Introduction
In order to make sound investment decisions, one is encouraged to evaluate all the possible alternatives. In this case, there are two sites that have been earmarked to host an Italian food business namely London and Brighton. As such, the paper shall evaluate the suitability of each site and make a recommendation on the best location using both quantitative and qualitative means.
2.0. Quantitative Analysis
2.1.1. Break Even Analysis
2.2.2. Best Decision Based on Break Even Analysis
Break-even analysis is one of the key considerations in committing financial resources to an investment. Fundamentally, any commercial venture must be concerned with operating profitably; else such a venture will be forced out of business since the capital will be depleted by a loss-making trend (Friedman and Miles, 2006). Conventionally, it is common wisdom to understand that a business will need some level of operations in order to seize making losses. At that point, an enterprise fully covers its costs but registers zero profits is known as the breakeven point. The breakeven point is an integral element in business management since it enables the decision maker to evaluate the level of operations that is needed to stop the losses, signaling the onset of profits. Therefore, knowing the point enables the business to evaluate whether it has the capacity to produce the number of units that are required for the business to start making profits. Therefore, this introduces the element of market size. The business evaluates the market size and determines whether the market can consume the firm’s products to a level the firm will be operating profitably (Siddiqui and Siddiqui, 2005).
In both the London and Brighton markets, the market size is large enough to consume the firm output. The observation is based on the assumptions that the firm has sufficient strategies that will enable the firm to penetrate these markets. In addition, considering the breakeven units of the two alternatives, the proposed business has the ability to meet the require units in order to breakeven in both locations. The implication is that there is room to operate profitably in the two sites. However, comparing the rate at which profit will start to be realized, Brighton site is better since the business will start realizing profits sooner compared to London. Therefore, under this approach, the preferred site is Brighton.
2.2.1. Investment Appraisal Using Capital Budgeting Techniques
Brighton City Location
Payback Period
The initial amount to be recovered is $100,000.
The computation is carried out as follows:
3 years + ($ (100,000.00 - 94,500.00)/$52,500.00) years
3.10 years
Net Present Value
Internal Rate of Return
Negative NPV computation
Internal Rate of return computation
8% + [{53,370.00/ (4,732.80+53,370.00)}*(25%-7.527%)]
8% +16.056%
24.056%
London City Location
Payback Period
The Initial investment that needs to be recovered is $175,000. The payback period is computed as follows:
3 years + {(175,000-140,000.00)/ 87,500.00} years
3 years + 0.4 years
3.4 years
Net Present Value
Internal Rate of return
Negate NPV Computation
Internal Rate of Return Computation
8% + {64,750.00/ (29,288.00+64,750.00)}*(25%-8%)
8% + 0.68855*17%
8% + 11.7054
19.70%
2.2.2. Investment Appraisal Using Capital Budgeting Techniques
Using the payback period, Brighton City Location should be preferred since it recovers the invested capital within a shorter period (3.10 years) compared to London location (3.4 years). The decision holds when the projects are evaluated using the internal rate of return approach whereby the Brighton city location will have an IRR of 24.056% compare to London (19.7%). However, using the net present value approach, the preferred location is London since it records a higher net present value at $64,750 compared to Brighton Location which records $53,370. The outcome is a mixed result. However, examining the nature of the methods that are used, NPV should override the other two methods. Other than profit maximization, a business also seeks to improve on its net worth (Friedman and Miles, 2006). Net present value approach provides an approach through which the value that a project contributes to the investor is evaluated. Therefore, since the London site contributes more to the investor than Brighton, the site should be preferred.
3.0. Qualitative Considerations
3.1. Location
Both locations are accessible by their target customers. However, in London, the customers will need to leave central London to access the hotel thus may be inconveniencing especially during the day when people are busy with their schedules. Brighton location is suitable since it will enable people to access it as they go about their schedules
3.2. Local Economy and Developments
In Brighton, the local economy is mainly driven by both visitors frequenting the area and locals while the site in London will mainly be driven by residence due to its nature, an upcoming middle- class residential neighborhood. In relation to development, London has more developed food and catering supply infrastructure. However, it is associated with high costs thus lowering the profitability margin. On the other hand, Brighton lacks such an infrastructure. Consequently, the enterprise may not benefit from lower costs of outsourcing hence it may make delivery more costly. In effect, deliveries costs in Brighton may end up being higher than in London. In addition, Brighton has a large pool of cheaper labor thus improving its profitability prospects which is not the case in London.
3.3. Suppliers
In both locations, fresh supplies are timely available. Therefore, availability of suppliers does not give a significant advantage of one location over the other. Therefore, the two sites are suitable, considering supplies.
3.4. Competition
In Brighton, the enterprise will be competing with other Italian foods restaurants and other highly rated restaurants while in London the firm will have the advantage of reduced competition since the firm will be in a relatively new neighborhood where established hotels are not present. In addition, there is no other Italian foods restaurant in this neighborhood thus limiting immediate competition at the London site.
4.0. Decision
Considering both qualitative and quantitative aspects, London is a better choice for two reasons. First, the London location is growing and populated with middle-income earners. As such, the market offer high growth prospects compare to Brighton which is already developed thus growing will need extensive marketing to acquire a market share from the already established Italian restaurants. Second, considering value maximization, London NPV is higher than Brighton thus will add more value to the investor compared to Brighton.
5.0. Additional Considerations
Factors such as family willingness to relocate, familiarity with the location and availability of funds to finance the startup, the two have different startup costs, should be considered.
Bibliography
Drake, P. P and Fabozzi, F. J. 2002. Capital budgeting: Theory and practice. New York, NY: Wiley.
Friedman, A. L and Miles, S. 2006. Stakeholders: Theory and practice. Oxford: Oxford University Press.
Siddiqui, S. A and Siddiqui, A. S. 2005. Managerial economics and financial analysis. New Delhi: New Age.
