WEL202A Ethics and Professional Practice
April 2, 2023EIBS7300 Creativity for Innovation and Design Thinking
April 2, 2023Assignment Outline:
This ‘Authentic Assignment’ contributes to 60% of the overall mark for the module. The assignment will be undertaken on an individual basis.
The word limit excluding calculations is 10 words for every 1 mark of discursive answer (+/- 10%). For example, for a 10-mark discussion question, the word limit is 300 words +/- 10%. Ignoring the word limit will incur a mark reduction.
All your Excel calculations/sheets should be copied and pasted into one single MS Word or pdf document containing your answers to the discussion requirements.
In answering the questions in this assessment, please start your answer to each requirement on a new page (a new page for requirement (a), a new page for requirement (b), etc)
Scenario
Mr Skinner and his best friend Chalmers have decided to set up an ‘All You Can Eat’ restaurant. To finance the business, they will each put in £75,000 from their savings. They intend to start trading from 1st April 2023. Skinner has already spoken to a bank who has agreed to provide an overdraft facility of up to £40,000 to cover short-term cash shortages during the first year. Interest on any overdrawn balance at the end of any month will incur interest at 2% per month in that their bank account is overdrawn.
Skinner & Chalmers are unsure as to whether the business should be in the form of a partnership or a private limited company. In any event, they intend to sell the restaurant as a going concern and retire in the sunny Shelbyville.
Last month Skinner commissioned a research and marketing firm to carry out a market research whose findings indicated that the demand for their ‘All You Can Eat’ food offer is likely to be 34,200 customers in the first year.
In the following four years, demand is expected to increase by 10% in year 2, 12% in year 3, 9% in year 4 and 7% in year 5. The research company is unable to forecast sales beyond year 5.
The demand in each year will be seasonal. 25% of annual sales will be in the first quarter, 30% in the second quarter, 20% in the third quarter, and 25% in the final quarter of the year. (you may assume that in each quarter, sales per month stays the same)
The price charged per customer in the first year will be set at £17 increasing by 3.8% per year in each of the following 4 years. All sales will be for cash.
The average material costs of food per customer is estimated at £7.30 in the first year. These costs will increase by an average of 3% per year in each of the following 4 years. Food material purchases (variable costs) will be made monthly sufficient to cover the sales (demand) for that month, and are paid for in the following month.
Staff salaries are estimated at £146,000 in the first year increasing by 2.6% per year in each of the following four years. Salaries are paid on a monthly basis.
Utilities are expected to be £7,100 for every two months, payable in the following month. The first invoice for the period April and May 2023 will be paid in June. Utilities are expected to increase by an average of 4.5% per year in the next four years.
Suitable premises to set up the restaurant will be leased at a lease premium of £60,000 payable immediately and at an annual rent of £74,800 per year in the first year payable quarterly in advance. The rent is expected to increase by 3.6% per year in each of the following 4 years.
The advertising spend in the first year only are expected to be £9,500 in April, £,8,200 in July, £7,300 in November and £6,900 in January. These are paid for in the month following the expenditure.
Furniture and equipment for the restaurant will cost £72,000 payable immediately. A revamp of the furniture will be needed in year 4 costing £48,000.
The business will need £31,000 of working capital. You may assume this will be needed at the start of business. You may assume that the investment in working capital will be recovered in full at the end of year 5.
Required: (Please start your answer to each requirement on a separate page)
a) Discuss the advantages and disadvantages of setting up the business as a partnership or a private limited company.
(10 marks)
(Word limit 300 words +/- 10%)
b)
i. Produce a 12-monthly cash budget for the first year of the business. (Your budget must include a ‘Total’ column) (21 marks)
ii. It is usual for a business to experience short-term cash flow problems. Suggest, in general, four measures by which a business can address their short-term cash shortages (4 marks)
(Total 25 marks)
c) Discuss the functions of budgeting, and the difficulties that start-up businesses face when attempting to draw up budgets.
(8 marks for discussing functions of budgets and 2 marks for difficulties in budgeting for start-ups = 10 marks)
(Word limit 300 words +/- 10%)
d) Calculate the following for the first year of the business:
i. Budgeted profit for the year (Ignore depreciation on equipment and furniture) – (5 marks
ii. BEP in terms of number of customers and sales revenue (4 marks)
iii. Margin of safety (2 marks)
iv. What should be the price to charge per customer for the restaurant to generate a profit of £200,000 in the first year? (4 marks)
(Total 15 marks)
e) Assuming this is a five-year project and ignoring all taxation implications, calculate the following: (Discount rate at 12%)
i. The payback period (3 marks)
ii. The net present value (20 marks)
iii. The Internal Rate of Return (IRR) using Excel to calculate (2 marks)
(Total 25 marks)
f) Discuss the advantages and limitations of each of the project appraisal methods listed in requirement (e) above.
(Payback 6 + ARR 5 + NPV 4 = 15 marks)
(Word limit 450 words +/- 10%)
(Total: 100 marks)