MOHAMMAD SALMAN,HENGYAN YU, 384ACC

Name: Mohammad Salman, Hengyan Yu

SID: 3408456, 3987825

Course: 384 Management Accounting for Business Decision

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TABLE OF CONTENT

Project Selection…………………………………………………………………………………………… 3

Strength & Weakness……………………………………………………………………………………… 4

Non- Financial Factors………………………………………………………………………………………6

Reference………………………………………………………………………………………………………9

Appendix……………………………………………………………………………………………………….10

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Using our findings, a report advising the Vice Chancellor as to which project should be adopted. Strength and Weakness of
each method of appraisal.

Project Selection:
From the table above, we get that the Project Relax has 30% of ARR, 2 year 3 month of PBP, £4,528,998.34 of NPV and 45.55% of
IRR. Appendix (A)

The Project Excite has 31% of ARR, 2 year 2 month of PBP, £1,478,348 of NPV and 44.76% of IRR. Appendix (B)

From the analysis we found that project relax has a slightly lower ARR than project excite although what should be taken into
account is the fact that project relax requires a smaller investment as it has a lower initial cost. There is a difference of £1.5m
between the two projects. The Payback period of project relax shows signs of financial health and a quick return as it would take 2
years and three months to recoup its original investment.
Project relax has a NPV figure of £4,528,998.34 which compared to project excites figure of £1,478,348 shows a significance
difference. Thus it shows project relax would be a better investment as less is invested yet more is made. Project relax also has a
higher IRR figure. Despite not being able to decide on which project relying alone on IRR when combined with NPV which is seen as
a more sophisticated method of appraisal judgment can be made that Project Relax is a better project to invest in. By assuming the
advantage and disadvantage of all the methods we have considered NPV method more as it is the most commonly used method

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which used by the financial analyst and It was much more helpful and easier to calculate and results us with the good investment
decisions. Considered the foundation, we can divide these four methods in two categories, one is profit based and another is cash
flow based. In these four methods, only ARR is profit based. The other three methods are all cash flow based. They can be more
trusted than the method of ARR.
Strength and Weakness:
The advantage of ARR is that the number it used can be directly find in the financial statement, its disadvantages are that it
only takes into account the profit, and it does not come across the timing of the initial payment. Payback period gives the exact
period when the initial money is payback, this method also consider the risk of the project. The PBP does not include the value of
any cash flows once the initial investment is repaid whereas the NPV and IRR takes in to account all the cash flows, which ends up
with a result that NPV and IRR are more reliable the PBP and ARR. NPV is relatively simple to calculate while other methods are
sometime complex (Zebra & Dively, 1994).
Then, we consider about the time value of money. For the interest rate, the initial investment will be more and more in the future.
This is what called time value of money. The money worth today can be worth less or more in future due to inflation. The time value
of money is not included in the methods of ARR and PBP; whereas NPV and IRR take it into account and use the depreciated factor
when calculate the cash flow. Both eight and ten year project are long projects. If we do not think about the time value of money, the
longer the time, the bigger the risk can be.
NPV not only includes all the cash flows in the whole period of the project, but also discounts the cash flow to reflect the time value

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of money. Although the discount rate will change every day in the whole year, it is reasonable to assume that it is same every day
and get an average figure to obtain the evaluated result. Besides, IRR is also a very good method. It connects the benefit in the
period of the project with the initial investment which reflected the yield of the project. Because of this, IRR is easy to be a standard
compared in the same industry. NPV is an absolute measure. On contrast, IRR is a relative measure. That means if the IRR is 20%
in a project and 40% in another project, the 40% project is preferred. But if the 20% project produces £10000 and the 40% project
only produces £2000, the 20% project is better than the 40% project. So we cannot decide which one is better only by IRR. When
compared between Project Relax and Project Excite, it is easy to decide because both NPV and IRR of the project Relax is bigger
than the Project Excite.. For the fluctuation of cash flows in the process of project, it may result to more than one outcomes of IRR. It
can mislead people to do the wrong decision. So as the method itself, it has weakness, but in this case the cash flow is steady
growing every year. In a word, for the method itself, the NPV has more advantages than the disadvantages and better than other
methods.
After all of those theoretical analyses, we prefer using the NPV to prove that the Project Relax is good choice. There are also some
empirical evidences that support my point. As Reaf A.Lawson and Richard P.Brief (1992) said, many writers warned that the ARR will
lead big error in measure of profitability, because it lacks economic significance, so as the PBP. Additionally, Fisher and McGowen
(1983) and Rappaport (1986) pointed that using ARR to compare is just like „comparing apples with oranges‟. On the other hand,
Samuel L. Baker (2000) concluded the IRR can fool you by itself and if you are evaluating investment, it would be better to use NPV
rather than IRR.

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Finally we came to the conclusion that from all these four methods the NPV is the best choice to get the most accurate result. And
after, integrating all these results, the Project Relax is more profitable than the Project Excite. So choosing the Project Relax is the
right decision.
While it is to give most importance to financial factors, it is essential that non- financial factors are considered too also
refrenced the two projects.

Non- Financial Factors:

The decisions made by using the appraisal methods are very important for any organization because the total money for
investment can be very large and the taken decision can have an impact on business in future. The good decision can raise the
business to high or the bad decision can become the cause of being bankrupt. “Different assumption about future consumption will
lead to different pattern of projected profits and cash flow”( Ray Proctor, 2009, pg 202). Investment appraisal is not only about the
financial factors it should also be focused on the non- financial factors which plays an important role in making any significant
investment decision. In actual fact these non financial factors are used as the backbone which either make or destroy the decision
taken. The important non-financial factors are:
- Government law: in order to meet the current and future government legislation system. This factor is important but generally
ignored while taking the decision (Peter Atrill etal. 2002).
- Competitors act: before making any decision it should be acknowledge of what action the competitors are being taking.

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- Satisfaction: the decision taking should be focused on the customer‟s needs and satisfaction the organisation should also have
good relationship with the suppliers and should also develop the business reputation.
- Employee‟s relationship: the result of the investment decision on employee‟s motivation should be considered before going on
further with the investment procedure.
- Climate problem: the popularity of green activities is now increasing to that level where companies had stopped investing in
such equipments which attack the environment in irresponsible and nonresponsive way (Peter Atrill, 2009).

In some cases the financial and non financial decisions are needed to be balanced on deciding the importance of each sector
with the business. By taking into account this process it can be well know how much the appraisal fits with the business strategy
as a whole. In past the non-financial factor was not much important as it is in now days because of the uncertainties caused
particularly in financial sector.

Before taking the decision of going with the project the university should have knowledge of competitor universities actions and
their planning‟s. Also the university should have enough backend profit or sale because these are the important non financial factors
and if organizations does not have enough backend sale the organizations can be closed for example: In 2004 shell announced a
record profit of £9.8 billion which is an all time record for European company but shell had only reserve oil for only 9 years whereas
its rival BP and Exxon had reserve oil for 14 years which mean shell can b close in 9 year time than its rivals(Ray Procter, 2009).

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So the university should have its backend profit or sale which can help the university even if the project results in non profitable in
future time. In the project Relax university should not buy the machinery or equipment which can break health and safety laws and
also the swimming pool and other fitness equipment should focus on the safety legislation. Moreover should allow enough time to
decide whether the staff will be satisfied with the Leisure facilities provided or not.

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Reference

Baker, Samuel L. (2000) Perils of the Internal Rate of Return. [online] available from
<http://hspm.sph.sc.edu/COURSES/ECON/invest/invest.html > [January 12, 2007].

Financial Management for Decision Makers, 5th Edition. FT Prentice Hall, Spain

Reaf, A.Lawson and Richard, P.Brief (1992) 'The Role of the Accounting Rate of Return in Financial Statement Analysis'. The
Accounting Review 67 (2), 411-426.

Management Accounting for Non-specialists 3rd Edition, 2002. FT Prentice Hall, London.

Fisher, F. and J.J. McGowen (1983) 'On the Misuse of Accounting Rates of Return to Infer Monopoly Profits'. American Economic
Review 73 (March), 82-97.

Rappaport, A. (1986) Creating Shareholder Value: The New Standard for Business Performance. New York: The Free Press.

Ray Proctor, (2009), Managerial Accounting For Business Decisions, 3rd Edition. FT Prentice Hall UK.

Zerbe R., & Dively D., (1994), Benefit- cost analysis, HarpeCollins College Publishers, Oregon.

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Appendix
Appendix (A)

Life of Investment = 10 years

Cost of Investment = 2,500,000

PROJECT RELAX "STAFF LEISURE FACILITY"

Number of full time staff eligible to use facility in year 1

year staff % TOTAL STAFF

1 3500 0 3,500.00
2 3500 2% 3,570.00
3 3570 2% 3,641.40
4 3641 2% 3,714.23
5 3714 2% 3,788.51
6 3789 2% 3,864.28
7 3864 2% 3,941.57
8 3942 2% 4,020.40
9 4020 2% 4,100.81
10 4101 2% 4,182.82

Swimming pool and Relaxation equipment user

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year Staff % TOTAL

1 3500 20% 700
2 3570 20% 714
3 3641 20% 728.2
4 3714 20% 742.8
5 3789 20% 757.8
6 3864 20% 772.8
7 3942 20% 788.4
8 4020 20% 804
9 4101 20% 820.2
10 4183 20% 836.6

Staff who will use fitness equipment only

year Staff % TOTAL

1 3500 10% 350
2 3570 10% 357
3 3641 10% 364.1
4 3714 10% 371.4
5 3789 10% 378.9
6 3864 10% 386.4
7 3942 10% 394.2

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8 4020 10% 402

9 4101 10% 410.1
10 4183 10% 418.3

Staff who will pay for all activity

year Staff % TOTAL

1 3500 30% 1,050.00
2 3570 30% 1,071.00
3 3641 30% 1,092.30
4 3714 30% 1,114.20
5 3789 30% 1,136.70
6 3864 30% 1,159.20
7 3942 30% 1,182.60
8 4020 30% 1,206.00
9 4101 30% 1,230.30
10 4183 30% 1,254.90

Staff who will not pay for any activity

year Staff % TOTAL

1 3500 40% 1,400.00

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2 3570 40% 1,428.00

3 3641 40% 1,456.40
4 3714 40% 1,485.60
5 3789 40% 1,515.60
6 3864 40% 1,545.60
7 3942 40% 1,576.80
8 4020 40% 1,608.00
9 4101 40% 1,640.40
10 4183 40% 1,673.20

Swimming pool and Relaxation equipment user

Monthly
year price £ % Total price P/M Staff Income Yearly Income
1 12 £12.00 700 £8,400.00 £100,800.00
2 12 5% £12.60 714 £8,996.40 £107,956.80
3 12.6 5% £13.23 728 £9,631.44 £115,577.28
4 13.23 5% £13.89 743 £10,321.38 £123,856.61
5 13.89 5% £14.59 758 £11,056.24 £132,674.94
6 14.59 5% £15.32 773 £11,838.79 £142,065.45
7 15.32 5% £16.08 788 £12,671.94 £152,063.33
8 16.08 5% £16.89 804 £13,575.70 £162,908.46
9 16.89 5% £17.73 820 £14,538.16 £174,457.94
10 17.73 5% £18.62 837 £15,581.54 £186,978.49

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Total £1,399,339.30

Fitness equipment user

Monthly
year price £ % Total price P/M Staff Income yearly Income
1 18 £18.00 350 £6,300.00 £75,600.00
2 18 5% £18.90 357 £6,747.30 £80,967.60
3 18.9 5% £19.85 364 £7,223.58 £86,682.96
4 19.85 5% £20.84 371 £7,730.62 £92,767.44
5 20.84 5% £21.88 379 £8,292.18 £99,506.20
6 21.88 5% £22.97 386 £8,867.60 £106,411.25
7 22.97 5% £24.12 394 £9,503.96 £114,047.50
8 24.12 5% £25.33 402 £10,181.78 £122,181.34
9 25.33 5% £26.59 410 £10,903.62 £130,843.45
10 26.59 5% £27.92 418 £11,672.19 £140,066.32
Total £1,049,074.07

All facility user

Monthly
year price £ % Total price P/M Staff Income Yearly Income
1 28 £28.00 1050 £29,400.00 £352,800.00
2 28 5% £29.40 1071 £31,487.40 £377,848.80

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3 29.4 5% £30.87 1092 £33,710.04 £404,520.48

4 30.87 5% £32.41 1114 £36,108.64 £433,303.67
5 32.41 5% £34.03 1137 £38,696.86 £464,362.28
6 34.03 5% £35.74 1159 £41,417.89 £497,014.67
7 35.74 5% £37.52 1183 £44,389.33 £532,671.94
8 37.52 5% £39.40 1206 £47,514.97 £570,179.60
9 39.4 5% £41.37 1230 £50,883.57 £610,602.79
10 41.37 5% £43.44 1255 £54,513.67 £654,164.08
Total £4,897,468.31

Cost of fitness class

Total price per

year price £ % class Staff TOTAL
1 2 £2.00 3000 £6,000.00
2 2 10% £2.20 3000 £6,600.00
3 2.2 10% £2.42 3000 £7,260.00
4 2.42 10% £2.66 3000 £7,986.00
5 2.66 10% £2.93 3000 £8,784.60
6 2.93 10% £3.22 3000 £9,663.06
7 3.22 10% £3.54 3000 £10,629.37
8 3.54 10% £3.90 3000 £11,692.30
9 3.9 10% £4.29 3000 £12,861.53
10 4.29 10% £4.72 3000 £14,147.69

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Total £95,624.55

Accounting Rate of Return

ARR = average profit / investment

Swimming Fitness All Facility Fitness Class Total Revenue Year Average profit Investment ARR
£1,399,339.30 £1,049,074.07 £4,897,468.31 £95,624.55 £7,441,506.23 10 £744,150.62 £2,500,000 30%

Net Present Value (N.P.V)

Year Profit Depreciation Cash flow 12% DF present value
0 -2,500,000 1 -2500000
1 £535,200.00 550000 £1,085,200.00 0.892857143 £968,928.57
2 £573,373.20 550000 £1,123,373.20 0.796428571 £894,686.51
3 £614,040.72 550000 £1,164,040.72 0.710714286 £827,300.37
4 £657,913.72 550000 £1,207,913.72 0.633928571 £765,731.02
5 £705,328.03 550000 £1,255,328.03 0.565178571 £709,484.50
6 £755,154.44 550000 £1,305,154.44 0.504464286 £658,403.80
7 £809,412.13 550000 £1,359,412.13 0.45 £611,735.46
8 £866,961.71 550000 £1,416,961.71 0.401785714 £569,314.97
9 £928,765.71 550000 £1,478,765.71 0.358035714 £529,450.94
10 £995,356.58 550000 £1,545,356.58 0.319642857 £493,962.19
Total £7,441,506.23 £12,941,506.24 £4,528,998.34

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NPV= 4528998.34
Internal Rate Of Return (I.R.R)
Year Profit Depreciation Cash flow DF at 50% PV DF at 45% PV
0 -2,500,000 1 -2500000 1 -2500000
1 £535,200.00 550000 £1,085,200.00 0.667 £723,466.67 0.690 £748,413.79
2 £573,373.20 550000 £1,123,373.20 0.444 £498,777.70 0.475 £533,795.96
3 £614,040.72 550000 £1,164,040.72 0.296 £344,556.05 0.328 £381,323.68
4 £657,913.72 550000 £1,207,913.72 0.197 £238,361.64 0.226 £272,405.37
5 £705,328.03 550000 £1,255,328.03 0.131 £164,866.41 0.155 £194,792.28
6 £755,154.44 550000 £1,305,154.44 0.087 £113,983.49 0.107 £139,516.51
7 £809,412.13 550000 £1,359,412.13 0.058 £78,845.90 0.073 £99,377.71
8 £866,961.71 550000 £1,416,961.71 0.039 £54,789.19 0.050 £71,336.69
9 £928,765.71 550000 £1,478,765.71 0.025 £37,462.06 0.034 £50,991.92
10 £995,356.58 550000 £1,545,356.58 0.017 £25,755.94 0.023 £36,235.95
Total £7,441,506.23 £12,941,506.24 -219134.930 £28,189.87

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Pay Back Period (P.B.P)

Year SwImming Fitness All Facilities Fitness Class Profit Depreciation Cashflow cumulative
0 -2,500,000
1 £100,800.00 75600 £352,800.00 £6,000.00 £535,200.00 550000 £1,085,200.00 £1,085,200.00
2 £107,956.80 80967.6 £377,848.80 £6,600.00 £573,373.20 550000 £1,123,373.20 £2,208,573.20
3 £115,577.28 86682.96 £404,520.48 £7,260.00 £614,040.72 550000 £1,164,040.72 £3,372,613.92
4 £123,856.61 92767.44 £433,303.67 £7,986.00 £657,913.72 550000 £1,207,913.72 £4,580,527.64
5 £132,674.94 99506.2 £464,362.28 £8,784.60 £705,328.03 550000 £1,255,328.03 £5,835,855.67
6 £142,065.45 106411.25 £497,014.67 £9,663.06 £755,154.44 550000 £1,305,154.44 £7,141,010.11
7 £152,063.33 114047.5 £532,671.94 £10,629.37 £809,412.13 550000 £1,359,412.13 £8,500,422.24
8 £162,908.46 122181.34 £570,179.60 £11,692.30 £866,961.71 550000 £1,416,961.71 £9,917,383.95
9 £174,457.94 130843.45 £610,602.79 £12,861.53 £928,765.71 550000 £1,478,765.71 £11,396,149.66
10 £186,978.49 140066.32 £654,164.08 £14,147.69 £995,356.58 550000 £1,545,356.58 £12,941,506.24
Total £1,399,339.30 1049074.07 £4,897,468.31 £95,624.55 £7,441,506.23 £12,941,506.24

solution:

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Appendix (B)

Life of Investment = 8 years

Cost of Investment = 1,000,000

PROJECT EXCITE "STUDENT LEISURE FACILITY"

GamingZone
Cost per session (2
Year Session hrs) Total Revenue
1 20,000 £2.00 £40,000
2 20,000 £2.25 £45,000
3 20,000 £2.50 £50,000
4 20,000 £2.75 £55,000
5 20,000 £3.00 £60,000
6 20,000 £3.25 £65,000
7 20,000 £3.50 £70,000
8 20,000 £3.75 £75,000
£460,000

Karaoke Room
Year Session Cost per Room Total Revenue
1 2,000 £50.00 £100,000
2 2,000 £52.50 £105,000
3 2,000 £55.13 £110,250
4 2,000 £57.88 £115,763
5 2,000 £60.78 £121,551

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6 2,000 £63.81 £127,628

7 2,000 £67.00 £134,010
8 2,000 £70.36 £140,710

Dance Session
Year Session Cost per Session Total Revenue
1 10,000 £2.00 £20,000
2 10,000 £2.20 £22,000
3 10,000 £2.42 £24,200
4 10,000 £2.66 £26,620
5 10,000 £2.93 £29,282
6 10,000 £3.22 £32,210
7 10,000 £3.54 £35,431
8 10,000 £3.90 £38,974
Total £228,717.76

Bar & Restaurant

Year Total Revenue
1 0% £75,000
2 10% £82,500
3 10% £90,750
4 10% £99,825
5 10% £109,808

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6 10% £120,788
7 10% £132,867
8 10% £146,154
Total £857,691.61

GAMING ZONE

Year NO PRICE REVENUE

1 20,000 £2.00 £40,000
2 20,000 £2.25 £45,000
3 20,000 £2.50 £50,000
4 20,000 £2.75 £55,000
5 20,000 £3.00 £60,000
6 20,000 £3.25 £65,000
7 20,000 £3.50 £70,000
8 20,000 £3.75 £75,000
Total £460,000.00

KARAOKE ZONE

Year NO PRICE REVENUE

1 2,000 £50.00 100,000
2 2,000 £52.50 105,000
3 2,000 £55.13 110,250

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4 2,000 £57.88 115,763

5 2,000 £60.78 121,551
6 2,000 £63.81 127,628
7 2,000 £67.00 134,010
8 2,000 £70.36 140,710
Total £954,910.89

ZUMBA ZONE REFULE ZONE

Year NO PRICE REVENUE NO % INCREASE REVENUE

1 10000 £2.00 £20,000 0 £75,000
2 10000 £2.20 £22,000 10% £82,500
3 10000 £2.42 £24,200 10% £90,750
4 10000 £2.66 £26,620 10% £99,825
5 10000 £2.93 £29,282 10% £109,808
6 10000 £3.22 £32,210 10% £120,788
7 10000 £3.54 £35,431 10% £132,867
8 10000 £3.90 £38,974 10% £146,154
Total £228,717.76 £857,691.61

Accounting Rate Of Return ARR

Gaming Zone karaoke Zone Zumba Zone Refuel Zone Total Revenue Year

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£460,000.00 £954,910.89 £228,717.76 £857,691.61 £2,501,320 8

Average annual 2501320/8 =312665
ARR= (312665/1000000)*100=31%
ARR= 31 %

Net Present Value NPV

Year profit / loss Depreciation Cash Flow DF 12% PV

0 -£1,000,000.00 1 -£1,000,000.00
1 £235,000.00 £200,000.00 £435,000.00 0.893 £388,392.86
2 £254,500.00 £200,000.00 £454,500.00 0.797 £362,324.62
3 £275,200.00 £200,000.00 £475,200.00 0.712 £338,237.97
4 £297,207.50 £200,000.00 £497,207.50 0.636 £315,984.35
5 £320,640.13 £200,000.00 £520,640.13 0.567 £295,425.19
6 £345,626.61 £200,000.00 £545,626.61 0.507 £276,431.42
7 £372,307.86 £200,000.00 £572,307.86 0.452 £258,883.01
8 £400,838.17 £200,000.00 £600,838.17 0.404 £242,668.46
Total £1,478,347.89

NPV = £1478347.89

Pay Back Period PBP

Year profit / loss Depreciation Cash Flow Cumulative

0 -£1,000,000.00
1 £235,000.00 £200,000.00 £435,000.00 £435,000.00

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2 £254,500.00 £200,000.00 £454,500.00 £889,500.00

3 £275,200.00 £200,000.00 £475,200.00 £1,364,700.00
4 £297,207.50 £200,000.00 £497,207.50 £1,861,907.50
5 £320,640.13 £200,000.00 £520,640.13 £2,382,547.63
6 £345,626.61 £200,000.00 £545,626.61 £2,928,174.24
7 £372,307.86 £200,000.00 £572,307.86 £3,500,482.10
8 £400,838.17 £200,000.00 £600,838.17 £4,101,320.27

Internal Rate of Return IRR

Year profit / loss Depreciation Cash Flow DF at 45% PV DF at 44% PV

0 -£1,000,000.00 1 -1000000 1 -1000000
1 £235,000.00 £200,000.00 £435,000.00 0.690 £300,000.000 0.694 £302,083.33
2 £254,500.00 £200,000.00 £454,500.00 0.475 £215,965.862 0.482 £219,043.75
3 £275,200.00 £200,000.00 £475,200.00 0.328 £155,668.966 0.334 £158,730.00
4 £297,207.50 £200,000.00 £497,207.50 0.226 £112,128.864 0.232 £115,324.52

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 MOHAMMAD SALMAN,HENGYAN YU, 384ACC

5 £320,640.13 £200,000.00 £520,640.13 0.155 £80,788.986 0.160 £83,519.35

6 £345,626.61 £200,000.00 £545,626.61 0.107 £58,325.603 0.111 £60,625.18
7 £372,307.86 £200,000.00 £572,307.86 0.073 £41,837.678 0.077 £44,115.40
8 £400,838.17 £200,000.00 £600,838.17 0.050 £30,249.094 0.053 £32,128.15
Total -£5,034.948 £15,569.68

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