., & Zuhri, B. S. S. (2023). Analysis of the Financial Feasibility of Potential Post-Pandemic Businesses Using the Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period (PP) Methods (Case Study: MSME Environmentally Friendly Bioplastic Products). Jurnal Multidisiplin Madani, 3(7), 1432-1441.

Malenko, A. (2019). Optimal dynamic capital budgeting. The Review of Economic Studies, 86(4), 1747-1778.

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