Comprehensive Business Plan and Financial Analysis for Hospitality

This report presents a comprehensive business plan for a hospitality venture, focusing on financial analysis and investment appraisal techniques. The plan includes an introduction to the business and its objectives, followed by a detailed financial and economic analysis of an investment project, specifically for starting a restaurant. The analysis covers project variables, assumptions, and the application of various investment appraisal techniques such as Net Present Value (NPV), Internal Rate of Return (IRR), Project Profitability Index (PI), Discounted Payback Period, and Accounting Rate of Return (ARR). The report also includes discussions on depreciation, break-even analysis, and sensitivity analysis. Furthermore, it addresses balance and accounts, summarizing the analysis and offering short-term and future management strategies. The document aims to provide theoretical knowledge and practical experience in using accounting formulas and techniques for cost control and profit maximization, as well as supporting management decisions.

Running head: A BUSINESS PLAN
A Business Plan
Name of the Student:
Name of the University:
Authors Note:

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Contents
Introduction:....................................................................................................................................2
Financial and economic analysis of an investment project:............................................................2
Investment appraisal techniques:.....................................................................................................5
Balance and accounts:....................................................................................................................17
Business plan analysis summary:..................................................................................................19
Recommendation:..........................................................................................................................20
Conclusion:....................................................................................................................................20
References:....................................................................................................................................22

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Introduction:
Career growth is an aspiration for each and every individual irrespective of the profession one is
in. Working in hospitality industry an individual will have the opportunity to show his or her
ability to use analytical techniques to measure, improve and manage performance of an
organization within the industry. A company is under obligation to prepare and present financial
statements on periodical basis. These are statements that contain important financial information
about the company and can be used effectively to take important decisions about the company. A
person with significant analytical knowledge can use these information effectively to take better
organization decisions to improve the performance of the company. An individual working
within an organization in the hospitality industry can conduct in-depth analysis on the basis of
available information to improve the performance of the company. This will help the individual
to achieve higher career growth as the organization will recognize the potential of the individual
by promoting him to higher position within the organization1.
The objective of this document is to develop theoretical knowledge and practical experience to
deal with accounting formulas and techniques to be used for controlling costs and increase
profits of an organization. In addition how to use the information to support the decisions of the
management shall also be discussed here in this document.
Financial and economic analysis of an investment project:
ABC Limited is an organization involved in providing international entertainment and hospitality
services. The organization has a development strategy that considers expansion of organizational
1 Małgorzata Baran Baran, "Knowledge Management In Organizations. The Case Of Business Clusters"
(2015) 22(5) Management and Business Administration. Central Europe.

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activities to different parts of the world on periodical basis2. At present the company is
considering investing in restaurant business. In order to implement the new business idea of
opening a restaurant the company needs an investment of 300,000 EUR. The capital would be
needed for acquiring necessary equipment and machineries along with initial working capital
necessary to conduct day to day business operations. It would take approximately 2 years to
acquire initial investment. Equity share capital shall be issued to collect the funds needed for
investment and it is expected that half of the required capital would be collected in year 1 and the
other half would be collected in the next year. However, since the initial investment needed is
65% of the total investment of EUR 300,000, the company has decided to take the additional
amount as loan from bank after collecting 50% of EUR 300,000 from issuing equity shares in the
market.
Project variables:
Before deciding to invest on any new project such as the one ABC is currently considering, i.e.
to invest in restaurant business, it is important to conduct in-depth analysis of such investment
project and proposal. Such analysis includes use of investment appraisal and capital budgeting
techniques which are based on the foundation of number of assumptions and underlying
variables. In this case the project variables along with necessary assumptions shall be considered
to assess the feasibility of the project. Project variables in this case include price, volume of
services, variable costs associated with services, fixed costs of the new project and other such
variables. Necessary assumptions shall be used on the basis of pessimistic and optimistic
scenarios to assess the expected outcome to the project under different situations3.
2 Gabriel Dwomoh, "Using Capital Budgeting Technique Of Net Present Value (NPV) To Determine The
Benefit Of Training Investment" (2017) 2(2) SSRN Electronic Journal.
3 H. Russell Fogler, "Overkill In Capital Budgeting Technique?" (2017) 3(3) Financial Management.

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Assumptions:
As per the judgment and knowledge of financial and analytical department the following
assumptions are realistic to the project.
I. Inflation rate is expected to be 10% during the life time of the project.
II. VAT in variable costs are 6%.
III. Initial working capital shall be kept at the bank’s credit account.
IV. The accepted rate of discount for the project is 20%.
V. Fixed expenses such as depreciation will be 15% and 21% including VAT.
Bank credit terms and conditions are as following:
I. The short term loan will have a term of 3 years and will carry a 7% annual rate of
interest.
II. Inflation rate shall be considered while calculating interest on loan to consider the
impact of inflation.
On the basis of above assumptions and underlying variables the following table has been
compiled that include each and every single detail about the proposal of starting a restaurant
business.
Sl.
No.
Details and
particulars
Numerical value such as
amount and percentages
1 Inveѕtment amοunt in EUR 300, 000
2 Duration of the project (Expected) 2

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3 Inveѕtment рart that ѕhοuld be aсquired:
50%
4 Сredit in the tοtal inveѕtment 35%
5 Lοan diѕburѕement рeriοd in уearѕ 5
6 Fiхed aѕѕetѕ ѕerviсe term, уearѕ 8
7 Equiрment ѕaleѕ eхсeeded the value οf the reѕidual value 10%
8 Wοrking сaрital amοunt 10% οf рrοfit
9 The real сredit rate 7%
10 Nοminal diѕсοunt rate 20%
11 Inflatiοn rate, % 10%
12 Οрtimiѕtiс and рeѕѕimiѕtiс aѕѕeѕѕment οf deviatiοnѕ frοm the 30%
13 Οрtimiѕtiс and рeѕѕimiѕtiс οutсοme рrοbabilitу 0.3
Investment appraisal techniques:
As mentioned earlier use of investment appraisal techniques helps in assessing the feasibility of
investment proposals. The findings of investment appraisal techniques helps in taking correct
decision in relation to a business proposal. Such techniques include net present value technique,
payback period method, internal rate of return technique and others.
Net present value (NPV):
Net present value is the technique that uses the time value of money and adjusts the future cash
flows from a project by discounting the same using an appropriate rate of discount. Generally

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cost of capital or rate of interest paid on loan amount is considered for discounting the future
cash inflows from a proposal. The accumulated present value of cash inflows from the lifetime of
a project is reduced by the amount of initial investment to calculate net present value. In case the
resultant NPV is positive then the project is considered financially feasible and beneficial for an
organization otherwise it is not. For large business projects, management often uses NPV to
decide whether to invest in the project or not.
As can be seen from the above table that the NPV of the project is expected to be EUR 299,060
which is greater than 0 hence, the project should be accepted. However, as mentioned earlier that
there number of assumptions and underlying variables that are considered for calculation of

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NPV, hence, it is important to understand that even slightest of changes in these variables and
assumptions will significantly change the NPV. Hence, necessary cautions must be used before
taking decisions in relation to a project using the outcome of NPV.
In this case, however, since NPV > 0 hence, the project should be accepted, i.e. ABC Limited
should invest in the proposal to start the restaurant business.
Internal rate of return of the project:
Internal rate of return is another technique used by the management to assess the feasibility of an
investment proposal as well as to assess the desirability of different investment proposals. IRR is
calculated by using the following formula:
If the IRR of a project is above than the cost of capital then, the project should be accepted
otherwise it would be wise to avoid investing in such projects. Thus, if IRR of a project > cost of
capital of the project then the project should be accepted whereas if the IRR of the project is < or
= cost of project then it is better to avoid investing in such project. In case, there are two or more
projects available for investment and the organization has limited resources available to invest in
any of those projects the project with highest IRR and if the same if greater than the cost of
capital then such project should be accepted4.
4 Michael A. Pagano, "Notes On Capital Budgeting" (2016) 6(5) Public Budgeting & Finance.

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Using the information about the project given below the IRR shall be calculated.
I. The borrowed amount = 105 000 EUR taken fοr 7% рer уear;
II. Own fund 195 000 EUR at a disсοunt rate of 20%;
III. Advanced сaрital value = ((105 000 х 7% х 195 000 х 20%)/300 000) х 100%=15%.
IRR is calculated below:
Further the comparison between discounting rate, i.e. cost of capital and IRR can be seen from
the graph below.

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The above graph also indicates the dependency of internal rate of return on the discounting rate
of a project.
IRR of the project as can be seen from the above graph and calculation is 42.7% thus,
considering that the cost of capital for advanced capital is 15% thus, the project is expected to
realize the coast quite easily. Thus, the project should be accepted as the IRR of the project >
than the cost of capital.
It is important to understand that IRR greater than cost of capital, i.e. advanced capital cost of
15% indicates that the project would provide a return of 42.7% per annum which is significantly
higher than the cost of capital hence, investing in the project would be financially beneficial for
the ABC Limited. Thus, ABC limited based on the IRR analysis should go ahead and invest in
the restaurant business.
Project profitability index:
Return on each capital unit is described by the project profitability index. It is another popular
method that management uses to determine the feasibility of a project. Current value of operation
flow and current value of investment flow are two important components used in determination
of project profitability index. As per the project profitability rules if project profitability index
(PI) > 1 then the project should be accepted. In case PI < 1 then the project should not be
accepted. Similar to NPV and IRR in case there are number of projects available and the
organization can invest only any one of the projects then the project with highest PI should be
accepted.
Calculation of PI is showed in the table below:

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The project should be accepted as the PI of the project is greater than 1.
Discounted payback period technique:
In discounted payback period the payback period is calculated by dividing the initial investment
in the project with the discounted annual cash inflows from the project. If the discounted
payback period is less than the useful life of a project then the project should be accepted. Hence,
the decision of investment in a project can be taken by using the discounted payback period
method also. Earlier simple payback period method was also used to assess the feasibility of a
project however, in order to consider the time value of money the discounted payback period
method has been introduced.
The table below shows the calculation of discounted payback period of the project:

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As can be seen from the above table that the project is expected to pay off the initial investment
within a period of 6 years thus, the payback period is less than the useful life of the project
hence, it would be financially feasible for the company to invest in the project. The decision can
be analysed from the following equation for the project5.
Discounted payback period of the project < Term of investment = Project should be accepted.
Thus, the project should be accepted and the company should invest in the project.
Accounting rate of return:
Accounting rate of return is based on the yield ratio. The initial investment is proportionately
calculated against the net profit of the project to calculate accounting rate of return. Project
accounting rate of return is calculated by using the following formula:
π= (-34 870 + 88 170 + 288 250 + 173 920 +59 590)/5 = 115 010
5 Susan Hoffmann, Norman Krumholz and Kevin O’Brien, "How Capital Budgeting Helped A Sick City:
Thirty Years Of Capital Improvement Planning In Cleveland" (2018) 22(3) Public Budgeting & Finance.

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V=142 570
ARR = π/(ο,5*V)=161
Thus, the accounting rate of return is 161% of the invested capital as is clear from the above
calculation. Thus, as per accounting rate of return, it is expected that the project will provide a
return of 161% of the amount of initial investment.
The decision rule is as following:
If Rv> = Rg, the рrοjeсt сan be realized; If Rv <Rg, the рrοjeсt ѕhοuld be rejeсted;
Since, the expected rate of return is merely 20% as compared to the accounting rate of return of
161% hence, the project should be accepted by the company.
Depreciation:
Depreciation is a periodical charge against the fixed assets for the normal wear and tear that it
suffers from its use in the operating activities of an organisation. Depreciation is allowed as an
expenditure for taxation purpose hence, charging depreciation to reduce the profit helps an
organization to pay less amount of tax as the taxable profit reduces by the amount of
depreciation. It is often the defining factor in determining the feasibility of a project hence, it is
important to consider the amount of depreciation and its effect on a project and its feasibility.
There are mainly two different types of methods that are used to charge the amount of
depreciation on fixed assets; these are straight line method and written down value method. Use

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of straight line method of depreciation is recommended for the ease of the method to determine
the amount of depreciation. The amount of depreciation to be charged against the revenue from
the project in this case is calculated below:
Historical Cost of Goods 242670 EUR
Number of years to depreciate over 8
Annual Depreciation Amount 30333.75 EUR
Monthly Depreciation Amount 2527.81 EUR
Depreciation Period = 96 months
Break even analysis and its importance in conducting feasibility study of the project:
Break even analysis tells an organization as to the number of units or sale value that the
organization must reach in order to ensure there is no loss to the organization. In order to
calculate the point of sales, an organization must reach to enter in the state of no loss no profit
position breakeven point is calculated. Breakeven point (BEP) is calculated by using the
following formula;
BEP in sales volume = Fixed costs / Profit volume ratio.
BEP is sale units = Fixed costs / Contribution per unit.
Considering the uncertainty that surrounds the future of an organization and its business
operations BEP provides reasonable amount of certainty to an organization as far as the amount
of sales that it must achieve to ensure there is no operational loss from business operations. In

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this case the breakeven point and critical sales volume are calculated in the table below using the
information about the project as provided at the beginning of the document in tabular format.
Thus, the unit price is 154,24 EUR
The graphical analysis shall be helpful in assess the BEP of the project in the graph below:

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The abobe sales volume graph shows the intersection point between total expenses and net profit
from the project. In additional the critical volume in sales is also indicated considering the
amount of investment needed for the project.
Critical Sales Determination by using algebra is given in the form of equations below:
Determine CSV in terms of value:
CSV= ((TFC+A)*Q’)/(Q’-TVC)
Where: (TFC + A) - total fixed costs (thsd EUR) = 149.20
TVC- total variable costs = 117.03 thsd. EUR
Q `- net profit from sales = 231,36 thou. EUR
CSV = 301.93 thousand EUR.
Determine CSV in natural terms:
CSV=((CSV*(100+20%))/(p*100)
Where CSV - CSV in terms of value
P - current (working) capital in percent of profit.
CSV = 1.958.
Thus, 301.93 is the amount of sales that must be earned from the project in order to cover both
variable and fixed costs to reach the position of no profit and no loss in the project6.
6 Arwiphawee Srithongrung, "Capital Budgeting And Management Practices: Smoothing Out Rough Spots
In Government Outlays" (2017) 38(1) Public Budgeting & Finance.

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Sensitivity analysis:
Sensitivity analysis helps in understanding the possible changes to the expected outcome from a
project if there is any change to the underlying variables and assumptions. Generally, pessimistic
and optimistic situations are used to conduct sensitivity analysis to assess the possible outcome
from a project if the situation changes in the future.
Expected changes to the outcome in case of optimistic scenario with +30% situation is illustrated
below:
The expected outcome will change drastically under pessimistic scenario as can be seen from the
calculation below:

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In order to conduct a detailed risk assessment of a project sensitivity analysis is conducted by
using different scenarios to quantify the expected variance in the outcome of a project if there is
any change to the variables and assumptions in the project. Thus, level of risks associated in
different projects can be calculated with the help of sensitivity analysis.
Balance and accounts:
The statement below is the Trial balance of the company as on July 12, 2017:
Ассοunts Dеbit balance Сrеdit balance
Саѕh
Dеbtοrѕ
Lοаn frοm Bаnk
Mοrtgаgе
Purсhаѕеѕ
Wаgеѕ аnd Ѕаlаriеѕ
Οffiсе ехpеnѕеѕ
Rеnt rесеivеd
Furniturе
Еquipmеnt
Саѕh
Dеbitοrѕ
Mοrtgаgе
Purсhаѕе
Wаgеѕаnd Ѕаlаriеѕ
ΟffiсеЕхpеnѕеѕ
Furniturе
Еquipmеnt
Lοаn frοm Bаnk
Rеnt Rесеivеd

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Mοtοr Vеhiсlеѕ
Ѕаlеѕοf Bаnquеtѕ аnd
Funсtiοnѕ
Аdvеrtiѕing
Ѕtοсk
Саpitаl
Mοtοr Vеhiсlеѕ
Аdvеrtiѕing
Ѕtοсk
Ѕаlеѕ οf Bаnquеtѕ аnd
Funсtiοnѕ
Саpitаl
Tοtаl:
A trial balance has two sides, i.e. debit sides and credit sides. Debit sides shows the all
accounts that have debit balances such as assets, expenses and losses; credit side on the
other hand shows all accounts that have credit balances such as revenue, profit, income
and liabilities. The objective of preparing trial balance is to identify error in account
balances, i.e. in case trial balance does not balance that means there is an error that has
occurred in recording and positing of entries in the books of accounts of the organization.
There are number of different types of errors that can occur while recording and posting
entries in the books of accounts. These errors include omission error, commission error,
compensating errors, errors of principle and others. It is desirable to have error free books
of accounts on the basis of which financial statements are prepared and presented to
ensure these statement show true and fair picture of an organization. Thus, preparation of

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trial balance is important to the overall process of accounting and is an important tool in
the hands of an accountant to unearth errors and mistakes in the books of accounts of an
organization.
Business plan analysis summary:
ABC Limited is considering investing in the restaurant project needs to consider both the risk
and returns associated with the project to take final decision regarding the project, i.e. whether to
proceed with the project or not. Thus, the two most important elements in any business plan are
risk and returns. The findings from the detailed calculation and use of investment appraisal
techniques are to be used to take final decision in relation to the investment proposal of the
company.
As per NPV of the project the restaurant business project is expected to have a NPV > 0. In fact
as per the NPV calculation the project is expected to have a NPV in excess of 200,000 EUR thus,
using the results of NPV the project seems to be extremely beneficial to the company. Hence, as
per the NPV analysis the project should be accepted by the company. Thus, the company should
make necessary investment in the restaurant business.
IRR of the project is well above the expected rate of return of 20%, i.e. 42.7% to be precise.
Thus, even from the IRR perspective also the project seems financially viable for the company
hence, the company should accept the project and make investment in the project.
With profitability index of the project well above 1 again the project is expected to be profitable
hence, making investment in the project is recommended.

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As per discounted payback period the project is expected to recover the initial investment and
cost of investment in 6th year. Considering the fact that the investment proposal has a higher
useful life than 6 years hence, the project should be accepted by the company.
As per BEP analysis the company needs to sell 1,958,000 units to reach the breakeven point.
Considering, the fact that the project is expected sale more than 1,958,000 units hence, even
from BEP analysis also the project seems financially viable for the company. Hence, the project
should be accepted.
Recommendation:
Thus, in short the project should be accepted as each and every single technique used suggests
that the project is expected to be extremely beneficial for the company from financial point of
view. Hence, the management is recommended to proceed with the restaurant business to expand
the operations of the company in the future7.
Conclusion:
Taking into consideration the discussion above it is clear that the project of starting a restaurant
business with EUR 300,000 is expected to financially beneficial for ABC Limited hence, the
management should go ahead with the restaurant business. It is important to note that not one but
all the investment appraisal techniques used to conduct feasibility study of the project showed
that the company is expected to be financially benefitted from the project. Hence, the company
should proceed with the investment proposal and make necessary investment required to
successfully operate the restaurant business in the future.
7 Adolfo de Motta and Jaime Ortega, "Incentives, Capital Budgeting, And Organizational Structure" (2018)
24(5) Journal of Economics & Management Strategy.

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References:
Baran, Małgorzata Baran, "Knowledge Management In Organizations. The Case Of Business
Clusters" (2015) 22(5) Management and Business Administration. Central Europe
de Motta, Adolfo and Jaime Ortega, "Incentives, Capital Budgeting, And Organizational
Structure" (2018) 24(5) Journal of Economics & Management Strategy
Dwomoh, Gabriel, "Using Capital Budgeting Technique Of Net Present Value (NPV) To
Determine The Benefit Of Training Investment" (2017) 2(2) SSRN Electronic Journal
Fogler, H. Russell, "Overkill In Capital Budgeting Technique?" (2017) 3(3) Financial
Management
Hoffmann, Susan, Norman Krumholz and Kevin O’Brien, "How Capital Budgeting Helped A
Sick City: Thirty Years Of Capital Improvement Planning In Cleveland" (2018)
22(3) Public Budgeting & Finance
Pagano, Michael A., "Notes On Capital Budgeting" (2016) 6(5) Public Budgeting & Finance
Srithongrung, Arwiphawee, "Capital Budgeting And Management Practices: Smoothing Out
Rough Spots In Government Outlays" (2017) 38(1) Public Budgeting & Finance