Evaluating Project Viability using NPV and IRR

The assignment discusses the calculation of Net Present Value (NPV) and Internal Rate of Return (IRR) for two projects, A and B. The NPV of Project A is greater than that of Project B, indicating that Project A is more viable for the firm. The IRR of Project A is 29.91% compared to 21.81% for Project B, further supporting the conclusion that Project A is a better investment option.

BUSINESS DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Plan for collection of primary data........................................................................................3
1.2 Survey methodology and sampling frame used in the research ...........................................3
1.2 Questionnaire for research ...................................................................................................4
TASK 2............................................................................................................................................5
2.1 Statistical tools and decision making....................................................................................5
2.2 Analysis of results.................................................................................................................6
2.3 Analysis of measure of dispersion........................................................................................6
2.3 Calculation of quartile, percentile and correlation coefficient..............................................7
TASK 3............................................................................................................................................8
3.1 Graphical representation of the collected data......................................................................8
3.2 Creation of trend line..........................................................................................................12
3.4 Preparation of business report.............................................................................................13
TASK 4..........................................................................................................................................14
4.1 Appropriate information processing tools...........................................................................14
4.2 Critical path method ...........................................................................................................14
4.3 Project evaluation technique ..............................................................................................16
CONCLUSION .............................................................................................................................18
REFERENCES..............................................................................................................................19
INDEX OF TABLES
Table 1: Calculation of mean, median and mode............................................................................6
Table 2: Calculation of standard deviation......................................................................................7
Table 3: Calculation of quartile and percentile................................................................................8
Table 4: Calculation of correlation..................................................................................................9
Table 5: Creation of trend line.......................................................................................................13
Table 6: Activity table...................................................................................................................15
Table 7: Calculation of payback period method............................................................................17
Table 8: Calculation of ARR.........................................................................................................17
Table 9: Calculation of Net present value......................................................................................18

Table 10: Calculation of IRR.........................................................................................................18
ILLUSTRATION INDEX
Illustration 1: You give importance to quality over price while making purchase decisions?......10
Illustration 2: Do you think that income level is affecting people purchase decisions related to
fast food?........................................................................................................................................11
Illustration 3: Aquapet is making available fast food items at higher price..................................12
Illustration 4: KFC and other restaurants are charging a high price on customers........................13
Illustration 5: Trend line for Aquapet............................................................................................14
Illustration 6: GANTT chart..........................................................................................................16
Illustration 7: Network diagram.....................................................................................................16

INTRODUCTION
Aquapet is a chain restaurant that intends to open restaurant in the UK. Before starting a
business lots of factors needs to be evaluated and in respect to this various statistical tools are
discussed in the report. Along with this these tools are also applied on the firm sales. After that
project evaluation is done in the report in order to select best project for the firm. Critical path
method is also discussed in the report and its chart is prepared and results are interpreted in
proper manner. In then report formal business report is prepared and comments are done on the
firm performance and opportunities that are available to same.
TASK 1
1.1 Plan for collection of primary data
Primary data is information which is collected for the first time by researcher thereby is
an unpublished source of information. Whereas, secondary data is a fact hat is already collected
by someone else and was published on source of information. In order to conduct research for
Aquapet, both kinds of data will be collected (Sharma, Ranga. and Sharma, 2010). Secondary
data will help in understanding the past scenario and primary data will help in analyzing current
situations. In order to conduct research in proper manner, a sample of 50 people will be taken
who resides in different borough of the London. Hence, by collecting information through these
respective sources, research can be conducted in legitimate manner.
1.2 Survey methodology and sampling frame used in the research
Sampling frame that can be used in the research is as follows: Simple random sampling- Under this, all sample units are taken randomly and no
parameter is used for selecting a sample unit. This sampling method is used when
specific types of people are not required in sample. Stratified sample- This is different technique where all sample units are taken from
different parts of population by dividing them (Ridker, et.al, 2012). This method is used
when specific types of samples are required for research purpose.
 Cluster sampling- This is also different method of sampling and under this, geographic
area is divided into several parts and sample units are taken from these parts.

For Aquapet, it will be better to use cluster sampling in order to collect data in a proper
manner.
1.2 Questionnaire for research
Name:
Age:
 18- 25 age
 26-45 age
 46-76 age
Gender
 Male
 Female
 Transgender
Marital status
 Married
 Unmarried
 Divorced
Do you give importance to quality over price while making purchase decisions?
 Yes
 No
Do you think that income level is affecting people purchase decisions related to fast food?
 Yes
 No
KFC and other restaurants are charging high price on customers.
 Agree
 Strongly agree
 Somewhat agree
 Disagree
 Strongly disagree
How many times do you visit Aquapet restaurant in a year?
 2 times
 5 times

 15 times
 More than 15 times
Aquapet is making available fast food items at higher price.
 Strongly agree
 Agree
 Somewhat agree
 Disagree
 Strongly disagree
In case of high price, do you like to visit Aquapet restaurant?
 Yes
 No
Do you think Aquapet must reduce price of its products?
 Yes
 No
Give your feedback regarding services and products of KFC restaurant.
________________________________________________________
TASK 2
2.1 Statistical tools and decision making
Table 1: Calculation of mean, median and mode
Sales
1 25000
2 27000
3 28000
3 30000
4 33000
5 35000
Mean 29667
Median 29000
Mode #VALUE!

 Mean- It indicates the average value of the variable for specific time period. It shows the
average performance of sales variable (Herbenick, et.al, 2010). Median- It is a value that divides entire data into two parts. Different trends in the huge
data can be analyzed by using this statistical tool.
 Mode- It refers to the value that often repeated in the data set. This method is mostly used
by equity analyst for analyzing the price change pattern (Gumbel, 2012).
2.2 Analysis of results Mean- Average value of the firm sales is 29,667 and their current sale is 35,000. It
signifies that firm is showing magnificent performance in its business. If sales fall below
mean value, then it becomes matter of concern for the firm (Fowler, Cohen and Jarvis,
2013). Hence, it does not happen and is good for Aquapet. Median- This value is 29,000 and on this value, data set is divided into two parts. On
analyzing trends in both set of data, it can be said that firm gives a good performance. It
is also observed that in second data set, sales increase at a rapid rate. Hence, firm is
giving excellent performance in its business.
 Mode- Value of mode is zero which means that none of their sales value is repeated in
the data set.
2.3 Analysis of measure of dispersion
Table 2: Calculation of standard deviation
Sales
1 25000
2 27000
3 28000
3 30000
4 33000
5 35000
Standard deviation 3777.12

Interpretation
Value of Standard Deviation (SD) indicates the difference in current value of the variable
from sales. SD of the firm sales is 3777.12 and current sales are above average sales. Hence, it
can be said that current salesis greater than average sales and Aquapet is giving good
performance.
2.3 Calculation of quartile, percentile and correlation coefficient
Table 3: Calculation of quartile and percentile
Sales
1 25000
2 27000
3 28000
3 30000
4 33000
5 35000
Q1 27250
Q2 29000
Q3 32250
Interpretation
Quartile and percentile divide data into several parts and is advanced statistical tool than
median (Hampel and et.al, 2011). Both quartile and percentile are same kind of statistical tools
and due to this reason, their values always remain same. The value of the quartile is increasing
which means that firm’s sales are increasing at high growth rate. Thus, it can be said that firm is
giving good performance.
Table 4: Calculation of correlation
Sales Profit
1 25000 2500
2 27000 2700

3 28000 2800
4 30000 3000
5 33000 3300
6 35000 3500
Correlation 1
Interpretation
Correlation indicate the relationship between two variables and here value is one which
means that firm is earning entire revenue only from sales and there is no contribution of other
income in the firm revenue (Samuels, Witmer and Schaffner, 2012). This also means that if firm
sales would decline by 10% then equal percentage decline will observed in case of company
profit.
TASK 3
3.1 Graphical representation of the collected data
You give importance to quality over price while making purchase decisions?

Interpretation
In research it has been seen that majority of the respondents think that quality in
comparison to price mostly affects their purchase decisions. Hence, Aquapet must give due
importance to maintaining its product quality.
Yes No
0
5
10
15
20
25
30
Column C
Illustration 1: You give importance to quality over price while making purchase decisions?

Do you think that income level is affecting people purchase decisions related to fast food?
Interpretation
In research it has been find out that income level also affects people fast food preference
and in order to capture market it is necessary for the restaurant chain to make available products
at cheaper price.
Yes
No
0 5 10 15 20 25 30 35
Column C
Illustration 2: Do you think that income level is affecting people purchase decisions related to
fast food?

Aquapet is making available fast food items at higher price.
Interpretation
Research results show that most of the people think that Aquapet is making available fast
foods at a cheaper price. This reflects that restaurant chain have good image among the people
and it must continuously sell its product at cheaper price.
5
10
5
20
10
Strongly agree
Agree
Somewhat agree
Disagree
Highly disagree
Illustration 3: Aquapet is making available fast food items at higher price

KFC and other restaurants are charging a high price on customers.
Interpretation
Results show that KFC and other restaurants are making available products at a higher
price. Hence, Aquapet has an opportunity to increase its market share in the industry.
3.2 Creation of trend line
Table 5: Creation of trend line
2010 25000
2011 27000
2012 28000
2013 30000
2014 33000
2015 35000
Agree
Strongly agree
Somwaht agree
Disagree
Highly disagree
Illustration 4: KFC and other restaurants are charging a high price on customers.

2016 37500
2017 40179
Interpretation
Trend line is going upward and this reflects that firm is giving good performance. For
preparing this chart it is assumed that average growth rate of the firm will be 7.14% in upcoming
years. Travel and tourism industry is growing in the UK and due to this reason firm business will
certainly grow.
3.4 Preparation of business report
To
The Director of the Aquapet Date- 22-02-2016
Honorable members
In the report several analysis tools are applied like mean, median, mode, standard deviation and
correlation etc. On the basis of these tools sale of the firm is analyzed and it is find out that firm
is giving good business performance. On the basis of primary data it is observed that people are
giving due importance to price and quality but they are keeping quality over price while making
1 2 3 4 5 6 7 8
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
Column C
Linear (Column C)
Illustration 5: Trend line for Aquapet

purchase decisions. Aquapet needs to keep its product price low and also require to keep quality
of product high. By doing so it can capture large market share in the UK fast food industry.
Travel and tourism industry will grow in the UK and this will boost firm sales in upcoming
years.
TASK 4
4.1 Appropriate information processing tools
Following are the important information processing tools for the business. Management information system- It is a system that is used at the middle level of
management. In this system huge amount of data can be stored and processed to prepare
reports in systematic manner (Cressie, 2015). Hence, major ground level decisions are
taken at the middle level of management and due to this reason this system is used by the
middle level managers. Decision support system- In this information system there is a facility of simulation of
situation. Hence, this system is used by the top level of managers in order to take
strategic business decisions.
 Transaction processing system- It is used at the middle level of management in order to
enter details of business transactions and to process same in order to prepare expenses
report in the systematic manner (Sachs, 2012). Due to specific features this information
system is used by the most of the organizations.
4.2 Critical path method
Table 6: Activity table
Predecessor
activity
1
Identification and defining the
problem 2
2 Statement of research objectives 1 1
3 Planning the research designs 1 1
4 Planning the sample 2 2,3
5 Data collection 7 4

6 Data processing and analysis 2 5
7 Formulating report 1 6
Interpretation
On analysis of chart it can be seen that project will be performed in sequence of 1-2, 3-4-
5-6-7. The total time in which project will be completed is 2+1+1+2+7+2+1= 16 days. If project
will go beyond these days then cost of same will get increase (Leach, 2014).
Illustration 6: GANTT chart
Illustration 7: Network diagram

4.3 Project evaluation technique
Table 7: Calculation of payback period method
Project A Project B
Initial investment -100000 -80000
1 30257 -69743 22000 -58000
2 36308 -33435 25000 -33000
3 43570 10135 30000 -3000
4 52284 62419 34000 31000
5 62741 125160 35000 66000
Interpretation
Pay back period indicate the duration in which project can recover investment amount
(Payback method- payback period formula. 2016). Payback period of project A is 2 years and the
same of project B is three years. Hence, it can be said that former project is more viable for the
firm then latter project.
Average rate of return method
Table 8: Calculation of ARR
Project A Project B
Initial investment 100000 80000
1 30257 22000
2 36308 25000
3 43570 30000
4 52284 34000
5 62741 35000
Total 225160 146000
Average 45032 29200
ARR 45.03% 36.50%

Interpretation
ARR indicate the average return that a project can earn on the investment value. ARR of
project A is 45.03% and same of project B is 36.50%. On this basis it can be said that project A
is more viable then project B for the firm.
Table 9: Calculation of Net present value
Project A Pv @10% Present value Project B PV @10%
Present
value
Initial
investment 100000 80000
1 30257 0.909 27503.613 22000 0.909 19998
2 36308 0.826 29990.408 25000 0.826 20650
3 43570 0.751 32721.07 30000 0.751 22530.0
4 52284 0.683 35709.972 34000 0.683 23222.0
5 62741 0.621 38962.161 35000 0.621 21735
Total 164887.224 108135
NPV 64887.224 28135
Interpretation
NPV indicate the net present value of the project that remains after deducting present
value of the cash flows from the initial investment value (Net present value. 2016). NPV of the
project A is greater than project B and on this basis former project is assumed to be viable for the
firm.
Table 10: Calculation of IRR
Project A Project B
Initial investment -100000 -80000
1 30257 22000

2 36308 25000
3 43570 30000
4 52284 34000
5 62741 35000
IRR 29.91% 21.81%
Interpretation
IRR refers to the actual return that a project earns on the invested amount. IRR of the
project A is 29.91% and sale of project B is 21.81%. Hence, project A is considered more viable
then latter project.
CONCLUSION
On the basis of above discussion it is concluded that firm must use statistical tools in
order to evaluate their performance. Trends have many aspects and all of them cannot be traced
by using single statistical tools. Hence, managers must use multiple tools in order to evaluate
their business performance. Companies must abstain from selecting any project randomly and
they must use project evaluation techniques in order to select best viable project for the firm
business. Firms must use critical path method in order to determine sequence for performance of
activities and to complete project on time. By doing all these things business can be run in proper
manner.