PV Comparison and IRR Analysis for Business Decision Making

This assignment discusses the use of tools and techniques for decision making in a business context. It presents two project options, A and B, with different cash flows and initial investments. The study uses three methods to evaluate the profitability of each project: Net Present Value (NPV), Accounting Rate of Return, and Internal Rate of Return. According to these methods, Project B is more profitable than Project A, with a higher NPV, accounting rate of return, and internal rate of return. The study concludes that using these tools helps businesses make optimal decisions and evaluate past and future performance.

BUSINESS
DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Plan for primary and secondary data collection with survey methodology and sampling frame
used..............................................................................................................................................1
Questionnaire...............................................................................................................................2
Collection of data and summering of information by using representative values.....................4
Analyzing the data using measures of dispersion........................................................................7
Quartile, percentile and correlation technique.............................................................................8
Suitable calculations to draw realistic conclusion and valid recommendations..........................9
TASK 2..........................................................................................................................................10
Graphs and charts......................................................................................................................10
Trend Lines for forecasting.......................................................................................................11
Business Presentation................................................................................................................12
Formal business report...............................................................................................................12
Appropriate information processing tools to analyse the information......................................12
Plan for the project.....................................................................................................................13
Financial tools............................................................................................................................14
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

LIST OF TABLES
Table 1: Sales and Profit..................................................................................................................7
Table 2: Descriptive Statistics of sales figures................................................................................7
Table 3: Descriptive Statistics of Profit figures...............................................................................7
Table 4: Quartile..............................................................................................................................8
Table 5: Percentile...........................................................................................................................8
Table 6: Correlation Coefficient......................................................................................................8
Table 7: Net Present value method................................................................................................15

INTRODUCTION
For making an optimal decision in the business organization there is need to application
of appropriate tools and techniques (Prieto, 2006). In the present report the purpose of effective
information for decision making in organization is detailed by using different techniques.
Restaurant chain is planning to open its second restaurant in London and for making an optimal
decision towards business expansion, range of analysis techniques were applied. In first task of
the study, data was collected from the primary and secondary sources and on the basis of which
techniques were applied to analyze the data for business purpose. Further in next part
information is produced fro decision purpose and also software generated information is used for
organizational decision making.
TASK 1
Plan for primary and secondary data collection with survey methodology and sampling frame
used
To open a second restaurant in London, Board of Directors have to collect the data from
different sources and on the basis of which they can make their decision whether it will be their
viable move or not.
 Primary Data collection method: Accessing of information directly from primary sources
will help the company to know current information about the needs and wants of London
restaurant market (Pennink and Jonker, 2010). Primary data will be collected from the
customers of restaurants of London. There are different techniques of collecting primary
data such as survey, interview, observation etc. In context to primary research, survey
methodology will be used (Khotri, 2008).
 Secondary method of data collection: Secondary data will be collected from different
sources such as research reports, internet, newspapers, articles etc. (Manion Cohen, and
Morrison, 2007). Collection of secondary data will helps to examine the information of
restaurant market of London.
Survey methodology and sampling frame for collection of primary data:
 Survey Methodology: Data will be collected from the customers of restaurants and for this
questionnaire technique of survey methodology will be used. It is the type of primary
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data collection method. In questionnaire methodology questions are included to access
information about their preferences, taste, quality, pricing etc.
 Sampling frame: Method of probabilistic sampling will be used and this method the
technique of random sampling will be applied to collect the data from samples (Pennink
and Jonker, 2010). Data will be collected from the customers and sample size will be 100
customers. On the basis of random sampling, customers will be randomly selected for
accessing information from them.
Questionnaire
Questionnaire for Opening of a New Restaurant in London
Name: ____________________________________
Gender: ________
1) Occupation
1. Student
2. Service
3. Business Other
2) Age
1. Below 18
2. 18 to 25
3. 25 to 40
4. Above 40
3) Type of food items you preferred to eat in restaurants?
1. Italian
2. Mexican
3. Asian
4. Chinese
4) How often you go to restaurant in a week?
1. Once in a week
2. 2 times
3. More than 2 times
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5) Type of factors which persuade you to eat food in particular restaurant?
1. Taste and Quality
2. Choices
3. Service
4. Ambience
5. All of the above
6) Do you agree that restaurants in London are serving food as a good value for money?
1. Strongly Agree
2. Agree
3. Neutral
4. Strongly Disagree
5. Disagree
7) In terms of range of pricing which type of restaurant you mostly preferred?
1. Low pricing
2. Economical prices
3. Higher prices
8) Would you like to prefer restaurant which offers discounts and schemes for customers?
1. Yes
2. No
3. Can’t Say
9) Does food served in restaurants meet in accordance with their price value?
1. Strongly Agree
2. Agree
3. Neutral
4. Strongly Disagree
5. Disagree
10) Any suggestions which you want to give regarding opening of new restaurant in London?
________________________________________________________________________
________________________________________________________________________
3

Collection of data and summering of information by using representative values
Data which was collected from the primary method was summarized below to examine
the preferences, needs and wants of customers of restaurant market of London.
22%
33%
21%
24%
Which type of food would like to eat in
restaurant?
Italian
Mexican
Asian
Chinese
On inquiring the responses of the customers of market about the type of would they
mostly preferred in restaurants of London, it was assessed that customers have equal preference
for different types of food. 22% of them prefer Italian, 33% likes to eat Mexican, 21% likes asian
and 24% prefers Chinese food in restaurants.
26%
44%
30%
How often you go restaurant in a
week?
Once in a week
2 times
More than 2 times
4

On examining the frequency of customers that how often they go restaurant in a week,
44% of them go 2 times in restaurant and 30% go more than 2 times in restaurants. Only 26% of
them go once in a week in restaurant. From these responses it was concluded that customers like
to eat food in restaurants.
Taste and
Quality Choices Service Ambience All of the above
0
5
10
15
20
25
30
35
16
12
20 21
31
Which factors influence you to go to
a particular restaurant?
When the customers were asked that which factor influence them to eat food in particular
restaurant, it was assessed that 31% of customers considered all the factors such as taste, quality,
choices, service and ambience of restaurant. 16% of considered the taste and quality of food and
only 12% of them prefer due to choices of food available in restaurant. 20% of them states about
service and 21% considered the ambience of restaurant.
5

Yes No Can’t Say
0
10
20
30
40
50
60
70 65
11
24
Would you like to prefer restaurant
which offers discounts and schemes
for customers?
Organization also has planned to offer discounts and schemes in its new restaurant, when
customers were asked that would they like to eat in restaurant which offers and discounts and
schemes, 65% of them replied with option ‘yes’. 11% of does not like to eat and 24% of them
depicts that can’t say about this option.
Low pricing
Economical prices
Higher prices
0 10 20 30 40 50 60
24
56
20
In terms of range of pricing which
type of restaurant you mostly
preferred?
On inquiring the terms of range of pricing which type of restaurant you mostly preferred,
56% of the customers states that they prefer restaurant where food are available at economical
range of prices. 24% of them prefer to eat in lower pricing and 20% generally eat food in
restaurant where the prices of food are high.
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Analyzing the data using measures of dispersion
Sales and profits of business were considered for last ten years from the year 2005 to 2013.
Table 1: Sales and Profit
Year Sales (£m) Profit (£m)
2005 700 520
2006 750 590
2007 830 680
2008 925 750
2009 1010 865
2010 1050 905
2011 1095 980
2012 1130 1055
2013 1180 1110
Table 2: Descriptive Statistics of sales figures
Sales (£M) Results
Mean 963.3333
Median 1010
Standard Deviation 171.701
Range 480
Minimum 700
Maximum 1180
Sum 8670
Count 9
Table 3: Descriptive Statistics of Profit figures
Profit (£M) Results
Mean 828.3333
Median 865
Standard Deviation 206.4431
Range 590
7

Minimum 520
Maximum 1110
Sum 7455
Count 9
On analyzing the sales and profit data of business by using the descriptive statistics for
the period of last ten years, it was evaluated that mean which depicts about the average sales of
company from 2005 to 2013 was £963.33 million and profit was £828.33 million. Median of
sales was 1010 and of profit were 865. Likewise the value of standard deviation indicates about
the deviation of values from the average sales and profits of business (Woodside, 2010).
Standard deviation of sales 171.701 was lower in compare to standard deviation of profits 865.
Quartile, percentile and correlation technique
Table 4: Quartile
Quartile Sales (£m) Profit (£m)
Q1 830 680
Q2 1010 865
Q3 1095 980
Table 5: Percentile
Percentile Sales (£m) Profit (£m)
P25 885 660
P50 980 810
P75 1070 985
Table 6: Correlation Coefficient
sales (£m) profit (£m)
Sales (£m) 1
Profit (£m) 0.99428 1
8

600 700 800 900 1000 1100 1200 1300
0
200
400
600
800
1000
1200
f(x) = 1.19546321814713 x − 323.296233481733
R² = 0.988593208260984
Sales and Profit
Suitable calculations to draw realistic conclusion and valid recommendations
Conclusion:
Quartile: Value of quartile of sales and profits of the restaurant shows the results in four equal
parts. Value of 2nd quartile depicts about the average sales and profits of the company which is
1010 and 865 (Hacklin and Wallnöfer, 2012). 1st Quartile is the smallest value which is 830 and
680and highest value that is 3rd Quartile is 1095 and 980.
Percentile: Percentile is calculated on the basis of 100 percent value. Result at 25th percentile
determines about the values considered at 25 percent of observation of sales profit which is 885
and 660. 50th percentile depicts about the mid value of sales and profit and its value is 980 and
810.
Correlation Coefficient: It depicts about the relationship between the two variables. Correlation
coefficient was measured to make decision that whether the profit of restaurant was correlated
with the sales or not. On assessing the relationship it was assessed that the value of ‘r’ was
0.99428. It denotes that there is positive and strong relation between the sales and profit of the
restaurant business (Cohen and et. al., 2013). Profit of company is depend on the sales of
business and is correlated with each other.
Recommendations: On the basis of analyzing the sales and profits of the restaurant, it is
recommended that the company has to increase its sales revenue. Profits of the company were
depending on the sales of business and increase in sales will also leads to increase in profitability
9

of the company (Andersen and Vaagaasar, 2009). It is recommended that for increasing sales
revenue, business should incurred expenditure in marketing and promotion activities which will
attract more number of customers and stimulate them to eat in food in their restaurants.
TASK 2
3.1 Graphs and charts
Histogram of sales
Row Labels (£m) Count
750-849 2
850-949 1
950-1049 1
1050-1149 3
1150-1250 1
750-849 850-949 950-1049 1050-1149 1150-1250
0
0.5
1
1.5
2
2.5
3
3.5
2
1 1
3
1
Sales
Interpretation: On the basis of the histogram graph, sales revenue of the business was analyzed
and it was interpreted that between the category of £m1050-1149, restaurant has achieved 3
times its sales revenue. These sales was from the year 2010 to 2012. On the other side in year
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2005-2007 also the sales of the restaurant has achieved twice in the category of £750-849. On the
basis of past performance of the restaurant sales revenue, it can be interpreted that growth of
sales was slow during the year 2010-2012.
Histogram of Profit
Row Labels (£m) Count
550-649 1
650-749 1
750-849 1
850-949 2
950-1049 1
1050-1150 2
550-649 650-749 750-849 850-949 950-1049 1050-1150
0
0.5
1
1.5
2
2.5
1 1 1
2
1
2
Profit
Interpretation: From the result of histogram of profit, it was analyzed that the profit margin of
the restaurant was not increased with higher growth rate from the year 2005 to 2008. But due to
increase in sales of the restaurant after 2008, profit of the business was increased and also in the
year 2012 and 2013, organization has achieved good amount of profit margin.
3.2 Trend Lines for forecasting
Trend line for sales forecasting for period of five years
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0
200
400
600
800
1000
1200
1400 f(x) = 165.140350877193 x
R² = 0.905027464532873
sales (£m)
Interpretation: As per the past results of the organization, future sales of the restaurant is
predicted and it is forecasted with the help of trend line. Sales were forecasted for the period of
5years with help of regression equation y = 165.14x. On the basis of forecasted results, it was
assessed that in future also the sales of restaurant will be increased and will achieve good amount
of revenue in its business.
year sales (£m)
2005 700
2006 750
2007 830
2008 925
2009 1010
2010 1050
2011 1095
2012 1130
2013 1180
2014 1651.4
2015 1816.54
2016 1981.68
2017 2146.82
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2018 2311.96
Trend line for profit forecasting for period of five years
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
0
200
400
600
800
1000
1200 f(x) = 146.614035087719 x
R² = 0.940163125781666
profit (£m)
Interpretation: With the help of trend line the profits of restaurant are also forecasted for next 5
years and it was assessed that in future also the profits of the business will increase. For
evaluating the future results, it was forecasted on the basis of y = 146.61x and it is examined that
profits of the restaurant will be on track of high growth rate.
year profit (£m)
2005 520
2006 590
2007 680
2008 750
2009 865
2010 905
2011 980
2012 1055
2013 1110
2014 1466.1
13

2015 1612.71
2016 1759.32
2017 1905.93
2018 2052.54
Business Presentation
PowerPoint presentation
Formal business report
To: The Board of Directors
From: Consultants
Status: Confidential Report
Date: 26 April 2015
INTRODUCTION
This report details about the research which was conducted in order to assess that whether
organization should open its second restaurant or not. To make appropriate decision, market
research was conducted. And also the financial position of the company was analysed that
whether they should invest for new restaurant or not.
METHOD
Below the following methods which are adopted in research were followed
 Primary research was adopted and data was collected from customers
 Questionnaire and survey technique was applied to access the data from customers
 Analysis of financial performance
FINDINGS
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 Positive response of customers and they were satisfied
 They were satisfied with food, quality and prices of our existing restaurant
 With the help of spreadsheet histograms were prepared and it was analyzed that majority
of the sales of the company was in 1050 to 1149 and profits was in 850 to 949 and also
in 1050 to 1150.
 With the help of foretasted trend line, it was examined that sales and profits of the
business will increase in future.
 Increasing trend of sales and profit will leads the business towards growth and
development of business
CONCLUSION
On the basis of market research and financial analysis of the organization, it is concluded that a
new restaurant can be open in London. It is one of the feasible and effective decision for the
company.
With the help of spreadsheet histograms were prepared and it was analyzed that majority
of the sales of the company was in 1050 to 1149 and profits was in 850 to 949 and also in 1050
to 1150. With the help of forecasted trend line, it was examined that sales and profits of the
business will increase in future. Increasing trend of sales and profit will leads the business
towards growth and development of business (Woodside, 2010).
Appropriate information processing tools to analyze the information
There are different information decision tools which can be used for decision making
purpose. Below different tools for analyzing the information are detailed and on the basis of
which organization can take decisions at operational, tactical and strategic level.
 Management Information System: This system helps the company to make decision by
analyzing, managing and collecting the data at one common database in computer. On the
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basis of which they can make decisions for their business (Coskun, Basligil and Baracli,
2008).
 Decision Support System: This decision making system is used by the management at
operational and planning stage as it used different techniques to make optimal decision.
 Transactional Processing system: In this system the concept of transactional process is
used which is categories the information into different segments (Theoharakis and et. al.,
2007). For example it can be used for making decision in related to customers of
company.
Plan for the project
Task Activities Number of Days
A Market Research 12
B Collection of primary data 16
C Collection of secondary data 6
D Analysis of collected data 14
E Interpretation 10
F Planning for new restaurant business 8
G Construction and Designing 40
H Completion 12
I Launching and customer service 7
Activity Time Predecessor 1 Predecessor 2 Predecessor 3
A 12
B 16 A
C 6 B
D 14 A B
E 10 D
F 8 A D E
G 40 F
H 12 F G
16

I 7 H
I
H
G
F
E
D
C
B
A
0 20 40 60 80 100 120 140
Gantt Chart
Series1 Critical Activity Noncritical Activity Slack
Time
Activity Early Start Early Finish Late Start Late Finish
A 0 12 0 12
B 12 28 12 28
C 28 34 113 119
D 28 42 28 42
E 42 52 42 52
F 52 60 52 60
G 60 100 60 100
H 100 112 100 112
I 112 119 112 119
Project 119
Financial tools
There are different investment appraisal techniques which can be used by restaurant
organization to assess the viability of the project. With the help of these technique optimal
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decision can be make that whether to invest in the project or not (Ulliana, Correia and Wormald,
2007).
 Net Present value method: On the basis of net present value method, Board of Directors
of company can choose the Project B for their restaurant business. NPV of Project B is
25390, which is much higher and positive in compare to Project B (Kinney and Raiborn,
2012). This project will be viable and profitable for their business.
Table 7: Net Present value method
Year PV factor @ 6% Cash flow
of
Project A
(£ m)
Cash flow
of
Project B
(£ m)
PV of Project A PV of Project B
1 0.94 6000 18000 5640 16920
2 0.89 12000 23000 10680 20470
3 0.84 25000 28000 21000 23520
4 0.79 25000 12000 19750 9480
Total Present Value 57070 70390
Less Initial Investment (45000) (45000)
NPV 12070 25390
 Accounting Rate of Return: Another technique is accounting rate of return method.
Project which has highest accounting rate of return is most profitable and favorable for
the business (Sangster, 2006). Investment in project B will give higher return to their
restaurant business as it will give 45% return in compare to Project A which has only
38% return.
Year Cash flow of Project A
(£ m)
Cash flow of Project B
(£ m)
1 6000 18000
2 12000 23000
3 25000 28000
4 25000 12000
18

Average return during the period 17000 20250
Initial Investment 45000 45000
ARR= Average return duringthe period
Initial Investment 38% 45%
 Internal Rate of Return: Project which has highest internal rate of return is beneficial for
the organization. On the basis of IRR method, Project B has 29% whereas Project A has
IRR of 15%. Board of Directors should invest in Project B only as it has higher IRR and
positive cash inflows (Ulliana, Correia and Wormald, 2007).
Year Cash flow of Project A (£ m) Cash flow of Project B (£ m)
1 6000 18000
2 12000 23000
3 25000 28000
4 25000 12000
Internal Rate of Return 15% 29%
CONCLUSION
From the above study it has been concluded that using of tools and techniques for
decision making helps the business to make optimal and effective decision. It also enables the
organization evaluate their past and future performance.
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REFERENCES
Journals
Andersen, S. E. and Vaagaasar, L. A., 2009. Organizational rationality and project management.
International Journal of Managing Projects in Business. 2(4). pp.479 – 498.
Cohen, J. and et. al., 2013. Applied Multiple Regression/ Correlation Analysis for the Behavioral
Sciences. Routledge.
Coskun, S., Basligil, H. and Baracli, H., 2008. A weakness determination and analysis model for
business process improvement. Business Process Management Journal. 14(2). pp.243 - 261.
Hacklin, F. and Wallnöfer, M., 2012. The business model in the practice of strategic decision
making: insights from a case study. Management Decision. 50(2). pp.166 – 188.
Prieto, M. A., 2006. Learning capability and business performance: a non-financial and financial
assessment. Learning Organization. 13(2). pp.166 – 185.
Sangster, A. 2006. Capital investment appraisal techniques: a survey of current usage. Journal of
Business finance and Accounting. 20(3). PP. 307-332.
Theoharakis and et.al., 2007. Insights into factors affecting production and operations
management (POM) journal evaluation. Journal of operations management. 25(4). pp.932-
955.
Woodside, G. W., 2010. Opening up decision making: making sense of entrepreneur and reseller
business‐to‐business strategies. Journal of Business & Industrial Marketing. 20(7). pp.347 –
354.
Books
Khotri, D.C., 2008. Research Methodology. New Delhi: New Age International.
Kinney, R. M. and Raiborn, A. C., 2012. Cost Accounting: Foundations and Evolution. 9th ed.
Cengage Learning.
Manion L., Cohen, L., and Morrison, K., 2007. Research methods in education. Routledge.
Pennink, B. and Jonker, J. 2010. The Essence of Research Methodology. Springer.
Ulliana, E., Correia, C. and Wormald, M. 2007. Financial Management, 6th Ed. Juta and
Company Ltd.
Online
Correlation Coefficient, 2013. [Online]. Available through:
<http://mathbits.com/MathBits/TISection/Statistics2/correlation.htm>. [Accessed on 5th
Jan. 2015].].
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