1. Introduction:

The textile company Akwaaba plc is looking to invest in a project to manufacture either bags or shoes. They have called for new business proposals, and have chosen two projects to invest in. The initial investment required for project A (bags) is £180,000, and for project B (shoes) is £170,000 with the use of different key decision theories and the principles managers use when making a decision. It then provides an example of how these theories can be applied to a business decision.

2. Payback Period:

When management comes to making important financial decisions, its crucial to calculate the payback period (Alesii, 2021). This parameter tells you how long it will take for each project to generate enough cash flow to cover its initial costs. In general, you should always choose the project with a shorter payback period. However, sometimes other factors such as risk and potential return can influence your decisionmaking process (FrankLefley, 2020).

There are a few different ways to calculate the payback period. In its simplest form, the equation looks like this:

Payback period = Initial cost of investment / Annual cash flow generated by the investment.

Use this equation to calculate the payback period for a series of investments. Just add up the initial costs of all investments and divide that number by the total annual cash flow (Levy, 2022). With this Calculation conclude the Payback Period of Project A (Bags) and Project B (Shoes).

Project A Bag (Net Cash Flow)

Initial Investment

£180,000

Cumulative Cash Flow

Year 1

£48,000

£132,000

Year 2

£62,000

£70,000

Year 3

£85,000

£15,000

Year 4

£100,000

£115,000

Year 5

£110,000

£225,000

Table 1: Payback Period for Project A

Payback Period

 

Years

2

Month

8

 

Here calculate the payback period and identify if strategic managers choose Project A, then the payback period will be two years and three months.

Project B Shoes (Net Cash Flow)

Initial Investment

£170,000

Cumulative Cash Flow

Year 1

£45,000

£125,000

Year 2

£65,000

£60,000

Year 3

£82,000

£22,000

Year 4

£98,000

£120,000

Year 5

£110,000

£230,000

 

Table 2: Payback Period for Project B

Payback Period

 

Years

2

Month

7

 

Here calculate the payback period and identify if strategic managers choose Project B, then the payback period will be two years and seven months.

3. Net Present Value:

NPV is a financial metric used to determine the value of an investment or project. It takes into account the time value of money, comparing the present value of cash inflows against outflows (GasparsWieloch, 2019). To calculate NPV, one would need to know the initial investment, the cash flows associated with the investment (either inflows or outflows), and the discount rate. The higher the NPV, the more valuable the investment or project is.

NPV for Project A (Bags)

Initial Investment

£180,000.00

Discount Rate

14%

Year 1

£48,000

NPV

£83,523

Year 2

£62,000

 

 

Year 3

£85,000

 

 

Year 4

£100,000

 

 

Year 5

£110,000

 

 

 

Here is showing Net Present Value for Project A is £83,523. At a discount rate of 14%.

Table 3: NPV for Project A (Bags)

NPV for Project B (Shoes)

Initial Investment

£170,000

Discount Rate

14%

Year 1

£45,000

NPV

£89,991

Year 2

£65,000

 

 

Year 3

£82,000

 

 

Year 4

£98,000

 

 

Year 5

£110,000

 

 

 

Here is showing Net Present Value for Project A is £89,991. A discount rate of 14%.

Table 4: NPV for Project B (Shoes)

Net present value (NPV) is a financial metric used to determine the value of an investment or project. It takes into account the time value of money, comparing the present value of cash inflows against outflows (Žižlavský, 2020). To calculate NPV, one would need to know the initial investment, the cash flows associated with the investment (either inflows or outflows), and the discount rate (Pantouvakis, 2021). The higher the NPV, the more valuable the investment or project is. The discount rate is used to take into account the time value of money. It is the rate of return that could be earned on an investment of equivalent risk.

4. Analysis:

There are several different key decision theories that strategic managers can use when making a decision. The most popular decision theories are discussed below.

  1. Rational decision theory:

Rational decision theory is based on the premise that humans are rational beings who make decisions based on logical reasoning. Under rational decision theory, managers use costbenefit analysis to determine whether a particular course of action is worth taking. They also consider the risks and rewards associated with each potential course of action.

  1. Game theory:

Game theory is based on the idea that people make decisions based on their perceived selfinterest. Managers who use game theory trying to figure out what the other players in a decision are likely to do, and then they make a decision that will give them the best possible outcome.

  1. Decision analysis:

Decision analysis is a structured way of making decisions that take into account all of the potential outcomes of a particular choice. This type of analysis helps managers weigh the pros and cons of each option and make a decision that has the fewest possible negative consequences

5. Evaluation:

When managers are ready to make decisions, it is important to consider the different options and choose the best one. There are a few different decision theories that can help make the best choice when resources are tight. The rational decision theory is the best option when resources are tight because it makes sure that the desired outcome is achieved as quickly as possible. This theory looks at each option and decides whether or not to pursue it based on how likely it is to achieve the desired outcome. The satisficing decision theory is a good option when resources are tight because it makes sure that an acceptable outcome is achieved.

6. Conclusion:

In conclusion, consultants advise strategic managers to take decisions according to the Payback Period and NPV. That is a higher NPV for Project B (Shoes) at £8,9991 and also the Payback Period is short for Project B which is two years and seven months. According to this strategic manager have to decide to choose project B for investment that is beneficial for Akwaaba plc in the future.

References

Alesii, G., 2021. Payback Period and Internal Rate of Return in Real Options Analysis. 03 ed. Available at: https://doi.org/10.1080/00137910600879148. [Accessed date: 02 May 2021]

FrankLefley, 2020. The payback method of investment appraisal: A review and synthesis. 03 ed. Available at: https://doi.org/10.1016/09255273(96)000229. [Accessed date: 14 July 202]

GasparsWieloch, H., 2019. Project Net Present Value estimation under uncertainty. 05 ed. Available at: https://doi.org/10.1007/s1010001705000. [Accessed date: 22 December 2019]

Levy, H., 2022. A NOte on the Payback Method. 04 ed. Available at: https://doi.org/10.2307/2329583. [Accessed date: 02 August 2022]

Pantouvakis, J.P., 2021. A New Approach to Studying Net Present Value and the Internal Rate of Return. 04 ed. Available at: https://doi.org/10.1155/2018/6108680. [Accessed date: 16 April]

Žižlavský, O., 2020. Net present value approach: method for economic assessment of innovations projects. 03 ed. Available at: http://creativecommons.org/licenses/byncnd/3.0/. [Accessed date: 18 Mrch 2020]

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