Evaluation Of Investment Opportunities For A Start-Up

Nature of Investments

Question:

Analyze which Project is better in order to make more Profits and Invest into the Project. 

Mark and Paul, two marketing students want to start their own start-up. They both present two investment opportunity in front of the investors in which they could invest. As they both are the student of marketing and wondering that which investment opportunity would offer them more profitability and which opportunity would be better to attract more investors to invest into the company. Mark and Paul have explained both the opportunities and all the financial figures related to both the investment project.

Now in this report, the financial figures of the proposals have been organized to evaluate and conclude a better result. Mark and Paul have come up with two ideas one is investment into the business of restaurant and other one is to invest into the new business development. Through this report, it has been tried to evaluate that which opportunity is investment is better and why it is better. Before it, the nature of the investment has also been concerned. For this report, various financial tools have been used.

Investments are recognized as a key financial term. This is a process in which an individual, company or society put some efforts and money to get back more money in return. In financial terms, individuals or the groups invest their savings into the financial market to increase the total worth of the invested amount. Investment is of numerous types. An investor could invest into the financial securities according to the requirement such as for short term investment, corporate securities and treasury bonds are good option whereas for long term investment, share and debentures are good option. Investment nature is quite complex (Gitman and Zutter, 2012). It is quite flexible, it is not required that the investment would always offer the high return to the company. Investment is a process which provides the various opportunities to the investors on the basis of risk and return factor.

Mark and Paul have come up with two ideas one is investment into the business of restaurant and other one is to invest into the new business development. In first investment proposal, both of them have explained that if the Mark and Paul would invest into this opportunity than the following expenses and income would be got by the company (Lafond and Roychowdhury, 2008). Both the students are not aware about the financial figures and thus the investment opportunity has been analyzed to identify that whether this opportunity would offer them high return or would there be any risk factor for the opportunity. Below are the information related to the restaurant purchase and expenses opportunity:

	Restaurant Purchase and Expenses
	Machinery	$    1,10,000
	Furniture	$       30,000
	Vehicle for Deliveries	$       43,000
	Utensils (cups and plates)	$       18,000
	Products	$       10,000
	Drinks (For 1 month)	$       20,000
Jun-01	Bank balance	$       80,000
Purchase $10000 for a week of meals
	Purchase of $ 20,000 for a month of drinks
Amount would be paid according to the following derails:
	10% in current month
	45% in second month
	45% in third month
	Labour
	Number of casual labour	3
	Working in a day (hours)	6 hours
	In a week (days)	6 days
	Rate	$ 23 per hour
	Drawings	$ 10000 each per month
	Overhead	$         5,000
	Sales
	20000 meals in first month
	18000 meals in second month
	18000 meals in third month
	22000 in forth month
	Average selling price	$              45
	Drink sales would be triples the amount of meals per month.
	Drink Price	$                6

Investment Opportunities Presented

(Nobes and Parker, 2008)

Through the above figures, the return from the investment has been analyzed. For calculating the return from this investment planning, budgeting techniques have been used. Sales budget:

Sales budget is the main budget which depict about the total sales of the investment opportunity. Through the sales budget of the company, it has been analyzed that the sales of this investment would start from august and would go on ahead. In June and July, it would take time to start up the restaurant. According to the given details in the case, it has been found that from the first month of trade, restaurant would sell approx 20000 meals in the first month and further the units would vary according to the season (Van der Stede, 2001). $ 45 has been set by the Mark and Paul as selling price of the project. Further, the drinks would also be sold by the in $ 6 per drink and the sale of drink would totally depend over the sale of the meals. Drink sale would be thrice of meal sale.  Following are the details of the sales budget of the restaurant:

Sales budget
For the year 2017
	June	July	August	September
Sales of meals			18000	22000
Sales per unit			$                   45	$                     45
Sales price			$       8,10,000	$         9,90,000
Sales of drink			54000	66000
Sales per unit			$                     6	$                       6
Sales price			$       3,24,000	$         3,96,000
Total Sales			$ 11,34,000	$  13,86,000

The above calculations express that the total sales of the drink and the meal of the company would be $ 3,24,000 and $ 3,96,000 and $ 8,10,000 and $ 9,90,000 in the month of august and sales. Through this, it has also found that the total sales of the company would be $ 11,34,000 in the month of august and $ 13,86,000 in the month of September.

Labour budget is the main budget which depict about the total labour hours and total labour rate of the investment opportunity. Through the labour budget of the company, it has been analyzed that the labour of this investment would be rigid from the first day of the June. In June and July, it would take time to start up the restaurant. According to the given details in the case, it has been found that from the first month of start up, 3 labours would work with the company. Following are the details of the labour budget of the restaurant:

Restaurant Purchase and Expenses
Labour budget
For the year 2017
	June	July	August	September
Number of labour	3	3	3	3
Working in a day (hours)	6	6	6	6
In a week (days)	6	6	6	6
Total weeks	4	4	4	4
Total Working hours	432	432	432	432
Rate	23	23	23	23
Total Labour rate	9936	9936	9936	9936

The above calculations express that the total labour hour of the company would be 432 in every month. All of them would work for 6 days in a week on the payment of $ 23 per hour. The total labour hour of the company would be $ 9936 in every month.

Analysis of Restaurant Purchase and Expenses

Cash budget is the main budget which depict about the total cash outflow and inflow of the investment opportunity. Through the cash budget of the company, it has been analyzed that ho much cash outflow and cash inflow would take place from the first day of the investment. In June and July, it would take time to start up the restaurant and thus the revenue would not be there (Garrison et al, 2010). According to the given details in the case, it has been found that from the first month of start up, cash outflow of the company has taken place. Following are the details of the cash budget of the restaurant:

Restaurant Purchase and Expenses
Cash budget
For the year 2017
	June	July	August	September
Beginning cash balance	$             80,000	-155936	-192872	855192
Add: budgeted cash receipts for meal and drinks	$                       –	$                  –	$    11,34,000	$   13,86,000
Total cash available for use	$             80,000	$   -1,55,936	$      9,41,128	$   22,41,192
Less: cash disbursements
Direct Material of meals and drinks		$           2,000	$          51,000	$         60,000
direct Labour	$                9,936	$           9,936	$            9,936	$           9,936
Overhead	$                5,000	$           5,000	$            5,000	$           5,000
Withdrawals	$             20,000	$        20,000	$          20,000	$         20,000
Machinery	$          1,10,000
Furniture	$             30,000
Vehicle	$             43,000
Utensils	$             18,000
Total disbursements	$          2,35,936	$        36,936	$          85,936	$         94,936
Cash surplus	$        -1,55,936	$   -1,92,872	$      8,55,192	$   21,46,256
budgeted ending cash balance	$        -1,55,936	$   -1,92,872	$      8,55,192	$   21,46,256

The above calculations express that the total cash outflow of the company would be  $ 2,35,936, $ 36,936, $85,936 and $ 94,936. Total cash inflow of the company would be $ 80,000, $ -1,55,936, $ 9,41,128 and $ 22,41,192. Through these calculations, it has been analyzed that the $ -1,55,936, $ -1,92,872, $ 8,55,192 and $ 21,46,256.

According to all the above budgets and the calculations of the budgets, it has been found that the investment would offer a good return to the investors after august month. Through these reports, it has been found that the Mark and Paul must make the changes into the operations of the restaurant (Deegan, 2013). The budgeting technique depict that the future of this investment opportunity is quite attractive.

The investment opportunity of the restaurant purchase and the expenses has been analyzed and it has been found that the Mark and Paul could face some issues in raising the funds through investment, as investor would not trust over their restaurant proposal for first instance and it would also be tough for them to manage the business according to the economical condition and the location of the restaurant. The associated risk of the restaurant is also higher (Du and Girma, 2009).

Mark and Paul have come up with two ideas one is investment into the business of restaurant and other one is to invest into the new business development. In second investment proposal, both of them have explained that if the Mark and Paul would invest into this opportunity than the following cash outflow and inflow would be got by the company. Both the students are not aware about the financial figures and thus the investment opportunity has been analyzed to identify that whether this opportunity would offer them high return or would there be any risk factor for the opportunity. Below are the information related to the new business development opportunity.

Initial Cost	$ -3,90,000
Cash Inflows
June	$  1,00,000
July	$  2,30,000
Aug	$  1,90,000
Sept	$  1,40,000

The above figures depict that the NPV of the company is $ 1,06,851.08 which depict about the positive results. Further, it has been found that the payback period calculation depict that the investor would get back the  amount in 3.77 years and accounting rate of return depict that 27.40% would be the average return of the company.

An investment opportunity is basically depends over the risk and return factor associated with the proposal. Through comparing and analyzing both the projects, it has been analyzed that the return from the first proposal is bit higher whereas it has also been found that the associated risk of second proposal is bit lower. The investors must consider both these factors and must make a better decision on the basis of this.    

Conclusion:

Lastly, it has been concluded that the return from the first proposal is bit higher whereas it has also been found that the associated risk of second proposal is bit lower. The investors must consider both these factors and must make a better decision on the basis of this. 

References:

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Du, J. and Girma, S., 2009. Source of finance, growth and firm size: evidence from China (No. 2009.03). Research paper/UNU-WIDER.

Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial accounting. Issues in Accounting Education, (25(4), pp.79(2-793.

Gitman, L.J. and Zutter, C.J., 2012. Principles of managerial finance. Prentice Hall.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Lafond, R. and Roychowdhury, S. 2008. Managerial ownership and accounting conservatism. Journal of accounting research, 46(1), pp.101-135.

Nobes, C. and Parker, R.H. 2008. Comparative international accounting. Pearson Education.

Van der Stede, W.A. 2001. Measuring ‘tight budgetary control’. Management Accounting Research, 1(2(1), pp.119-137.