Financial Analysis and Decision Making for a New Restaurant Project

The assignment content is about evaluating the viability of two investment projects, one for a new restaurant project and another for a gold coast investment. The evaluation techniques used are NPV, ARR, and PBP. The results show that the new restaurant project has a higher NPV ($106,930) and ARR (85%) compared to the Gold Coast investment. However, the payback period for the new restaurant project is longer at 2.12 years. The assignment concludes that the new restaurant project is viable due to its positive NPV, but it may not be the best option considering other factors such as availability of funds and required skills.

Running head: INVESTMENT DECISION MAKING
Investment Decision Making
Name
Institution

INVESTMENT DECISION MAKING 2
Executive Summary
The purpose of this study is to assist Mark and Paul in making an investment decision
choice between starting a new restaurant and investing the Gold Coast project. In financial
investment, the two projects are known as mutually inclusive projects: One has to be
foregone if the other one is chosen. There are several techniques used in making investment
decisions. For example, net present value, Payback period, accounting rate of return,
Profitability Index are used to making an investment decision. The nature of investment
involves returns and risks. The higher the expectation from an investment, the higher the
associated risks. In the other hand, the scope of investment management is based on several
factors. Investor’s objectives, preferences, skills, and constraints. Financial evaluation has
been conducted on the two projects to evaluate their viability. The analysis has revealed that
the two projects are not comparable. However, the new restaurant project should be chosen
because it’s easier to manage and the owners have a direct control over it.

INVESTMENT DECISION MAKING 3
Table of Contents
1.0 Introduction...............................................................................................................................4
1.1 Purpose..................................................................................................................................4
1.2 Scope.....................................................................................................................................4
1.3 Limitations.............................................................................................................................4
2.0 Nature and Scope of Investments....................................................................................................4
3.0 Investment Opportunity One Budget.........................................................................................6
3.1 Material Budget table.............................................................................................................6
3.2 Labour Budget table..............................................................................................................6
3.3 Cash Budget table..................................................................................................................6
3.3.1. The total cash budget table..................................................................................................7
3.4 Overview and Analysis of Budgets........................................................................................7
3.4.1. Material Cost Analysis.........................................................................................................7
3.4.2. Labour Cost Analysis...........................................................................................................8
3.4.3. Cash budget Analysis...........................................................................................................8
3.5 Practical issues Associated with the Investment....................................................................8
4.0 Investment Opportunity Two Ratio Analysis.............................................................................9
a) Net Present Value (NPV)...........................................................................................................9
b) Accounting rate of return (ARR)...............................................................................................9
c) Payback Period (PBP)..............................................................................................................10
5.0 Comparison of Investment Opportunities................................................................................10
6.0 References...............................................................................................................................12
Appendix 1 Workings..........................................................................................................................13

INVESTMENT DECISION MAKING 4
1.0 Introduction
1.1 Purpose
The purpose of this study is to assist Mark and Paul in making an investment decision
choice between starting a new restaurant and investing the Gold Coast project.
1.2 Scope
Mark and Paul cannot invest in both the investment opportunities. They have to
choose one over the other. In financial investment, the two projects are known as mutually
inclusive projects: One has to be foregone if the other one is chosen. There are several
techniques used in making investment decisions. For example, net present value, Payback
period, accounting rate of return, Profitability Index are used to making an investment
decision. Other factors to be considered include the risks and expected return, availability of
cash outflow, and availability of skills, expertise to manage the investment. Some of these
factors will be applied in choosing one of the two investment opportunities.
1.3 Limitations
The study is limited to making decisions based on the financial aspect of an
investment: the investment with higher returns is chosen. The expected business risks that
may hinder performance have not been addressed.
2.0 Nature and Scope of Investments
According to Finance, investment is defined as purchasing a financial product or
services with expected favorable future returns. Likewise, investment practices refer to
buying of a valued item, financial product, or placing your money in a project with
anticipation of receiving positive future returns. Generally, investment refers to applying
money to make more money after a given period. Likewise, investing can be described in
three ways. First, buying assets with the aim of increasing the future income. Second,
increase wealth accumulation. And third, employing appropriate strategies to fulfill the long-
term goals (Gibson, 2008).
Investment management is aimed at assisting a potential investor in making the right
investment decisions. After analyzing the entire investment process, starting with the required
funds and resources and ending with the expected gains, then an investment decision can be

INVESTMENT DECISION MAKING 5
made. In the case of mutually exclusive investment, the one with high projected income
should be chosen.
The nature of investment involves returns and risks. The higher the expectation from
an investment, the higher the associated risks. Moreover, an investment with a higher period,
the lesser the uncertainties associated with the investment while the short the investment
period, the higher the level of uncertainty. The risk is defined as the probability is realizing an
actual income which is different from the expected one. Investment can be categorized
according to the expected risks. For example, investors can go for government securities
which are more secure while another investor chooses to buy and sell equity shares which are
associated with the high-risk level (Watson, 2006).
The scope of investment management is based on several factors. Investor’s
objectives, preferences, skills, and constraints. These factors differ from one investor to
another. The next step is to create investment policy and strategy. Investment policy entails
creating investment diversification and choosing the amount to be invested in each pool.
While, investment strategy comprises of laying objective for achieving the expected revenue
as well as controlling the associated risks (Gleim, 2001). In the case of Mark and Paul, they
should develop investment policies and strategies for each of the two investments. All other
factors remaining constant, they should evaluate each project on the basis of expected
income, associated risks, skills and expertise required to run them. The project that scores
high cumulatively should be chosen.
After formulation of investment policy and strategy, the next step is execution. The
execution phase involves a lot of analysis, research and judgment on the expected income,
level of safety, and liquidity. The success of the execution phase depends on the judgment,
innovation, and initiatives of the investors. Having chosen either investing in the new
restaurant or the Gold coast project, mark and Paul should execute it (Barney, 1991).
The last phase involves monitoring the performance of the project and making the
necessary adjustments. Based on the industry performance and market changes, investors are
expected to make changes from time to time to maximize the efficiency and performance of
the project. Based on the evaluation findings compared to the projected expectations,
investors may choose to terminate the project before its maturity, and the amount invested, or
change strategy being employed (Spender, 2014).

INVESTMENT DECISION MAKING 6
3.0 Investment Opportunity One Budget
This section analysis various expenditures and expected income associated with the
new restaurant investment project. The three budgets for this project are material budget,
labour budget, and cash budget (Arnold, 2014).
3.1 Material Budget table
Item June
($)
July
($)
August
($)
September
($)
Totals
($)
Machinery/Equipment 110,000
Furniture (tables and chairs) 30,000
Vehicle (deliveries) 43,000
Utensils (cups, plates) 18,000
Produce (for 1 week) (4*10000) 0 0 4,000 22,000 26,000
Drinks (for 1 month) 0 2,000 11,000 20,000 33,000
TOTALS 260,000
3.2 Labour Budget table
Labour Cost
Item
June
($)
July
($)
August
($)
September
($)
Totals
($)
I day (6hours * $23) cost 138 138 138 138
1 week (36*138) cost 4968 4968 4968 4968
I month (4968 * 4) cost 19,872 19,872 19,872 19,872
Monthly Totals 19,872 19,872 19,872 19,872
Monthly Totals * 3 casuals
($19872*3) 59,616 59,616 59,616 59,616 238,464
3.3 Cash Budget table
Expected Revenue
Item June ($)
July
($) August ($)
September
($)
Totals
($)
Total sales (Units)
Produce 20,000 18,000 18,000 22,000
Drinks (monthly produce units
*3) 60,000 54,000 54,000 66,000
Total sales ($)
Produce * 45 900,000 810,000 810,000 990,000 3,510,000
Drinks*6 360,000 324,000 324,000 396,000 1,404,000
4,914,000

INVESTMENT DECISION MAKING 7
To calculate the cash budget, the expected revenue should be obtained first. Then the
total costs (labour, materials, total overheads and withdrawals) are deducted from the Total
sales.
Therefore, Total revenue collected during the four-month period is;
The total expected revenue is $ 4,914,000.
3.3.1. The total cash budget table
Therefore, the total cash budget is shown below;
Items Debit (Dr) ($) Credit (Cr) ($)
Opening Cash in Bank 80,000
Expected Revenue 4,914,000
Total 4,994,000
Less:
Material Cost 260,000
Labour Cost 238,464
Total Overheads (5000 *4) 20,000
Total Withdrawals (10000*2*4) 80,000
Total Costs 598,464
Total Cash Inflow 4,395,536
3.4 Overview and Analysis of Budgets
3.4.1. Material Cost Analysis
The material coast entails the expenditure on the current and non-current assets. If the
project is accepted, Mark will have to buy machinery/ equipment, furniture, delivery vehicle,
utensils, produce and drinks. Respective cost of each item is as disclosed in the material cost
table. The total material budget adds up to $ 260,000. However, it is expected that Mark and
Paul will only have $80,000 in their bank account. While the total cost of the non-current
assets is $ 201, 000. Therefore, they will have a deficit of $ 121,000 to make the purchases.
Like, the cost of material and drinks amounts to $59,000 payable in proportions of 10%.
45%, and 45% within 90 days of delivery (Deegan, 2011).
3.4.2. Labour Cost Analysis

INVESTMENT DECISION MAKING 8
From the proposal for a new restaurant, Mark and Paul will hire three casual workers
who will work for 6 hours daily and earn $23 per hour. The total labour cost for one
employee would be $138. By working 6 days in a week (36 hours), one employee would earn
$4,968 translating to $ 19,872 in a month. In short, one casual worker will earn a total of
$19,872 in one month. Three employees will $ 59,616 in one month and $238,464 in four
months (June, July, August & September) (Spender, 2014).
3.4.3. Cash budget Analysis
Cash inflow is calculated by deducting total costs and withdrawals from the expected
sales. It is anticipated that the restaurant will make monthly sales of 20,000, 18,000, 18,000,
and 22,000. Each produce unit will be sold at $45 translating to monthly produce sales of
$900,000, $ 810,000, $ 810,000, and $ 990,000 in June, July, August, and September
respectively. The total produced sales during the period would be $ 3,510,000 (Capps &
Glissmeyer, 2012).
Likewise, it is anticipated that the restaurant will make monthly sales of 60,000, 54,000,
54,000, and 66,000. Each produce unit will be sold at $45 translating to monthly produce
sales of $360,000, $ 324,000, $ 324,000, and $ 396,000 in June, July, August, and September
respectively. The total produced sales during the period would be $ 1,404,000. Therefore,
total expected revenue during the period is $4,914,000 (Shirreff, 2004).
The total cost & expenses during the period, which comprise of material cost, labour
Overheads, and withdrawals, is $ 598,464. By deducting $ 598,464 from $ 4,914,000, a net
income of $ 4,395,536 is arrived at (Huang, 2008).
3.5 Practical issues Associated with the Investment
Besides the financial analysis of the project, other factors should be considered as well.
First, mark and Paul should conduct a feasibility study on the targeted market. The
study will help to establish the taste and preference of the potential buyers, how best to
segment the market, the market needs and expectations, the median monthly income in the
market and existing competition.
Second, for effective management of the business, the investors require adequate
skills in the fields of management and hospitality (Lucarelli, 2011).
Third, the investors should examine the market performance by considering factors
such as growth, available opportunities and the risks that challenge effective and efficient the
performance.

INVESTMENT DECISION MAKING 9
Last, Mark and Paul should gauge their proposed business plan against those of the leading
players in the market. The comparison would establish whether or not the new restaurant has
what it takes to gain considerable market share and competitive advantage in the market
(Mercy, 2014).
4.0 Investment Opportunity Two Ratio Analysis
The second proposed project is to invest in the Gold Coast. Mark and Paul will form a
partnership with other investors. To determine whether or not the project is viable for
investment, techniques such as net present value, accounting rate of return and payback
period have been applied.
a) Net Present Value (NPV)
NPV is calculated by deducting Present Value Cash outflow (PVCOF) from Present Value
Cash Inflow (PVCIF).
In this case, the Cost of investment (PVCOF) is $390,000.
The NPV is calculated as shown in the table below;
Year Cash
flow
PVIF
12%
Amount
1 100,000 0.893 89,300
2 230,000 0.797 183,310
3 190,000 0.712 135,280
4 140,000 0.636 89,040
PVCIF 496,930
Less:
PVCOF
390,000
NPV 106,930
Decision: The project is viable because the NPV is greater than Zero ($106,930).
b) Accounting rate of return (ARR)
The accounting rate of return is calculated by dividing the Average Accounting profits by the
Average Investments.
ARR= (Average Accounting profits/ the Average Investments) * 100%.
Note: Average accounting profits is equal to Average Earning after Tax (AEAT).
AEAT= $(100,000+230,000+190,000+140,000)/ 4 = $ 165,000
While, Average investment = (Initial outlay + Salvage Value)/ 2

INVESTMENT DECISION MAKING
10
= $(390,000 + 0)/ 2
= $ 195,000
Therefore, ARR= $(165,000/ 195,000) * 100%
= 85%
Decision Criteria: For mutually exclusive, the one with a higher ARR is chosen. In
another hand, for a single project, the management should set a desirable ARR.
c) Payback Period (PBP)
The PBP is calculated as shown below;
Year Cash flow Accumulated Cash
Flow
Cash Outlay
1 100,000 100,000 390,000
2 230,000 330,000
3 190,000 520,000
4 140,000 660,000
PBP= 2 years + (60,000/520,000)
=2.12 years
If the investment is made, it would take 2.12 years to recover the initial investment.
For mutually exclusive investment, one with the shortest payback period is chosen. In the
case of a single project, it is a duty of the management to set a desirable PBP.
5.0 Comparison of Investment Opportunities
The two projects are not comparable. One the initial cash outlay is different. The new
restaurant project requires an initial cost of $260,000 to commence while the second project
requires an initial cash outlay of $390,000. This makes it difficult to compare them. The
comparison would have been possible if the cash outflows were equal (Mercy, 2014).
Second, the evaluation techniques used in determining the viability of the two projects are
different. The first investment project relies on Cost-Benefit Analysis while the second one
uses the NPV, PBP, and ARR techniques for evaluation. Comparability would have been
possible if similar techniques would have been used (Mercy, 2014).
In choosing the one project to invest in several factors such as availability of required
funds, investment scope and required skills and needs should be considered. First, with only
$80,000 in their bank, Mark and Paul cannot afford the required $390,000 required to invest

INVESTMENT DECISION MAKING
11
in the Gold Coast investment. In the other hand, the suppliers provide the proprietors with a
flexible payment method. They can afford this arrangement (Watson, 2006). Second, the
expected net cash inflow from the new restaurant project is higher. As young entrepreneurs
and marketing students, Mark and Paul have the required skills to run the new restaurant
project. They can as well advance their skills on the management and hospitality.

INVESTMENT DECISION MAKING
12
6.0 References
Arnold, G. (2014). Corporate financial management (1 ed.). New Jersey: Pearson Higher Ed.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of
Management, 17, 99-120.
Capps, C. J., & Glissmeyer, M. D. (2012). Extending The Competitive Profile Matrix Using
Internal Factor Evaluation And External Factor Evaluation Matrix Concepts. The
Journal of Applied Business Research.
Deegan, C. (2011). Financial Accounting Theory: European. New York: McGraw-Hill
Higher Education.
Gibson, C. (2008). Financial Reporting and Analysis: Using Financial Accounting
Information. New Jersey: Cengage Learning.
Gleim, I. N. (2001). CMA Review, Part 2: Financial Decision Making. London, UK: Gleim
Pubns.
Huang, C.-f. (2008). Foundations of Financial Economics. New Jersey: Prentice Hall.
Lucarelli, C. (2011). Risk Tolerance in Financial Decision Making. Washington: Palgrave
Macmillan Studies .
Mercy, A. (2014). The role of financial statement in investment decision-making.
International journal of accounting information system (, 2), 91 -105.
Michael, Z. (2012). Financial Decision Making Using Computational Intelligence. Chicago:
Springer .
Ra, & Gerhart . (2010). Human resources management: Gaining a competitive advantage.
Journal of Economics, 5(5), 332.
Shirreff, D. (2004). Dealing With Financial Risk (The Economist). New York: Bloomberg
Press.
Spender, J.-C. (2014). Business Strategy: Managing Uncertainty, Opportunity, and
Enterprise. Chicago: Oxford University Press.

INVESTMENT DECISION MAKING
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Watson, D. (2006). Corporate Finance: Principles and Practice. New Jersey: Financial
Times/ Prentice Hall.
Appendix 1 Workings
a) Material Cost Working
July Material Cost of Produce & Drinks ($)
Produce 0
Drinks (10% of 20,000)(July) 2,000
August Material Cost of Produce & Drinks ($)
Produce (10% of 40,000) (August) 4,000
Drinks (10% of 20,000) (August) 2,000
Drinks (45% of 20,000)(July) 9,000
September Material Cost of Produce & Drinks ($)
Drinks (45% of 20,000)(July) 9,000
Drinks (45% of 20,000)(August) 9000
Drinks (10% of 20000) (Sep) 2000
Produce (45% of 40,000)(August) 18,000
Produce (10% of 40,000)(Sep) 4000