Market Research for Amistar Launch

The assignment examines the application of market research to determine suitable markets for a new product launch, specifically 'Amistar.' It emphasizes the importance of primary data collection and analysis techniques like mean, mode, median, column charts, trend analysis, IRR, and NPV. The objective is to guide management in making informed decisions regarding the product's market entry strategy.

Assignment title Business Decision Making
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Learner Declaration
I
Date: 08/05/2016
BUSINESS DECISION MAKING
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Contents
Introduction......................................................................................................................................5
Task 1...............................................................................................................................................6
Q1: Select a country of your choice where Amistar can be launched, and discuss the reasons
why your chosen country seems appropriate for expanding your business. This report should
also contain a plan explaining how you will collect the primary or secondary data, and a
discussion of the survey methodology you will adopt as well as the sampling method you will
use. (LO 1.1, LO 1.2, LO 3.4 & M2)...........................................................................................6
Q2: Design a market survey questionnaire (with around 12 carefully adapted questions) that
can be used to gain more insights for launching Amistar in a country that you have chosen
(include concepts like product preference, place, price and promotion, etc.). (LO1.3)..............8
M1: Explainhow you calculate the coefficient of skewness. Justify and explain how you can
use this concept to improve the performance of a business?.....................................................10
Task 2.............................................................................................................................................12
Q1. Calculation of Mean, Median and Mode and analysis and explanation of the significance
of these statistical calculations to an organization like Syngenta (LO2.1 & LO2.2).................12
Q2. Calculation of Range and standard deviation and explanation on the significance of these
calculations for an organisation like Syngenta (LO 2.3)...........................................................15
Q3. Importance of calculation of Quartiles, Percentiles and the correlation coefficient to an
organisation like Syngenta (LO 2.4)..........................................................................................17
Task 3 (LO3: 3.1, 3.2, 3.3, M3 and D1)........................................................................................17
Q1: Produce a Column/Bar graph showing Sales, Cost and Profit using software such as
Microsoft Excel, and, in a paragraph, draw valid conclusions based on the information derived.
(LO3.1)...........................................................................................................................................19
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Q2: Produce sales and profit line graphs showing trend lines which can be used for projecting
both the sales and profit. Show the regression equation separately on the graph. (LO3.2).......20
Q3: Prepare a presentation using software such as Microsoft PowerPoint, for the upcoming
meeting. Apply part of your answers from Q.1and Q.2 in this task, drawing valid conclusions
and recommendations. (LO 3.3 & M3)......................................................................................22
D1...............................................................................................................................................28
In approximately 300 words, critically evaluate the use of Time Series Analysis as a tool for
forecasting..................................................................................................................................28
Task 4 (LO4: 4.1, 4.2, 4.3 and D3)................................................................................................29
Q1: From the data above, prepare a Gantt chart, and state the benefits of using Gantt Charts as
a Project Management Tool. (LO4.1)........................................................................................30
Q2: Prepare a network diagram for the activities using software like Microsoft Project or Open
Project, clearly showing the critical path. In addition, show your calculation and answer for
the Project Duration. (LO4.2)....................................................................................................32
Q3: The Payback period, Accounting Rate of Return(ARR) and Net Present Value (NPV) of
each project. Recommend which project to undertake, and state why you would recommend
this option. (LO4.3& D3)...........................................................................................................34
D3: critically evaluate the four measures of investment appraisal (Payback period, ARR, NPV
and IRR).....................................................................................................................................38
Conclusion.....................................................................................................................................45
D2 Achieved here..........................................................................................................................46
Works Cited...................................................................................................................................46
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Introduction
Syngenta is the company established in UK and planning to launch its new product i.e.
Amistar in new market place so that they are able to reap advantage of diversified
market place. For this purpose, research has been conducted and all matters like data
collection, its methods, survey mythology and sampling were used in this report. After
collection of relevant data in the research, data shall be analysed by using statistical
methods. Therefore this report includes use of mean, mode and median for processing
data and makes it error free for decision making.This report also includes methods
under measures of dispersion i.e. range and standard deviation. Another concern that is
raised in this report is of capital budgeting methods i.e. payback period, net present
value, IRR, etc. These are sued to evaluate capital projects that were undertaken by the
company.
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Task 1
Q1: Select a country of your choice where Amistar can be launched, and discuss
the reasons why your chosen country seems appropriate for expanding your
business. This report should also contain a plan explaining how you will
collect the primary or secondary data, and a discussion of the survey
methodology you will adopt as well as the sampling method you will use.
(LO 1.1, LO 1.2, LO 3.4 & M2)
Syngenta is the organisation that is dealing in researching and developing fungicide that
will be used in protecting plants allaround the world. Syngenta is involvedin operating
business that will support and manage security of the plants that were grown all over
the world. Syngenta includes separate department for research and development under
which they develop such pest management fungicides. Apart from that, Syngenta is
alsoinvolve in making farmers as their member in this context and provide them with
sufficient education related to securities of plants.
Management of Syngenta is considering todevelopnew market for its product i.e.
Amistar. Therefore management of Syngenta is concern foridentifying market where
they can provide its services and can earn huge profits by selling Amistar there. Main
focus of Syngenta is to provide better measures to country in terms of crops or plants
management and security. Amistar not only provides security to crops but it also helps
in upgrading its quality(Driscoll & Brizee, 2010). Management is looking for the country
which has agriculture asits base and therefore we have lined up fewcountries for the
same and they are India, Pakistan, China, Sri Lanka, etc. among them Sri Lanka has
been selected for expanding its business by introducing Amistar in there.
Appropriate research has been conducted on agricultural sector of Sri Lanka, which
reveals that Sri Lanka has been apopular country in terms of spices, green veggies, etc.
Sri Lanka is involved in export of many items that are related to agriculture.Most of the
population is involved in agricultural activities there. It has beenseen (after research)
that farmers there are usingold technique for the security of plants and crops. Most of
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the areas in Sri Lanka were not using any product that can protect its crops. Other than
that Sri Lanka includes 52% as agriculture sector and government in Sri Lanka is
alsosupporting agriculturalactivities(Kumar, 2014). Therefore the government of Sri
Lanka had announced subsidiary and government grants on the products that were
manufactured or imported for the purpose of security of the crops and plants. This move
of the government of Sri Lanka has made Sri Lanka more attractive in terms of business
expansion country for Syngenta for their new product i.e. Amistar.
For the purpose of this research, both primary and secondary data will be used and
then analysed for making it error free. Primary data is collected from primary sources
that include questionnaire, interview, etc. Therefore primary data provides to the point
data to the researcher (Kaueper & Beaumont, 2010). Therefore in case of Syngenta,
primary data will be collected from the use of questionnaires. Questionnaires are the
method under which open ended and close ended question will be asked to the target
population and answers are analysed for the decision making. But in this research
limited primary data can be gathered because of distance. On the other hand,
secondary data will also be gathered for this research. Secondary data shall be carefully
gathered and used in this research since it is less reliable as a source. Secondary data
for this research will be collected from internet and mostly from the Sri Lankan
government sites and from other authorised and official sites only. On the other hand,
agricultural sector reports in Sri Lanka will be gathered and analysed so that deeper
analysis for business expansion opportunity can be gathered in terms of Amistar
product of Syngenta.
Since for the collection of primary data questionnaires will be used therefore sample
size, sample criteria and sampling method that is to used need to be defied here. It can
be noted that huge population is to be target therefore adequate sample is to be defined
(Driscoll & Brizee, 2010). For this research, simple random sampling method shall be
used because there are many farmers or other target people that need to be questioned
therefore simple sampling shall be done. Before providing questionnaires, criteria for the
respondent needs to be asked i.e. he / she shall be a farmer, standard income, area of
land used for agriculture, etc. Researcher aims to adopt appropriate survey method in
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regard to undertake appropriate decisions so that it could assist managers in regard to
carry out successful business. However, the information collected through using primary
sources are always accurate and feasible. Hence, managers are required to easily
evaluate the crucial information in regard to expand the business functions in market.
Also, the data collected through survey methodology results in making appropriate
future decisions and thus reach potential respondents through spreading questionnaire
through google scholars, social media websites or e-mail. The collected data through
such sources helps in making effective decisions in terms of raising business
performance.
Sampling frame- Carrying out random sampling technique helps in collecting random
sample frame in regard to assess the information from selected respondents.
Researcher also uses selected frame in regard to assists scholar and thus choose the
most crucial group of population from whole universe. Further, it is essential for
researcher to adopt effective techniques through which appropriate information could be
collected and thus enhance the business functions in market. It aids management to
undertake flexible decision so that business expansion could be attained.
Q2: Design a market survey questionnaire (with around 12 carefully adapted
questions) that can be used to gain more insights for launching Amistar in a
country that you have chosen (include concepts like product preference,
place, price and promotion, etc.). (LO1.3)
1: What is your agricultural land size?
□Less than 1000 sq. Yard
□ 1000 sq yd to 2500 sq yd
□ 2500 sq yd to 5000 sq yd
□ More than 5000 sqyd
2: Do you use any measures to protect your crop?
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Yes
No
3: What measure you used for protection of crops?
In seed
In form of spray
In form of mud
Any other form
4: What is your income from agriculture?
Less than £ 1000
£ 1000 to £ 2499
£ 2500 to £ 4999
More than £ 4999
5: Have you heard about Amistar?
Yes
No
May Be
6: Do you know what pesticides or protection sprays are made of?
Yes
No
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7: Does government or other authority provides measures for protection of
crops?
Yes
No
8: In your opinion, which of the following methods is best for protecting crops?
Pesticides
Fertilizers
Animal oil sprays
Any other measure
9: Do you believe Amistar will provide you with sufficient protection to crops?
(After proving information about Amistar)
Yes
No
May Be
10: Do you believe that technological up gradation will help you in protecting
crops?
Yes
No
Mat be
11: Will you try Amistar once it launches in Sri Lanka?
Yes
10

No
May be
12: Any suggestion for improvement in features of Amistar?
(Boulton, 2012)
M1: Explain how you calculate the coefficient of skewness. Justify and explain
how you can use this concept to improve the performance of a business?
It includes probability theory under which mean, median and standard deviation present
in mean and median will be analysed for the purpose of calculating Coefficient of
Skewness. Coefficient of Skewness supports business decisions related to results
calculated in mean, median and standard deviation. Coefficient of Skewness can be
positive or negative or zero.
Coefficient of Skewness = 3 (mean – median) / standard deviation
Use of Coefficient of Skewness: Coefficient of Skewness is used to analysedata
related to mean, median and standard deviation and measures relationship between
these elements. Therefore it provides information for the decision making process.
Greater mean reflectpositive coefficient of Skewness and lower mean denotes negative
coefficient of Skewness. Positive coefficient of Skewness provides positive results as
compared to negative.
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Task 2
Q1. Calculation of Mean, Median and Mode and analysis and explanation of the
significance of these statistical calculations to an organization like Syngenta
(LO2.1 & LO2.2)
Annual Expense / £m
NO. of Countries
(f) Mid-value f * x
0-10 13 5 65
10-20 25 15 375
20-30 37 25 925
30-40 22 35 770
40-50 21 45 945
50-60 20 55 1100
60-70 12 65 780
150 4960
Mean=
4960 / 150
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£ 33.06 millions
Analysis- Mean is the method by which managers can calculate averageresultsof the
given data or scenario. Therefore for better decision making process mean is the
adequate base for the manager of Syngenta. In this case, mean is calculates average
expenditure that has been made on Amistar by different countries. It is calculated so as
to analyse the expenditure pattern of different countries. Average expenditure of
countries is £ 33.06 million.
(Collins, 2014)
Annual Expense /
£m
No. of Countries
(f) Mid-value
Cumulative frequency
(cf)
0-10 13 5 13
10-20 25 15 38
20-30 37 25 75
30-40 22 35 97
40-50 21 45 118
50-60 20 55 138
60-70 12 65 150
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150
Median =
Whereas,
L is the lower limit of median class
cfp is cumulative frequency of preceding-class
CI is the class interval
Median class = 150/2 =75
Therefore, 20-30
Median
20+ (75-38) / 37 * 10
£ 30 millions
Analysis- Median is a more accurate method to calculate average results i.e. median
calculates actual middle point in the given data. In this case, Syngenta can use
capabilities of median in its decision making process. It measures actual middle point of
expenditure made by different countries on Amistar.Median is £ 30 million in the total
expenditure made.
Mode
Mode= Lower limit of class+ (F 1 / F1 + F2) x Class interval
F1 is the difference of modal class and its preceding class
F2 is the difference of modal class and its succeeding class
Mode = 20+ [12 / (12+15)]* 10
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£ 24.4 millions
(Kerrigan, 2014)
Analysis- Mode is the indictor of highestfrequency in the given data that can be used as
benchmark or standard in terms of highest value. In this case, management or line
manager of Syngenta can use mode in terms of calculating highest expenditure made
by the country on Amistar.
Q2. Calculation of Range and standard deviation and explanation on the
significance of these calculations for an organisation like Syngenta (LO 2.3)
Measures of dispersion technique are used by the higher level management in terms of
calculating risk involved in the calculated results or figures. There are various methods
under measures of dispersion that can be used analysing risk in the average results of
the organisation. Following are two methods of measures of dispersion that can be used
in the decision making process by the management of Syngenta:
Range- It is the method in which maximum risk of variation is involved and can be used
in the decision making process in qualitative terms. Range calculates maximum
different i.e. difference between lowest and highest value in the provided data or values.
Standard Deviation- It is the method under which risk in the calculationresults is
determined. Standard deviation measures the possible change in the average results
from its exact point or from its central value in the normal course of time(Barde & Barde,
2012). Therefore standard deviation is the most important and reliable method of
measures of dispersion that can be used in the decision making process.
Following is the calculation of range and standard deviation:
Range= 70 – 0 = 70
Analysis- 25 million is the maximumpossible variation that maytake place in the
calculated results under any circumstances. Therefore management of Syngenta shall
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analyse that there is huge difference between highest and lowest value that leads to
more risk involvement in the results.
Standard Deviation
Annual
Expense (£m)
NO. of Countries
(f)
Mid-value
(£m)
(x) f * x x2 f*x 2
0-10 13 5 65 25 325
10-20 25 15 375 225 5625
20-30 37 25 925 625 23125
30-40 22 35 770 1225 26950
40-50 21 45 945 2025 42525
50-60 20 55 1100 3025 60500
60-70 12 65 780 4225 50700
150 4960 11375 209750
Standard deviation = √ (209750/150) – (33) 2
£17.42 millions
(Barde & Barde, 2012)
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Analysis- Above is the result of standard deviation that is calculated to identify possible
variation in the calculated results. It calculates possible variation in results but in which
direction it may take place is not calculated. Therefore, average result can be increased
or decreased by £17.42 millioni.e. expenditure made by different countries on Amistar.
Therefore the line manager or management of Syngenta shall take into account
standard deviation of the results.
Q3. Importance of calculation of Quartiles, Percentiles and the correlation
coefficient to an organisation like Syngenta (LO 2.4)
Quartile - is the qualitative measure that can be used by the management of Syngenta
in their decision making process.Quartile is the measure that is used to divide or
bifurcatestotal population or data that is under consideration into four parts and then
makes easy for management to take decisions. It is a benchmark technique which is
used to set four benchmarks in the total population. Management of Syngenta can use
quartile by dividing its total expenditure or other measure into four parts i.e. quartile 1,
quartile 2, quartile 3 and quartile 4 then takesdecisions on the basis of these levels.
Percentile- It isquantitative measure that can be used by management or manger.
Percentile divides or parts total figures that is under-consideration into 100 parts and
then use this in its decision making process. Targets or standards in quantitative terms
can be established by the management of Syngenta for the decision making. 25th, 50th
and 75thpercentiles can be calculated for the better decision making process.
Correlation coefficient- It is a qualitativemeasure that can be used in the decision
making process of the management. Correlation coefficient measures the relationship of
two or more factors of the company like sales, expenses, profit, level of production, etc.
Correlation coefficient is used to measure therelationshipbetween them i.e. how other
component will react when first component is changedor vice-versa. In this case,
management of Syngenta can use this measure in its decision making process of
evaluating different elements.
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Task 3 (LO3: 3.1, 3.2, 3.3, M3 and D1)
Year
Sales
(£’millions) Cost (£’millions) Profit (£’millions)
2005 270 200 70
2006 310 220 90
2007 320 220 100
2008 400 250 150
2009 380 250 130
2010 350 240 110
2011 330 220 110
2012 330 230 100
2013 340 230 110
2014 480 240 140
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Q1: Produce a Column/Bar graph showing Sales, Cost and Profit using software
such as Microsoft Excel, and, in a paragraph, draw valid conclusions based
on the information derived. (LO3.1)
(Der & Everitt, 2014)
From the above column chartit can be analysed that as the time passes Japanese
market has shown great results in termsofcost savings and profitability(Hedberg, 2010).
It can be analysed that after 2009 cost of production in the Japanese market has been
decline and more profits has been achieved as compared to its sales revenue. In 2012
and 2013, market has shown constant cost in the Japanese market that brings to the
native that fixed cost in Japanese market is at higher side. Sales revenue had also
shownincreasingtrend from 2005 to 2009 but after 2009 sales revenuehasdropped. In
recent year i.e. 2014 Japanese market has achieved the highest sales revenue but on
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the other hand it has shown inefficient cost savings in its business operations. Therefore
in Japanese market trends can be hard to set since it has shownfluctuated results.
Management of Syngenta shall present adequate presentation so that better results can
be analysed and represented to other organisation interested inthe Amistar project.
Q2: Produce sales and profit line graphs showing trend lines which can be used
for projecting both the sales and profit. Show the regression equation
separately on the graph. (LO3.2)
(Bisgaard & Kulahci, 2011)
Analysis- Trend line is used to forecast the results or future values that can be use in
the decision making process of the organisations or of decisionmakers.Trend line is
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represented in thegraph for the purpose of forecasting the future figures or results.
Following is the regression equation of both sales and profit forecasting figures:
Sales
y = 11.57x + 287.3
R² = 0.367
Profit
y = 3.818x + 90
R² = 0.236
Regression equation is used to measure correctness or accuracy in the calculated
result of trend line or results of future figures. If regress equation is one or near to 1 then
results shown in the trend line is more accurate and otherwise not. Both equation shows
that regression equation is way less than 1 therefore results reflected areless reliable.
Following is the prediction of saleand profit figures:
Sales: £ 410 and £ 420 for 2015 and 2016 respectively.
Profit: £ 122 and £ 129 for 2015 and 2016 respectively.
From the above figures it can be analysed that sales and profit figures willincrease in
the future in the Japanesemarket this indicates that Amistar willprovide adequateresults
in terms of sales and profit of the investor company in Amistar product of Syngenta.
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Q3: Prepare a presentation using software such as Microsoft PowerPoint, for the
upcoming meeting. Apply part of your answers from Q.1and Q.2 in this task,
drawing valid conclusions and recommendations. (LO 3.3 & M3)
PPT
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23

24

25

26

27

D1
In approximately 300 words, critically evaluate the use of Time Series Analysis as
a tool for forecasting.
Critically evaluate the use of Time Series Analysis as a tool for forecasting-
Time series analysis is a tool that can be used in prediction of future values of the data
on the basis of provided past values. Time series analysis is the analysis that is used in
the decision making process of any organisation and in this case it can be used by the
management of Syngenta in terms of analysing the market situation. Under time series
analysis future figures are based on the past performance of that element(Bisgaard &
Kulahci, 2011). There are many methods that can be applied on for the purpose of
calculating future values or for forecasting future values in the time series analysis.
Results of time series analysis is the most adequate results that can be used in decision
making process as this analysis uses time factor for the calculation therefore trusted
results can be obtained. In this case of Syngenta in launching new product i.e. Amistar
in the market. Time series analysis has been used for predicting future values of sales
and profit that Japanese market will provide. This analysis will help management and
other interested parties to analyse the importance of Japanese market for launching
Amistar. If the prediction, done under time series analysis is favourable then Japanese
market will be selected for the product and if not then Japanese market shall not be
considered.
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Task 4 (LO4: 4.1, 4.2, 4.3 and D3)
Activities Description Preceded by Duration/ (days)
A Lay foundation and build
structure
- 80days
B Build-stairs A 30days
C Build-roof A 40days
D Build-Windows A 8days
E Plastering A 70days
F Carpenter BCDE 70days
G Electrical BCDE 84days
H Heating BCDE 70days
I Plumbing BCDE 63days
J Floor-covering FGHI 28days
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K Decorating FGHI 35days
Q1: From the data above, prepare a Gantt chart, and state the benefits of using
Gantt Charts as a Project Management Tool. (LO4.1)
Benefits of using Gantt Charts:
Gantt provides adequate base for the decision making process in the management of a
project therefore it is advisable to be used in the project management. As it lined up all
activities and its completion time period therefore this provides management or project
manager with adequate base of managing project.
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Resource management in the project is another advantage that Gantt chart provides as
it makes arrangement in advance of all the activities and whatresources are required to
complete the activity.
Time management is another benefit of Gantt chat. Since it is blue print of future plan or
future courseof actions and each activity has assigned time period that is required to
complete the activity. Therefore this enables projectmanagerto take appropriate
decisions related to management of project.
Gantt chart also supports coordination among different resources of the project that will
be used in the undertaken project. Coordination also provides adequate base for
coordinating different activities as increase and decrease in time assigned to each
activity can be therefore. Therefore project manager will be able to take decisions
related to better management with the help of Gantt chart.
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Q2: Prepare a network diagram for the activities using software like Microsoft
Project or Open Project, clearly showing the critical path. In addition, show
your calculation and answer for the Project Duration. (LO4.2)
Duration of project = 80+70+84+35 = 269 days
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Critical path of the project can be defined as the project management tool that will draw
thenetworkdiagram for the presentation of flow of activities of the project. Network
diagram is made with the use of Open Project as a management tool that reflects the
flow of activities. Critical path is the path in the network diagram that shows the longest
way to complete the project and which shall be analysed for cost and time cutting.
Therefore critical path shall be determined in the project so that it can be redacted to
reduce the time required to complete the project. In the present case, following is the
critical path in the network diagram: 80+70+84+35 = 269 days. All the critical tasks are
highlighted in red and are the tasks with the longest timeframe on our project. In order
to improve efficiency those are the tasks we must focus to improve directly in order to
reduce the overall value in time of the project.
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Q3: The Payback period, Accounting Rate of Return(ARR) and Net Present Value
(NPV) of each project. Recommend which project to undertake, and state
why you would recommend this option. (LO4.3& D3)
PROJECT: GRANGE MOUTH
Year
C-F (in
millions)
Cumulative C-F
(in millions)
PVFactor @
10%
P.V. (in
millions)
Year-1 £ 30 £ 30 0.91 27.27
Year-2 £ 40 £ 70 0.83 33.04
Year-3 £ 60 £ 130 0.75 45.06
Year-4 £ 30 £ 160 0.68 20.49
Year-5 £ 50 £ 210 0.62 31.05
156.91
Pay – back period
3 + (150-130) / 30
3.6 years
ARR
Average rate of return = Average-profit / [(Initial investment +Salvage value) / 2] * 100
34

Average-profit = £ 210 million / 5 years = £ 42 million
Initial investment 150*100
42 / 150 x 100
28 %
Net present value
Present value of cash inflows – present value of cash outflows
£ 156.91 million – £ 150 million
£ 6.91 million
(Asma, 2012)
D3 IRR
Year
C-F (in
millions)
PV
Factor @
10%
P.V. (in
millions)
PVFactor
@15%
P.V. (in
millions)
Year-1 £ 30 0.91 £ 27.27 0.87 £ 26.10
Year-2 £ 40 0.83 £ 33.04 0.76 £ 30.24
Year-3 £ 60 0.75 £ 45.06 0.66 £ 39.48
Year-4 £ 30 0.68 £ 20.49 0.57 £ 17.16
Year-5 £ 50 0.62 £ 31.05 0.50 £ 24.85
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Total £ 156.91 £ 137.83
Write formula
10% + (£ 156.91million – £ 150million) / (£ 156.91million – £137.83million) x (15% -
10%)
11.80 %
PROJECT: INVERNESS
Year C-F (in millions)
Cumulative
C-F (in
millions)
PV Factor @
10%
P.V. (in
millions)
Year-1 £ 30 £ 30 0.91 £ 27.27
Year-2 £ 50 £ 80 0.83 £ 41.3
Year-3 £ 50 £ 130 0.75 £ 37.55
Year-4 £ 40 £ 170 0.68 £ 27.32
Year-5 £ 40 £ 210 0.62 £ 24.84
£ 158.28
Pay – back period
3 + (£ 150-£ 130) / 40
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3.5 years
Average rate of return
£ 42 / 150 x 100
28 %
Net present value
£ 158.28million – £150million
£ 8.28million
D3 Internal rate of return
Year
C-F (in
millions)
PV
Factor @
10%
P.V. (in
millions)
PV Factor
@15%
P.V. (in
millions)
Year-1 £ 30 0.91 £ 27.27 0.87 £ 26.10
Year-2 £ 50 0.83 £ 41.3 0.76 £ 37.80
Year-3 £ 50 0.75 £ 37.55 0.66 £ 32.90
Year-4 £ 40 0.68 £ 27.32 0.57 £ 22.88
Year-5 £ 40 0.62 £ 24.84 0.50 £ 19.88
Total £ 158.28 £ 139.56
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10 % + (£ 158.28million -£ 150million) / (£ 158.28million – £ 139.56million) x (15% -
10%)
12.21 %
(English & Baker, 2011)
Recommendation: From the above calculations and analysis of many methods of
capital budgeting it is recommended that project Inverness shall be selected for the
investment as its net present value is higher than project Grange-mouth. IRR is another
base for the decision making process which is used in this decision and on the basis of
IRR project Inverness is the best method that provides more profits as compared to its
cost of capital.
D3: critically evaluate the four measures of investment
appraisal (Payback period, ARR, NPV and IRR).
Investment appraisal or Capital investment appraisal who is also known as Capital
budgeting is a planning process that primarily will facilitate the determination of a
particular firm investments both long term ones or short term. There are multiple
components that will fall under the scrutiny of the capital budgeting in a firm like the
property, research and development projects, advertising campaigns, equipment that in
some cases could be new plants or new machinery, etc.
Investment appraisal in simple words is the budgeting of minor and major capitals and
investments of the company’s expenditure. In smaller companies the tools and
techniques are used to decide the future ventures into breaching new markets, finding a
market segment that meets their needs, for expansion or for the inclusion of new
activities to the portfolio. In larger and really big companies investment appraisal is a
pre-established and fully incorporated part of the general tools employed by their
business managers, with a span of several departments in some particular cases.
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The investment appraisal factors are normally based on the priorities of stakeholders
and decision makers, but let it be noted even though that is common knowledge in
certain cases profits are not always at the heart of those decisions, for example a
company might on rare occasions take a positioning decision that is not necessarily
profitable but it will prove to be a good move for the future. This available wide criteria
selection of capital investment appraisal or budgeting is based upon long term growth
when compared to short term profits.
In order to get the full picture and a better in-depth understanding of capital investment
appraisal I will talk about the pros and cons of several traditional techniques employed
by a large spectrum of companies.
Payback period- It is the measure that is used to identify the time period that will be
required to recover your initial investment made on the capital project. It is widely
considered the easiest method of capital investment appraisal techniques. Shorter
payback period shows more efficiency of the project in terms of earningrevenues or
cash inflows of the project and it is usually preferred when compared to longer pay back
periods. It ignores post profitsor cash inflows of the project after payback period.
Therefore does not undertake full inflows(Siddiqui, 2014).
Pros:
It is extremely popular due to its sheer simplicity. In the UK research has shown that
firms and companies favour it and perhaps this is understandable given how easy it is to
grasp and calculate.
In the current fluctuating business environment and the rapid technological and
scientific advances, we can concur that new plant and machinery may need to be
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replaced sooner, updated or upgraded than in the past, so a new growing trend on a
quick payback on investment is proving as essential.
Also in the current UK investment climate and due to the volatility of the markets there is
a particular demand for fast returns. The majority of the long term profitable possible
investments are reviewed due to the longer wait for the revenues flow.
Cons:
One of the major shortfalls of this particular technique is that it lacks enough real facts,
there is no clear differential between the lengths of one payback period with one of a
similar quantum, it is planned by pitting one investment opportunity against another.
Cash flows are regarded as either pre-payback or post-payback, but the latter tend to
be ignored.
Payback period takes no account of the effect on business profitability as its sole
concern is cash flows.
Summary:
It is advised and probably good practice to use payback period as an initial screening
tool used to asses competing projects. In my opinion it is inappropriate as a basis for
future sophisticated investment decisions.
ARR- It is the accounting method that used to calculate profit of the project in terms of
cash inflows and by not using present values concept. It uses net profits of the capital
project for its calculation. Average profits (total net profit / life of project in years)
arecompared with average investment (initial investment + salvage value / 2) made in
the capital project.
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“Accounting Rate of Return (ARR) – this capital investment appraisal technique
compares the profit that can be earned by the concerned project to the amount of initial
investment capital that would be required for the project. Projects that can earn a higher
rate of return is naturally preferred over ones with low rate of return. ARR is a non
discounted capital investment appraisal technique in that it does not take into
consideration the time value of money involved.”
Pro’s of ARR
As with the Payback method, the chief advantage with ARR is its simplicity. This makes
it relatively easy to understand. There is also a link with some accounting measures that
are commonly used. The Accounting rate of return is similar to the Return on Capital
Employed in its construction; this may make the ARR easier for business planners to
understand. The ARR is expressed in percentage terms and this, again, may make it
easier to use.There are several criticisms of ARR which raise questions about its
practical application:
Con’s of ARR:
1st, the ARR doesn't take account of the project duration or the timing of cash flows
over the course of the project.
2nd, the concept of profit can be very subjective, varying with specific accounting
practice and the capitalisation of project costs. As a result, the ARR calculation for
identical projects would be likely to result in different outcomes from business to
business.
3rd, there is no definitive signal given by the ARR to help manager to decide whether or
not to invest. This lack of a guide for decision making means that investment decisions
remain subjective.
Discounted Cash Flow Methods
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3: Discounted Payback Period
This technique works similar to payback period, the difference here is that discounted
values of cash flows are used for calculation of the payback period.
4: Net Present Value (NPV)
The NPV method calculates the present values for all future cash flows. The discount
rate may be the Weighted Average Cost of Capital (WACC) or it may be any cost of
capital depending on the risk of the project in consideration. This type of appraisal is
regarded superior to the ARR and the payback period, however there are certain
assumptions, on which this technique is based, making its evaluation less reliable.
NPV- It is most common and easy touse method of capital appraisal technique. Under
this method profitof the project in present value terms will be calculated. Both inflows
and outflows of cash shall be undertaken for the evaluation of profit from project. It
result is positive then capital-project is profitable otherwise not(Miller, Vandome, & John,
2011).
“Net Present Value (NPV) – this capital investment appraisal technique measures the
cash in-flow, whether excess or shortfall, after the routine finance commitments are met
with. All capital investment appraisals have a single objective – drive towards a positive
NPV. The NPV is a mathematical calculation involving net cash flow at a particular
present time 't' at discount rate at the same time, i.e. (t – initial capital outlay). Thus
there is an inverse proportional relation between discount rate and NPV. A high
discount rate would reduce the net present value of capital. A high interest rate
increases discount rates over a period of time and most capital investment appraisals
are wary of such an increase.”
Description - Perhaps the mostly widely used technique for analyzing a potential
investment opportunity or project is the net present value of cash flow or NPV approach.
Using the NPV of cash flow technique we would discount all cash flows in our business
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case at the opportunity cost of capital - in most cases the weighted average cost of
capital for a company. The business rule that is applied with this analysis is to accept all
projects or investments where the NPV of cash flows is greater than zero - so we're
looking for positive NPVs.NPV compares the value of a dollar today to the value of that
same dollar in the future, taking inflation and returns into account. If the NPV of a
project is positive, it should be accepted. However, if NPV is negative, the project
should probably be rejected because cash flows will also be negative.
Pros - Accounts for the fact that the value of a dollar today is more than the value of a
dollar received a year from now - that's the time value of money concept. The other
strength of this measure is that it recognizes the risk associated with future cash flow -
it's less certain
Cons - Does not give visibility into how long a project will take to generate a positive
NPV due to the calculations simplicity. Our NPV rule tells us to accept all investments
where the NPV is greater than zero. However, the measure doesn't tell us when a
positive NPV is achieved. Does it happen in five years or 15? If at all. Another limitation
of the NPV approach is that the model assumes that capital is abundant - that is there is
no capital rationing. If resources are scarce, then the analyst has to look carefully at not
just the NPV for each project they are evaluating, but also the size of the investment
itself. Fortunately, there is another measure that can help overcome this weakness - the
calculation of internal rates of return.
IRR- It is the method which is used to calculate rate of return which denotes equilibrium
in terms ofprofit and loss in the capital project undertaken by the management. IRR is
the most complex method under capital appraisaltechniques which undertakes present
value concept in its calculation. Cost of capital is the main element of this method and is
quite hard to get right cost of capital.
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“Internal Rate of Return (IRR) – capital investment appraisal techniques define IRR as
discount rate that gives a value of zero to NPV or net present value. Among all capital
investment appraisal techniques, IRR is generally considered to measure the efficiency
of the capital investment. Thus, if cost of capital investment in company works out to be
greater than the IRR value, the project is highly likely to be rejected. On the other hand,
a low cost of capital has more chances of being accepted. IRR is calculated by equating
NPV to zero and then deriving the discount rate. Even though IRR and NPV are related
capital investment appraisal techniques they are different from each other. IRR
considers the time value of money over the project life time and derives the world
discount rate.”
“All the above mentioned capital investment appraisal techniques are used for ranking
projects. Usually, organizations have many projects that are appraised simultaneously
for financial viability. Once the preliminary appraisal of a project is completed, it is
compared and ranked against other peer projects. The projects in consideration are
ranked from having high Profitability index to lowest Profitability index. The higher
ranking projects are usually implemented after careful and detailed due diligence.”
Description - The internal rate of return, or discounted cash flow rate of return, offers
analysts a way to quantify the rate of return provided by the investment. The internal
rate of return is defined as the discount rate where the NPV of cash flows are equal to
zero. The IRR can be calculated using trial and error (changing the discount rate until
the NPV = 0). Generally speaking, the higher a project's internal rate of return
(assuming the NPV is greater than zero), the more desirable it is to undertake the
project. The rule with respect to capital budgeting or when evaluating a project is to
accept all investments where the IRR is greater than the opportunity cost of capital.
Under most conditions, the opportunity cost of capital is equal to the company's
weighed average cost of capital (WACC).
Pros - It is widely accepted in the financial community as a quantified measure of return
and it's also based on discounted cash flows - so accounts for the time value of money.
And when used properly, the measure provides excellent guidance on a project's value
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and associated risk,
Cons - There are three well known pitfalls of using IRR that are worth discussing:
1. Multiple or no Rates of Return - if you're evaluating a project that has more than
one change in sign for the cash flow stream, then the project may have multiple IRRs or
no IRR at all.
2. Changes in Discount Rates - the IRR rule tells us to accept projects where the IRR
is greater than the opportunity cost of capital or WACC. But if this discount rate changes
each year then it's impossible to make this comparison.
3. IRRs Do Not Add Up - one of the strengths of the NPV approach is that if you need
to add one project to an existing project you can simply add the NPVs together to
evaluate the entire project. IRRs on the other hand cannot be added together so
projects must be combined or evaluated on an incremental basis.
Conclusion
Conclusion can be drawn in terms of decision making techniques used in this report.
Syngenta has to take many decisions in their business operations and for business
expansion in terms of launching new product i.e. Amistar in new market place.
Therefore for this purpose research is the best technique to identify possible markets. In
research, primary data plays important role in the evaluation of research topic. After
collection of relevant data, management of Syngenta shall evaluate its collected data
using mean, mode and median for better results.Then column chart and trend analysis
is nest measure that is used by the management of Syngenta for presenting information
and this makes easy for management to evacuate results. IRR and NPV is the
technique that is used for evaluating capitalprojectsand determine its profitability for
decision making process.
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D2 Achieved here
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