Topic:Investment Appraisal

Assignment instructions:

John wants to open an Indian Restaurant in Portsmouth as Option A or Cambridge as Option B. The information he has collected from the market research is presented below.

Portsmouth

Location: The premises that John has identified are situated in the area with many new businesses, which succeed. There is a growing middle-class population in the selected area that are looking for local entertainment rather than the one in centre. There is a bus station only 15 minutes from central Portsmouth.

New developments: Several old facilities in the chosen area have now been demolished and replaced with small shops and apartment blocks. In addition, the local roads have all been resurfaced and the area near the bus station has been redesigned to have a more colourful look.

Suppliers: A good network of established food and catering suppliers in Portsmouth are present but delivery costs are high due to the challenges of the driving conditions. There are also several good trade and wholesale food markets that open very early so it is easy to purchase fresh, good quality food.

Competition: While Portsmouth itself has an abundance of restaurants to choose from, there are no restaurants yet in the chosen area. However, there are three cafes offering food and some local takeaways. One of these takeaways sells good quality Italian pizzas.

Cambridge

Location: The premises that John has identified are situated centre close to some of Cambridge major universities. The city centre is highly popular with local residents and tourists alike, as the area has many entertainment offerings.

Local economy: There are many residents in Cambridge that travel daily to London for work, hence those high salaries earned in London are actually spent in Cambridge boosting the local economy.

Suppliers: Cambridge has a few big universities, hence there is a good supply of young and cheap human resources. Students are eager to work part-time, with low wage jobs, in order to support their studies.

Competition: In Cambridge a restaurant is never further than couple of minutes walk from anywhere. Not only restaurants but most local pubs and cafes also offer food at affordable prices. Italian restaurants are popular in Cambridge and famous for their fast and friendly service, as well as their reasonable prices, competition is rigid.

Financial data

Option A: Portsmouth

Investment data

	Cash in	Cash out	Discount Factor 8%
Initial Investment		100 000	1.00
End of Year 1	50 000	32 500	0.93
End of Year 2	70 000	45 500	0.86
End of Year 3	150 000	97 500	0.79
End of Year 4	150 000	97 500	0.74
End of Year 5	150 000	97 500	0.68

Break-even data

Unit variable cost of 1 meal: 1 Average sales price of 1 meal: 10

Fixed costs: 2000 per month Maximum monthly output: 1500 meals

Option B: Cambridge

Investment data

	Cash in	Cash out	Discount Factor 8%
Initial Investment		175 000	1.00
End of Year 1	50 000	32 500	0.93
End of Year 2	100 000	65 000	0.86
End of Year 3	250 000	162 500	0.79
End of Year 4	250 000	162 500	0.74
End of Year 5	250 000	162 500	0.68

Break-even data

Unit variable cost of 1 meal: 2 Average sales price of 1 meal: 12

Fixed costs: 3000 per month Maximum monthly output: 2000 meals

Task:

Using the provided information answer the following tasks. Based on your analysis, advise John as to which option you think he should invest in.

Carry out an investment analysis using THREE appropriate techniques;

Based on your assessment and justifications, state which project you advise for future investment and why;

Choose one of the accounting tools you applied and critically analyse it;

No need for an introduction and conclusion. You are only required to answer the questions above;

Clearly, show calculations with decisions(straight answer is not accepted).

Common requirements:

- Critical analysis;

- Correct application of Harvard Referencing style;

- Support your claims with relevant academic sources;

- Proper application of accounting techniques;

- Clean and clear presentation including structure, style, clarity and visuals.

What we are looking for:

- Your own work free of plagiarism;

- Clear demonstration of computations;

- Your knowledge of accounting techniques and their application;

- Your critical thinking.