Cost Benefit Analysis and Payback Period for Small Business Enterprises

This article discusses cost benefit analysis and payback period for small business enterprises. It explains the key components of cost benefit analysis and how it helps small businesses start a new business. It also provides advice on payback period and financial plan for a travel business. The article includes a table of costs and benefits for the travel business, as well as recommendations for Joey Tribbiani.

Running head: FOUNDATIONS OF COMPUTING SYSTEMS
Foundations of Computing Systems
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Part A:........................................................................................................................................2
Part B:.........................................................................................................................................5
Q1. Defining cost benefit analysis and briefly evaluating its key components, while indicating
how cost benefit analysis help small business enterprises start a new business:.......................5
Q2. Indicating what is payback period, while indicate the payback period for the travel
business and providing adequate advice:...................................................................................6
Q3. Providing adequate recommendation to Joey Tribbiani:.....................................................6
References:.................................................................................................................................8

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Part A:
Set Up Costs
Items Time period over 7 years
Hardware/software
costs
Unit
cost
Quant
ity
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Computers 1,400 4 5,600 3,920
Server 2,500 1 2,500 1,750
Backup system 2,200 1 2,200 1,540
Printer 1,200 1 1,200 840
Photocopy machine 3,500 1 3,500 2,450
Software license 1,500 4 1,500
1,50
0 1,500 1,500
One-off costs
Consultant fee
20,00
0
Business registration
fee 2,500
Office fit
out/furniture
30,00
0
Staff training 5,000
Total
74,00
0 -
1,50
0 -
12,00
0 - 1,500
Cost reduction after
4 years 30%
Software license
renewal fee 1,500
Operating Costs
Items Time period over 7 years
Fixed Costs
Month
ly
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Office rent

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1,600
19,20
0
19,20
0
19,20
0
19,20
0
19,20
0
19,20
0
19,20
0
Business insurance 100 1,200 1,200 1,200 1,200 1,200 1,200 1,200
Internet connection 80 960 960 960 960 960 960 960
Staff salary 6,000
72,00
0
72,50
0
73,00
0
73,50
0
74,00
0
74,50
0
75,00
0
Loan payment 761 9,129 9,129 9,129 9,129 9,129 9,129 9,129
Variable costs
Electricity 200 2,400 2,448 2,497 2,547 2,598 2,650 2,703
Stationery 200 2,400 2,400 2,400 2,400 2,400 2,400 2,400
Domain name and
website 90 1,080 1,080 1,080 1,080 1,080 1,080 1,080
Phone charges 100 1,200 1,200 1,200 1,200 1,200 1,200 1,200
Miscellaneous
expenses 500 6,000 6,000 6,000 6,000 6,000 6,000 6,000
Total 9,631
115,5
69
116,1
17
116,6
66
117,2
16
117,7
67
118,3
19
118,8
72
Salary rise 500
Electricity rates rise 2%
Loan calculation
Annual interest rate 0.60%
Number of months of
payments 84
Loan amount 50,000
Monthly payment 761
Benefits
Time period over 7 years
Items
Sales/
Month
Income
/Month
Incom
e/Year
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
Year
7
Ticket sales
70,00
0 7,000 84,000
84,0
00
84,0
00
84,0
00
84,0
00
84,0
00
84,0
00
84,0
00

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Holiday
travel
packages
10,00
0 1,000 12,000
12,0
00
12,0
00
12,0
00
12,0
00
12,0
00
12,0
00
12,0
00
Hotel
bookings
15,00
0 1,500 18,000
18,0
00
18,0
00
18,0
00
18,0
00
18,0
00
18,0
00
18,0
00
Total
95,00
0 9,500
114,00
0
120,
840
120,
840
120,
840
120,
840
120,
840
120,
840
120,
840
Sales Profit 10%
Escape Travel & Tours Cost Benefit Analysis
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Set up costs 74,000 - 1,500 - 12,000 - 1,500
Operating costs
115,56
9
116,11
7 116,666 117,216 117,767
118,31
9 118,872
Benefits
120,84
0
120,84
0 120,840 120,840 120,840
120,84
0 120,840
Cumulative costs
189,56
9
305,68
6 423,852 541,068 670,835
789,15
4 909,526
Cumulative benefits
170,84
0
291,68
0 412,520 533,360 654,200
775,04
0 895,880
Return on
investment (%) -9.88% -4.58% -2.67% -1.42% -2.48% -1.79% -1.50%
Payback in dollars
(18,72
9)
(14,00
6)
(11,332
) (7,708)
(16,635
)
(14,114
) (13,646)
Payback period in
years 5

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Part B:
Q1. Defining cost benefit analysis and briefly evaluating its key components, while
indicating how cost benefit analysis help small business enterprises start a new business:
With the help of cost benefit analysis organisation are able to understand the level of
expenses and income, which could be generated from a particular investment or project.
Moreover, cost benefit analysis is a globally used method, which compares cost of the project
with its benefits. This allows the organisation to gauge into the financial viability of the
project and make adequate investment decisions, which could increase their product in the
long run. The main key components of the cost benefit analysis are list of alternative
scenarios, identifying benefits & cost, comparison of alternatives, and sensitivity analysis,
which allows the organisation to detect the financial viability of the selected project.
Boardman et al. (2017) mentioned that with the help of cost benefit analysis organisations are
mainly able to detect the relevant cash outflow and inflow, which can be conducted by the
project.
The implementation of cost benefit analysis directly allows small business
entrepreneurs to gauge into the risk and reward attributes of the project. This eventually helps
small entrepreneurs to save the investment capital and detect investment opportunity, which
could improve return from investment over the period of time. The use of cost benefit
analysis directly allows the organisation to improve the level of income from investment,
while detecting the actual expenses and benefits which could be generated from the
investment (Johansson and Kristrom 2018).

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Q2. Indicating what is payback period, while indicate the payback period for the travel
business and providing adequate advice:
Payback period is an investment appraisal technique, which allows the organisation to
understand the number of years that could be taken by the project for returning the initial
investment capital. The payback period is essentially calculated to be within the life of the
project to make the investment option viable, where the investment will be collected as
quickly as possible. From the calculation that is been conducted for Joey Tribbiani the initial
investment will not be collected within the life of the project, as the cumulative expenses is
higher than the cumulative income of the project. Hence, on the basis of payback period the
overall investment does not indicate a profitable investment for Joey Tribbiani, as the
payback period is greater than the project life. On the other hand, Jonker, Junginger and Faaij
(2014) argued that payback period does not incorporate time value of money, which directly
reduces the financial viability of the investment appraisal technique to detect the actual
financial position of the project to generate higher returns from investment.
Q3. Providing adequate recommendation to Joey Tribbiani:
Business objective:
The main business objective is to attain higher sales of selling tickets, holiday travel
packages and making hotel bookings, as it will positively affect income stratum of the travel
agency. The further objective of the business is to improve the level of returns by reducing
the level of expenses from operations.
Service and product description:
The travel agency will sell tickets, holiday travel packages and make hotel bookings,
as it will be the main income stream for the organisation. In addition, the customized travel

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packages could eventually help the travel company to acquire the required level of income,
which could raise their profits from operations.
Marketing strategy and target market:
With the implementation of marketing strategy, the travel business could flourish and
built adequate customer base. In addition, the use of online marketing system with the
television advertisements could eventually help in improving the level of marketing presence
to generate adequate returns from investment (Solomon, et al. 2014). The main target market
for travel business are households, businesses and experience seekers. The household is
mainly targeted with holiday packages and hotel bookings, which eventually allow the
organisation to acquire adequate revenue from selling packages. Moreover, the target of
business can be conducted by selling tickets and holidays bookings, which are conducted by
employees of the organisation. Lastly, the accommodation of individuals who seek
experience could help in generating revenues by selling holiday packages for different exotic
destinations.
Financial plan and requirements:
The financial plan prepared in the above table are accurate, while reduction in
expenses of employees could eventually help in improving their income streams. This
deduction in expenses from 72,000 per year to 60,000 would provide an immense boost on
the financial stability of the project. Hence, the move will allow the organisation to reduce
the payback period to 2 years, which might help in gathering the required investment funds.
Therefore, decline in salary expenses will eventually allow Joey Tribbiani to conduct the
business successfully and generate higher return on investment.

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References:
Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit
analysis: concepts and practice. Cambridge University Press.
Johansson, P.O. and Kriström, B., 2018. Cost–Benefit Analysis. Cambridge University Press.
Jonker, J.G.G., Junginger, M. and Faaij, A., 2014. Carbon payback period and carbon offset
parity point of wood pellet production in the South‐eastern United States. Gcb Bioenergy,
6(4), pp.371-389.
Solomon, M.R., Dahl, D.W., White, K., Zaichkowsky, J.L. and Polegato, R., 2014. Consumer
behavior: Buying, having, and being (Vol. 10). London: Pearson.