Business Decision Making 3 of 3
A Gantt chart is a scheduling technique used to assign a time scale and sequence to a project or plan. A Gantt chart comprises of horizontal bar charts drawn to scale for every project activity. The length of the horizontal bars shows the time to attain completion (Ghionea, 2014). The steps involved in the creation of Gantt charts include the establishment of horizontal axis to represent time, use of vertical axis to represent activities, and representation of each bar using suitable length. The activities represented by the Gantt chart include lot preparation, creating footings, establishing foundations, and framing.
Figure 1: Construction Schedule Bar Chart using data sample from (Ghionea, 2014).
Critical Path Analysis Diagram
In a CPA diagram, each activity has an arrow. The position of an activity in the diagram illustrates its dependency (Ghionea, 2014). The number beneath each arrow shows the number of days that a given task takes to complete. The activities involved in constructing an extension of business premises includelot preparation, creating footings, establishing foundations, and framing. Activities which occur at the same time appear in the form of parallel arrows.
Figure 2: Construction Schedule CPA Diagram using sample data from (Ghionea, 2014). Critical path is in red.
Reasons for using Gantt chart and CPA Diagram Information Tools
A Gantt chart or the bar graph enables the project manager to schedule subcontractors and materials utilized in the construction so that the sub and the proper materials arrive in time. Therefore, a Gantt chart helps save time and money. The Critical Path Analysis shows time taken to complete each activity and the dependencies, float times and critical activities.
Float Times
The float time indicates the amount of time a delay in a task can occur without causing a delay in the subsequent work. For instance, in the Critical Path Analysis diagram, the float time exists for 16 days from day 25 up to event 125.
Return on Capital Employed (ROCE)
Return on capital employed is the measure of the returns a business achieves from the company capital. The return on capital is in the form of a percentage. The capital employed is equal to the Company’s equity plus the non-current liabilities. The Return on capital shows the efficiency of the investments of a company. A real Return on capital percentage is one that registers a higher value than the company's borrowings (Azhagaiah and Silambarasan, 2014). ROCE= Capital Employed= Equity + Non-current Liabilities= Total Assets – Current Liabilities. Since the liabilities of moving to a new premise are high, then the return on capital for moving to a new premise will consequently be low.
Advantages of Return on Capital Employed
Return on capital employed analysis method has several advantages. Firstly, ROCE measures the efficiency of management and the company as a whole. Besides, ROCE helps develop a sense of responsibility and teamwork by measuring the value of activities carried out by a corporation.
Disadvantages of Return on Capital Employed
The return on capital employed analysis method has several disadvantages. Firstly, the Return on Capital Employed does not show the depreciation of the operating capital. Secondly, ROCE does not account for the amortization of the working capital. Since the capital employed is the denominator then a company that registers depreciated assetsexperiences a rise in ROCE without an increase in profit.The values and valuations of assets sometimes give rise to difficulties and misunderstandings.
Discounted Cash Flow Analysis (Net present value)
The discounted cash flow analysis shows the net present value (NPV) of the projected cash flow represented by providers of capital and cash net needed for investment. The discounted cash flow analysis highlights the objective that the value of a business yields from the ability to develop cash flows for capital providers. The DFC relies on the big expectations of the enterprise than the market factors or historical precedents (Cojocea, 2014). The key components of the DFC include free cash flow (FCF), terminal value (TV), and the discount rate. The steps of DFC valuation are projected unleveraged FCFs, choosing a discount rate, calculating TV, calculating Enterprise value, calculating equity value, and reviewing results.
Advantages of DFC
DFC analysis method has several advantages. Firstly, DFC is a forward-looking approach and relies more on future expectations rather than the historical outcomes. Secondly, DFC analysis focuses on cash flow generation and is less prone to assumptions and accounting practices. The DFC also enables different valuation of various components.
Disadvantages of DFC
DFC analysis method has several disadvantages. Firstly, DFC valuations appear as a range of values other than a single expected value. Secondly, the TV often denotes a significant value of the total DFC valuation hence estimates in such instances is dependent on TV assumptions rather than the assumptions of the operation of business assets.
Payback analysis
Payback refers to the time of recovery of the investment initial cash flow from the cash inflows gathered from the investment (Mahlia, Razak, and Nursahida, 2011). Payback analysis is among the simplest investment appraisal methods. The formula to calculate the payback depends on whether the cash flow from the project is odd or even. In the even case, the formula is payback period= Initial investment/cash inflow per period. In case the cash inflows have uneven characteristics, the formula used is A+B/C where A stands for the last time that registered a negative cash flow. B represents the absolute value of the total cash flow at the end of period A, and C represents the total cash flow after the period A. The payback of moving the business to new premises will be lower hence more costly.
Advantages of Payback Analysis
The Payback analysis has several advantages. Firstly, the payback period is easy to evaluate. Secondly, the payback period can serve as a measure of the project risks. Besides, for companies with liquidity problems, payback easily ranks the objects with a fast return on money.
Disadvantages of Payback Analysis
The payback analysis has several disadvantages. Firstly, the Payback analysis does not take into consideration the time value of money hence causes incorrect decisions. Secondly, the payback analysis ignores the cash flow that occurs after the payback period.
The best Analysis Methodology
The Return on Capital Employed (ROCE) proves to be the best analysis method since itassociates the phases of financial planning, sales objectives, profit goal, and cost control.
References
Ghionea, IG 2014, 'Optimization Of The Manufacturing Process Planning For A Set Of Spur Gears', Annals Of The University Dunarea De Jos Of Galati: Fascicle II, Mathematics, Physics, Theoretical Mechanics, 37, pp. 85-93, Academic Search Premier.
Azhagaiah, R, & Silambarasan, D 2014, 'Firm Size and Corporate Leverage: Cement Industry', SCMS Journal Of Indian Management, 11, 3, pp. 37-50, Business Source Complete.
Mahlia, T, Razak, H, & Nursahida, M 2011, 'Life cycle cost analysis and payback period of lighting retrofit at the University of Malaya', Renewable & Sustainable Energy Reviews, 15, 2, pp. 1125-1132, GreenFILE.
COJOCEA, BI 2014, 'Comparative analysis of the financial discount rate and of the net present value of a public investment project throughout its life', Theoretical & Applied Economics, 21, 12, pp. 165-184, Business Source Complete.
