Investment Appraisal and Recommendation

The assignment content is a series of tables showing the net present value (NPV) calculations for three different systems: System 1, System 2, and System 3. The tables provide data on the present value of each system's cash flows from 2015 to 2020, along with the project cost and net return. Based on the NPV calculation, it is recommended that the company select System 1 for investment due to its higher returns, better payback period, and high positive NPV.

Business decision
making
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Table of Contents
Introduction .....................................................................................................................................5
LO 1 Use variety of sources for the collection of data, both primary and secondary.....................5
1.1Plan for collection of primary and secondary data ................................................................5
1.2 Survey methodology and sampling frame.............................................................................5
1.3 Design a questionnaire ..........................................................................................................6
LO 2 Range of techniques to analyze data effectively for business purposes ................................7
2.1 Create the information for decision making .........................................................................7
2.2 Analyze results to draw valid conclusions ............................................................................9
2.3 Analyze data using measures of dispersion .........................................................................9
2.4 Explain quartiles, percentiles and correlation coefficient ..................................................10
LO 3 Produce information in appropriate formats for decision making .......................................12
3.1 Graphs through spreadsheets ..............................................................................................12
3.2 Trend lines ..........................................................................................................................12
3.3 Business presentation ..........................................................................................................13
3.4 Formal business report ........................................................................................................13
LO 4 Use software generated information to make decision in the company ..............................14
4.1 Information processing tools ...............................................................................................14
4.2 Project Plan .........................................................................................................................15
4.3 Financial tools for decision making ....................................................................................17
Conclusion ....................................................................................................................................20
References .....................................................................................................................................21
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List of tablesList of figuresIntroduction
Different types of decisions are made within business. The purpose of this research report
is to identify how decisions are processed within firms. It will help in evaluating the methods
which are used for processing the data. Further, it will present the information in appropriate
formats for decision making within business. The study will also show the use of different
financial tools in analyzing the financial information. At last, the report will end in reflecting the
use of software generated information in the organization.
LO 1 Use variety of sources for the collection of data, both primary and
secondary
1.1 Plan for collection of primary and secondary data
In order to open its second restaurant, restaurant chain is making plans related to primary and
secondary research. The research will be targeted on the potential customers. The plan is as
follows:
Primary research – It is new and unprocessed in nature as it is collected for the first time. It
requires filtering of information to make it usable for the research. For this study, primary data
will be gathered from customers of London by adopting survey technique. In that context, a
questionnaire will be frame. It will consist of open ended and close ended questions (Fowler
2009). The sample size for the participants is 50. Technique of random sampling will be applied
for selection of samples outside different restaurants in UK.
Secondary research – On getting used by someone, the primary data becomes secondary. It is a
data which is available from published and non-published sources. So data will be collected from
secondary sources like internet, books, journals etc (Groves and et.al., 2013). All the sources will
be valid and authentic.
1.2 Survey methodology and sampling frame
For the following research, survey methodology will be used under which data will be
collected through questionnaire technique. The technique is appropriate because it helps in
collecting large volume of data at a particular point of time (Jankowicz, 2005). Questionnaire is
designed with the purpose of identifying the taste and preference of the customers in London. In
this manner different kinds of expectations and improvements will be grabbed from the people so
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that services of the new chain can be designed accordingly (Andersen, Dysvik and Vaagaasar,
2009).
Sampling is related with selection of appropriate sample from which relevant information
for the study can be collected. It makes the data collection work easier and more flexible. For
this study, random sampling has been adopted in order to select the samples. These will be able
outside different restaurants in UK (Hacklin and Wallnöfer, 2012). In order to fulfill the research
aim and objectives, a sample size of 50 people has been kept and it is quite appropriate for the
research.
1.3 Design a questionnaire
Table 1: Questionnaire
1. Name
2. what is your age
3. Tick on your gender
4. Do you visit the restaurant regularly?
 Yes
 Once a week
 Once in month
 Rarely
 Never
5. What kind of dishes would you like to eat?
 European
 African
 Indian
 American
 Italian
6. Do you know about ABC restaurant?
 Yes
 No
7. Are you satisfied with its services?
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 Yes
 No
8. Please rate the service of ABC?
 Good
 Very Good
 Excellent
 Average
 Poor
9. Please rate the food at ABC?
 Good
 Very Good
 Excellent
 Average
 Poor
10 What you have to say about the environment at ABC?
 Nice
 Good
 Very Good
 Excellent
 Poor
11 Would you recommend ABC to other people?
 Yes
 No
12 Do you think new branch of ABC should be opened?
 Yes
 No
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LO 2 Range of techniques to analyze data effectively for business purposes
2.1 Create the information for decision making
Here, the information is created for the purpose of realizing whether restaurant must open
its new chain having more focus on Asian dishes or European dishes (Prieto, and Revilla, 2006).
For that purpose, past 7 years’ financial data of the restaurant company has been used.
Table 2: Financial performance in terms of expenditure and sales
Yea
r
Advertising expenditure (£’000) Asian dishes(£’000) European dishes (£’000)
2007 25 200 120
2008 28 230 150
2009 30 300 200
2010 26 270 110
2011 27 330 220
2012 25 350 240
2013 22 300 200
Descriptive statistics
For advertising expenditure
Advertising
expenditure
(£’000)
Mean 26.14286
Standard Error 0.961858
Median 26
Mode 25
Standard Deviation 2.544836
Sample Variance 6.47619
Kurtosis 0.516825
Skewness -0.13696
Range 8
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Minimum 22
Maximum 30
Sum 183
Count 7
For Asian dishes
Asian
dishes(£’000)
Mean 282.8571
Standard Error 20.20305
Median 300
Mode 300
Standard
Deviation
53.45225
Sample Variance 2857.143
Kurtosis -0.80374
Skewness -0.46004
Range 150
Minimum 200
Maximum 350
Sum 1980
Count 7
For European dishes
European
dishes
(£’000)
Mean 177.1429
Standard Error 19.11298
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Median 200
Mode 200
Standard
Deviation
50.5682
Sample Variance 2557.143
Kurtosis -1.75611
Skewness -0.28569
Range 130
Minimum 110
Maximum 240
Sum 1240
Count 7
2.2 Analyze results to draw valid conclusions
Mean – It is regarded as the average value of the data set. The restaurant chain is having average
advertising expenditure is 26.14286 (£’000), average European dishes sales is 177.1429 and
average Asian sales is 282.8571 (Schraeder and Morrison, 2005).
Mode – It is that value which has the highest frequency. The highest value in advertising
expenditure is 25, in Asian dishes sales is 300 and in European dishes sales is 200 (Morato,
2013).
2.3 Analyze data using measures of dispersion
Advertising expenditure
(£’000)
Asian
dishes(£’000)
European dishes
(£’000)
Range 8 150 130
Quartile range 2.5 65 80
Standard
deviation
2.54 53.45 50.56
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 Range – Difference between the highest and lowest number is range. The range value for
advertising expenditure is 8, for Asian dishes it is 150 and for European dishes is 130.
(Newbold, and et. al., 2009). The value of range for advertising expenditure shows that
the expenditure is not highly spread out. While the range for Asian and European dishes
shows that sales for both the dishes are highly spread out in the data set. Quartile range – It divides the quartile into four confined intervals. (Day, 2005). The
quartile range for advertising expenditure is 2.5, for Asian dishes its 65 and for European
dishes, it is 80. The quartile range for advertising expenditure shows that less than half of
the expenditure is dispersed. For Asian dishes it shows that more than 50% of the sales
are dispersed and for European dishes it shows that near to 100% of the sales are
dispersed
 Standard deviation – It is a measure used to quantify the amount of variation or
dispersion of a set of data values. The standard deviation for advertising expenditure is
2.54, for Asian dishes it is 53.45 and for European dishes is 50.56. (Graff, 2003)
2.4 Explain quartiles, percentiles and correlation coefficient
Table 3: Range Quartile and S.D.
Advertising
expenditure (£’000)
Asian dishes(£’000) European
dishes (£’000)
Percentile 25th Quartile 1 25 250 135
Percentile 50th Quartile 2 26 300 200
Percentile 75th Quartile 3 27.5 315 215
Percentile – Percentiles are applied in marking the scores of non-referenced tests (Jankowicz,
2005). The values for all the percentiles that are 25th, 50th and 75th can be seen from the above
table. It is calculated by applying the following formula: It shows that company is incurring a
advertising expenditure of 25000£ at first quartile of the financial year, 26000£ at second
quartiles and 27500£ at third quartile. The sales for Asian dishes at first quartile is 250000 £, at
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second quartile it is 300000£ and at third quartile it is 315000£. The sales for European dishes at
first quartile is 135£, at second quartile is 200000£ and at third quartile is 215000£.
Correlation coefficient
Advertising expenditure (£’000) Asian dishes
(£’000)
Advertising expenditure
(£’000)
1
African dishes(£’000) -0.05251 1
Correlation coefficient measures the impact of one variable on another variable
(Correlation Coefficient, 2013). The value of correlation shows that there is negative relationship
between the two variables.
Advertising expenditure (£’000) European dishes (£’000)
Advertising expenditure (£’000) 1
European dishes (£’000) -0.0222 1
The value of correlations shows that there is no impact of advertising sales and European
sales
Asian dishes
(£’000)
European dishes (£’000)
Asian dishes
(£’000)
1
European dishes
(£’000)
0.866767 1
The value of correlation shows that there is a high relationship between the two variables
(Correlation Coefficient, 2013).
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LO 3 Produce information in appropriate formats for decision making
3.1 Graphs through spreadsheets
Bar chart
From the above graph it can be noticed that advertising expenditure is increasing at a
constant rate while European sales are showing fluctuating pattern.
Line chart
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Histogram
Interpretation
From the above preparation of bar graphs, trend lines and bar charts, it can be analyzed
that restaurant chain is performing financially well. Business has succeeded in achieving
stagnancy in all these years while on the other side, sales has also shown amazing results (Prieto
and Revilla, 2006). It was discovered that sales trend of Asian dishes is higher as compared to
European dishes. It is a sign that Asian dishes have become very popular among the people in
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London. The restaurant chain can more concentrate on its Asian dishes as these are liked by the
customers (Wood and Pierson, 2006). On the other side they are required to bring more
innovation in serving of the European dishes.
3.2 Trend lines
Scatter graphs
Trend lines
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Interpretation
The above graphs estimate the future trend of the business of the restaurant chain. Among
the two dishes, Asian dishes have produced very productive results. While on the other hand, ups
and downs can be noticed in the sales pattern of European dishes (Groves and et.al., 2013). It can
be estimated that sales for Asian dishes will increase in the future; hence the restaurant firm is
required to impart more efforts in this direction. The sales for European dishes will become
stagnant in future and restaurant should work on making these dishes more likeable among the
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customers (Morato, 2013). Sales for both segments are higher than the advertising expenditure of
the business and this shows that restaurant is in a good financial position (Schraeder and
Morrison, 2005). Hence, these things create lot of business opportunities for the new restaurant
chain and it is expected that the opening will receive a warm welcome from the side of the
customers.
3.3 Business presentation
3.4 Formal business report
Introduction
The objective of the research is to analyze the financial viability of opening of a new
restaurant by a popular chain of restaurants. The idea is to open a new chain in streets of London.
For that purpose, primary and secondary investigation has been done
Method
Following investigating procedures were adopted:
 Questionnaire approach was adopted to identify the preferences of the people in London
regarding restaurant food
 A sample size of 50 people was used for questionnaire process. Random sampling
approach was applied for selection of sample
 Tools like correlation coefficient, measures of central tendency, quartiles, line graph,
scatter graph etc were applied in order to analyze the secondary data
 Tool such as Spreadsheets, bar graphs, trend line, histogram were also used for purpose
of evaluation
Findings
After performing the primary and secondary research, following things were concluded:
 The goodwill of the brand is high in the market
 People are well satisfied with the foods and services
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 Among the findings it was derived that employees of the restaurant are helpful and
proficient
 It was derived that customers in London are very fond of Asian Cuisine.
 Pattern of sales and advertising expense have indicated that restaurant is in good financial
condition. Company has the required potential to open a new branch
Conclusion
From the above study, it can be concluded that new restaurant chain is having many
opportunities to utilize. The chances of its survival are high in the market as the company is
backed up with strong financial growth. As it is noticed that customers in London are fond of
Asian dishes hence, firm can make more efforts to continue this trend.
LO 4 Use software generated information to make decision in the company
4.1 Information processing tools
There are different types of information processing tools which can be implemented
within the business. These are as follows:
 Transacting processing system – This technique helps in managing day to day operations
within business. It includes activities such as supply chain, invoicing, order management
etc This system will help the business in processing daily range of operations related to
supply chain, order management, invoicing, purchasing, inventory management etc
(Prieto, and Revilla, 2006). It can be implemented in different departments within
business.
 Management information system – MIS is established for securing and processing the
information at a common platform. It can be very useful in converting the data into
statistical information and along with that, it facilitates sound decision making at various
management levels (Hacklin and Wallnöfer, 2012).
 Decision support system – It brings clarity and transparency within the data so that
process of decision making can become transparent. Improvement in communication at
different business level can also be noticed.
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 Electronic Point of Sale – It is an electronic way of retail checkout. Generally, the system
is self-contained and is capable of performing all activities of a store checkout counter
(Andersen, Dysvik and Vaagaasar, 2009). It includes payments by bank or credit cards,
sales reporting, transactions verification, stock update etc.
4.2 Project Plan
Gantt Chart
Critical path:
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Network Diagram
4.3 Financial tools for decision making
The restaurant chain is seeking to adopt one of the information processing systems within
the business names system 1, system 2 and system 3. The financial feasibility of these systems
will be judged by adopting investment appraisal techniques. The application is as follows:
Table 4: Expected Cash Flow
Financial
information
System 1 System 2 System 3
Capital Cost (£’000) 24000 37000 12000
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Cash Flow Cash Flow Cash Flow
2015 6000 8000 4000
2016 6000 8000 4000
2017 6000 9000 4000
2018 6000 9000 2000
2019 6000 6000 1000
2020 6000 6000 1000
Total Cash Flow (£’000) 36000 46000 16000
Payback technique
Table 5: Payback calculation
System 1 System 2 S
y
s
t
e
m
3
Cash
Flow
Cumulati
ve
Cash
Flow
Cumulati
ve
Cash Flow Cumulati
ve
Capital Cost
(£’000)
-24000 -37000 -12000
2015 6000 -18000 8000 -29000 4000 -8000
2016 6000 -12000 8000 -21000 4000 -4000
2017 6000 -6000 9000 -12000 4000 0
2018 6000 0 9000 -3000 2000 2000
2019 6000 6000 6000 3000 1000 3000
2020 6000 12000 6000 9000 1000 4000
Payback Period 4 4.5 3
Interpretation – The above calculation reflects that payback period for system 3 is lesser as
compared to system 1 and system 2. It shows that system 3 is more feasible and productive
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Accounting rate of return
Table 6: ARR calculation
System 1 System 2 System 3
2015 6000 8000 4000
2016 6000 8000 4000
2017 6000 9000 4000
2018 6000 9000 2000
2019 6000 6000 1000
2020 6000 6000 1000
Average Profit (£’000) 6000 7666.666667 2666.666667
Capital Cost (£’000) 24000 37000 12000
ARR (Average Profit/Average Cost)*100 25 20.72072072 22.22222222
Interpretation - The above calculation of ARR shows that accounting rate of return of system 1
is higher as compared to system 2 and system 3. This again shows that system 1 will provide
more returns for the business.
Net present value
Table 7: NPV calculation for system 1
System 1 PV factor @ 10% Present Value
2015 6000 0.909 5454
2016 6000 0.826 4956
2017 6000 0.751 4506
2018 6000 0.683 4098
2019 6000 0.62 3720
2020 6000 0.56 3360
Total present value (£’000) 2
6
20

0
9
4
Project Cost (£’000) 2
4
0
0
0
Net Return (£’000) 2
0
9
4
Table 8: NPV calculation for system 2
System 2 PV factor @ 10% Present Value
2015 8000 0.909 7272
2016 8000 0.826 6608
2017 9000 0.751 6759
2018 9000 0.683 6147
2019 6000 0.62 3720
2020 6000 0.56 3360
Total present value (£’000) 3
3
8
6
6
Project Cost (£’000) 3
7
0
0
0
Net Return (£’000) -
3
1
3
4
\
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Table 9: NPV calculation for system 3
System 3 PV factor @ 10% Present Value
2015 4000 0.909 3636
2016 4000 0.826 3304
2017 4000 0.751 3004
2018 2000 0.683 1366
2019 1000 0.62 620
2020 1000 0.56 560
Total present value (£’000) 1
2
4
9
0
Project Cost (£’000) 1
2
0
0
0
Net Return (£’000) 4
9
0
Interpretation – From the above calculation of net present value, it can be interpreted that
system 1 is generating higher returns as compared to other two systems (Hacklin and Wallnöfer,
2012). System 1 is profitable and productive for the business and also it is having high positive
net present value.
Recommendations
After the application of investment appraisal techniques, it is recommended that company
must select system 1 for investment. It is because system 1 is capable of producing higher
returns. It has the potential to develop high profitability and productivity for the company.
System 1 is having better payback period, high ARR and high positive NPV
Conclusion
From the above research, it can be concluded that in order to collect the primary data,
survey methodology is very appropriate to apply. Questionnaire approach is feasible as it helps
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in collecting large volume of data. Spreadsheets, graphs, trend lines, line graph, histogram are
effective tools to represent business information. Project management tools like Gantt chart,
network diagrams etc. are very useful in performing operations management. Among all, the
capital intensive techniques NPV approach is very effective as it takes into account the time
value of money.
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