Seasonal variations should now be incorporated to obtain the final forecast for week 5
Therefore, using additive model method, the sales forecast in week 5 for Co-op Supermarket will be about $287,121.97
From the above data, we have the following chard for Co-op Supermarket’s sales in week 1 to 4 and the forecasting sales for week 5 as follow:
- Proportional model
Another method to calculate the seasonal variation is proportional or multiplicative method. This model for the time series analysis expresses each actual figure as a proportion of the tren (BPP Professional Education, 2004, p159).
The time series is used in this method is
Y = T x S x R.
We also assume that the residual component is 0, therefore, the seasonal component is
S = Y/T
The seasonal variations for week 1, 2, 3 and 4 are as follows
The summary of the seasonal variations expressed in proportional terms is as follows
The trend line is plotted by using the figures on Thursday of Week 1 (44.16667) and Wednesday of Week 4 (46.83333).
Trend rose 46.83333 - 44.16667 = 2.66666
The average daily rise = 2.66666 / 17 = 0.15686
Taking 0.15686 as the daily increase in the trend, the forecast of sales for week 5, before seasonal adjustments (the trend line forecast) would be as follows
Seasonal variations should now be incorporated to obtain the final forecast
Therefore, using proportion model method, the sales forecast in week 5 for Co-op Supermarket will be about $287,554.55
The following chart will show the amount of sales of Co-op Supermarket from week 1 to 4, and also the predicted sales for week 5:
Report:
REPORT ON FORECASTS FOR THE DAILY SALES
IN WEEK 5 OF CO-OP SUPERMARKET
To: Ms. Trang Sales Director, Co-op Supermarket
From: Nguyen Thanh Le, Sales Manager, Co-op Supermarket
Subject: Forecasts for the daily sales of clothes and shoes department located in third floor in week 5 of Co-op Supermarket
Date: 4th July 2010
-
Introduction:
This report analyzes the forecasts for the sales in week 5 of Co-op Supermarket. The information is made depended on the historical sales of last four weeks as follow:
The results are different between different methods however, the recommendation on the reliability of each method would help the company to choose the best result and closest to the final result.
- Methods
Three following methods were used to summarizing the forecast for week 5:
- Least squares regression method
- Addictive method
- Proportional method
- Conclusion
Different method leads to different result in forecasting the sales in week 5.
- By using least squares regression method, the forecast sales for week 5 are:
The total sales that Co-op Supermarket may get in week 5 may be about $324,452.2
- By using addictive method, the sales may get the result as follow:
The sales forecast in week 5 for Co-op Supermarket when we use the addictive method will be about $287,121.97
- Finally, using the proportional method, the following result show the forecast sales of Co-op Supermarket in week 5:
The sales forecast in week 5 for Co-op Supermarket can be include by using this method is about $287,554.55
- Recommendation
Forecasting and prediction is not very accurate, it would be good if we could achieve higher percentage of accuracy (Prasanna and Jaideep, n.d). Therefore, though all of three methods can be used in order to forecast the sales of the company, and the trend increases over time, proportional or multiplicative model is the best method since it gives the prediction with the highest percentage of accuracy. While the addictive model simply adds absolute and unchanging seasonal variations to the trend figures, the multiplying increasing trend values by a constant seasonal variation factor, take account of changing seasonal variations (BPP Professional Education, 2004, p164). Therefore, the most reliable forecast for the sales of week 5 of Co-op Supermarket is $287,554.55 in total and the detail for each day as follow:
Prepared by:
Nguyen Thanh Le
- Management Information Systems (MIS) Report
MANAGEMENT INFORMATION SYSTEMS (MIS) REPORT
MEMORANDUM
Title: The Management Information Systems and Tools for operational, tactical and strategic levels of Co-op Supermarket Trading
To: Ms. Trang, Sales Director
From: Nguyen Thanh Le, Sales Manager
Date: 5th July 2010
Co-op Supermarket located in the central of Ho Chi Minh City. Dearly and friendly feeling, comfortable and full of add-on services are common features of Co-op Mart Supermarkets (Co-op Mart, 2006). With the slogan “Quality products, Best prices and Best Service” (Co-op Mart, 2006), Co-op Supermarket has the various functional areas included in 4 floor of a building. At the moment, the company relies on paper-driven systems. But it is considering introducing a comprehensive computerized system for its Management Information Systems (MIS) which is a computer system or related group of systems which collects and presents management information to a business in order to facilitate control (BPP Professional Education, 2004, p271). It is necessary to consider both internal and external information through the Management Information systems to enable the managers of the company to make decision and develop the business through operational, tactical and strategic levels of information. Through the information from MIS, the management will be able to get the general view of the business. MIS include 6 information systems and divided into 3 levels, which are top/executive level, middle/management level, and lower/supervisory level.
- Top/Executive level
First, top lever or executive level of management includes the most important people who can decide the development of the whole organization such as the Chief Executive Officer (CEO). The Executive Support Systems (ESS) is the tool which can help these senior managers to make strategic unstructured decisions. An ESS can provide senior managers with easy access to key internal and external information of the company. This also helps them to come up with long team planning. Therefore, the information that the manager of Co-op Supermarket may need for the strategic level are the forecasts of 5 year sales trend, 5 year operating plan, 5 year budgeting plan, financial plan and human resources plan.
For example, in order to come up with a decision of making a financial plan, the manager needs to combine both internal and external information. The internal information would be the financial data of the company over the last few years from the office systems and analysis. The external information would be the development of Vietnamese economy, the competitors’ development and also the make share with trends of prices.
ESS has many different features that helpful for management to make decision. It is flexible since the information can be taken from official or unofficial sources. It is suitable for quick response time since it relies on graphic presentation of information, not detailed information. So the manager can take the general information easily and the process of making decision can be shortening very much.
- Middle/management level
Middle or management level has two information systems which are Management Support System (MSS) and Decision Support System (DSS). DSS can be used to support the manager in semi-structured or unstructured decision making. They are intended to provide a wide range of typical information that a decision support application might gather and present. Using these systems, the middle managers will be able to control the business and ensure that the system is in a good condition. Management Support System (MSS) provides the vision people need to maximize control over the operations (Majure, n.d). It gives the management a chance to have the real-time feedback on the operations so they can make quick and informed decisions. Therefore, the information needed at tactical level or middle/management lever may be the sales management, sales region analysis, inventory control, production scheduling, annual budgeting, cost analysis, capital investment analysis, pricing/profit ability analysis, relocation analysis and contract cost analysis.
For example, when the manager of Co-op Supermarket want to add more types of product to sell in the supermarket, they can use DSS to find out the customer’s need and wants, their requirement, interesting, hobbies, and incomes. This information would help the manager to get the general knowledge about the current position and the market to balance the benefit they can get with the risks that they have to take to control and develop the business.
- Lower/supervisory level
The lower or supervisor level is not as important as two other levels. It is used daily and with short team decision. There are three information systems included in this level which are Knowledge Work Systems (KWS), Office Automation Systems (OAS), and Transaction Processing Systems (TPS).
Knowledge Work Systems (KWS) are information systems that facilitate the creation and integration of new knowledge into an organization (BPP Professional Education, 2004, p276). This system take part in motivate knowledge worker to improve themselves with different skills such as Computer Aided design (CAD), Computer Aided Manufacturing (CAM) and Specialized financial software that analyses trading situations. For example, with this method, a servicing staff can create a new way to arrange the product to attract more customers according to the interests and excitement of customers and other strategies of the company’s competitors.
Office Automation Systems (OAS) is computer systems designed to increase the productivity of data and information workers. The major activities of typical office such as document management, facilitating communication and managing data can be supported by this system. For example, in order to develop the customer care services, Co-op Supermarket’s manager can use this system to provide e-mail. This e-mail can be send to different customers to make them satisfied and also remind them about the company image. In the process of using this method, Co-op Supermarket has to consider both internal and external information. Such as information about the company’s service, activities, etc for internal and customer’s needs and wants, also general market information for external.
Transaction Processing Systems (TPS) perform ad records routine transactions which are necessary to conduct the business. For example, Co-op Supermarket want to create a payroll for employees, the manager can use TPS to do this work easily since the system provide the information about the employees’ performance, labor position, and other related information.
At the moment, Co-op Supermarket applies all these information systems among their department – Sales and marketing, Manufacturing, Finance, Accounting, and human resources.
- Sales and marketing:
In sales and marketing department, the manager needs to control the number of products every day. They also have to provide suitable prices for the update market. Moreover, the managers have to provide research about the customer requirement, also the market to complete the marketing activities of the company, so the Transaction Processing Systems (TPS) need to be applied to control effectively. Moreover, in daily work, employees can come up with their own innovation and creativity, so the Knowledge Work Systems (KWS) can be used to help them create new strategies easily. Finally, the Office Automation Systems (OAS) can be applied in order to attract and satisfy more customers. Many different strategies which use this system need to be provided daily such as advertisement, e-mail, letter, leaflets, etc
- Manufacturing department:
Because managers have to control the amount of product everyday to conclude the productivity that means the inventory of the company must be control. Moreover, the machines of the Co-op Supermarket also need to monitor, so the Decision Support System (DSS) can be applied to make it easy to manager to control the manufacture of the company.
- Finance department:
In this department, the managers will control the finance of the whole company. They have to manage the benefit that the company can get every day. So the transaction Processing Systems (TPS) would be suitable for these activities. Moreover, the managers have to control the salary of employees, also the cost of material, and promotional cost, so the Management Support Systems (MSS) can be use to make the process become easier and quicker.
-
Accounting department:
The managers in this department have to control the salary of the employees which also related to the bonus and punishment of the staff every day. Moreover, this department has to conclude the account payable and receivable of Co-op Supermarket every day, so the transaction Processing Systems (TPS) is suitable to make the business run effectively and correctly. The activities of analyze the investment of Co-op Supermarket also under this department, so the Management Support Systems (MSS) also can be use to do this activity.
- Human resource department:
In this department, the managers have to come up with the training and developing program for employees, so the Executive Support Systems (ESS) should be applied to make this activity become more effective. Moreover, during the business every day, the staff can improve their own skills and performance, so the training system is provided in daily business. Therefore, the Transaction Processing Systems (TPS) can be used to complete this activity.
Conclusion
In conclusion, these are my recommendation about the Management Information System (MIS) and tools for three level of management which are operational, tactical and strategic for all department of Co-op Supermarket. I hope that these suggestion and comment can help the company come up with the most effective methods to develop the business and gain the productivity also benefit in the future.
Prepared by
Nguyen Thanh Le
3. Inventory control
- Economic Order Quantity and the annual savings
The economic order quantity (EOQ) or economic batch quantity (EBQ) is the order quantity for an item of stock which will minimize costs (BPP Professional Education, 2004, p299)
The formula to calculate the EOQ is
EOQ = √(2CoD/Ch)
Where Co = the cost of making one order (Ordering cost)
D = the usage in units for one time period
Ch = the holding cost per unit of stock for one time period (Holding cost)
Co-op Supermarket has a plan to offer volume discounts on the purchase price for one of its products which is pens. The following is the detail scheme for the discounts
According to the information from the company about this plan, we can conclude some related number to use in order to calculate the Economic Order Quantity and the annual savings for the company.
D= $ 75,000
Purchase cost = $ 0.50
Ordering cost (Co) = $5
Holding cost (Ch) = 20% x $ 0.50 = $ 0.1
Q1 = 2,750 packs
Applying these into the formula, we now can have the EOQ of Co-op Supermarket
EOQ = √ (2x$5x$75,000 / $0.1) = 2,738.6 round 2,739
In order to come up with the annual savings which would be obtained of the order quantity which is 2,750 replaced the current order size which is 2,739 packs, we have to come up with two different value of EOQ to compare and then help the company to make the best decision in which the total cost is the least.
Total cost = Holding cost + Ordering cost + Purchasing cost
When calculating the EOQ, we skip the purchasing cost, so the factors that need to be considering during the comparison include the holding costs and ordering cost. We now can complete the following table to make the comparison
According to the comparison above, we can conclude that the annual saving if the company orders 2,739 packs at a time instead of 2,750 as currently is:
Annual saving = $(1643.36363 - 1643.36128) = $ 0.00235
- Inventory control systems, cost minimizing order size for Co-op Supermarket and the best course of action for the company
Co-op Supermarket is an organization which is the same as other firm with the cost of purchasing stock is the largest cost in the business. Therefore, the stock or inventory must be controlled and checked carefully in order to save money and maintain the development of the business. There are many different reasons for holding stocks. It is to ensure sufficient goods are available to meet expected demand from customers and the market. It is also a factor that ensure about the continuing process of producing goods of a company. Moreover, it can take advantage of bulk purchasing discounts and absorb seasonal fluctuations and any variations in usage and demand. It also can allow the business flow smoothly without any stuck in the middle of road. Finally, it is a deliberate investment policy, especially in times on inflation or possible shortages.
The EOQ is a model that a manger can use to decide the way of planning and controlling the stock efficiently and effectively to minimize the costs. It does not fall into one of the discount bands; therefore we do not need to recalculate it. However, we need to compare the annual costs of the following order sizes to come up with the cost minimizing order size for Co-op Supermarket.
- EOQ of 2,739, as calculated above
- 3,000 ( the lower boundary of the first discount band)
- 4,000 ( the lower boundary of the second discount band)
- 5,000 ( the lower boundary of the third discount band)
- 20,000 ( the lower boundary of the forth discount band)
The economic order quantity is now 5,000 packs, to take advantage of the bulk purchase discounts. This is $ (37,772 - 31,218.75) = $6,553.25 a year cheaper than ordering 2,739 packs at a time. This is also the best action that Co-op Supermarket should take to minimize the cost and gain the productivity of the company.
-
Material Requirements Planning
Co-op Supermarket Company provides many different products to its customers. One of the product structure trees with composition of each component appears in the tree is shown as following:
The company has to produce 300 units of end item in period 6. Moreover, the inventory of Co-op Supermarket already has 60 units of end item. Therefore, the company just has to produce 240 end items. The lead times are two periods, so 240 end items must be ordered 2 weeks before so that the company can produce the total of 300 items on time. That also means 240 end items must be ordered at week 4.
According to the product structure tree, in order to have 240 end items, the company must have 240 components A, 240 components B and 240 components C. However, the number of components the company order must be considered with the on-hand inventory of the company to make the most effective plan to produce products.
In order to produce 240 end items in the end of period 6, the company must order 2 week before. That also means it must have 240 components A in week 4. Moreover, the scheduled receipts are 40 units of Component A in Period 3. Therefore, the company should only order 200 Components A. The lead times are two periods for Component A, so Co-op Supermarket should already order 200 Components A in week 2.
With component C, 240 components are asked in week 4. However, Co-op Supermarket’s stock include 100 components C. therefore, the company just has to order 140 units if this component. The lead time for this component is one period. So 140 components C should be ordered 1 week before week 4 or the items must be order at week 3.
According to the product structure tree, G is the subcomponent of C. In order to have 1 component C, it is necessary to have 2 components G. As we have mentioned before, there are 140 components C need to be gathered in week 4, so 280 components G must be order. Moreover, the lead time for component G is 1 period, so the order must be hold in week 3.
However, the order size for component G is in multiples of 300 units. Therefore, Co-op Supermarket has to order 300 units instead of 280 units. So 20 extra components still be ordered by the company but are not used in this project of producing 300 end items in period 6.
Also according to the product structure tree, component E is the sub-component of A. One component A can be produced only when 2 component E are ready. Therefore, in order to have 200 components A, 400 components E are required. However, Co-op Supermarket already stocked 100 components E, so it only need to order 300 items. The lead time of component E is one period, so the order must be made before week 3 one period. That means 300 components E must be ordered at week 1.
One problem can be arisen since the provider demands Co-op to order use order sizes for component E that are multiples of 400 units. So Co-op Supermarket has to take 400 components E while the quantity the company need is just only 300 units.
Moreover, component E is also a sub-component for G. According to the product structure tree, every single component G will need 1 component E to complete. Therefore, in order to have 280 components G, the company needs to have 280 components E. Since 100 stocked components E have been used for the completion of component A. So the Supermarket will have to order 280 components E to make components G. However, because of the order size in multiples of 400 items, the company still has to order 400 components G despite only 280 components are used.
By combining two tables for components E above, we can conclude the Material requirement planning for components E as follow:
In conclusion, after combining all the results of plans for the end items and for components A, C and G then components E, the following table shows the planned order report for Co-op supermarket.
To sum up, there are some problems arise during the process of producing 300 end items of Co-op Supermarket. Because of the limitation of order sizes in multiples, Co-op Supermarket has to order total 300 components G and 800 components E when the company only needs 280 components G and 580 components E. Therefore, the company has to pay for 20 extra components G and 220 extra components E. This may cause the waste of money for irrelevant items. Moreover, these extra items would be considered as the inventories of the company. So the company must spend money for the holding cost for the storage process.
- Project Management plan
Co-op Supermarket is planning to improve staff morale and motivation and has decided to replace the existing staff canteen with a modern cafeteria. The following activities needed to be undertaken for the project:
Through the activities of the above project, a network diagram is drawn below:
- Critical path and duration:
A network can have many different paths of activities to follow. However in order to get the most effective performance, an organization must be able to find out the critical path for their own project with the duration time to finish every activities. There is away to calculate the critical path for a project in which people can list all the paths through the network and their durations to make comparison.
For the Cafeteria Project of Co-op Supermarket, all the paths of activities through the network and their durations can be shown in the following table:
Since critical path is the longest path, according to the diagram and the table above, we can realize in this project, the critical path is D – E – F – G – H – I – Dummy – K with the duration of 38. Therefore, the total project time is 38 weeks
Conclusion:
The significance of the critical path is that the activities that lie on it cannot be delayed without delaying the project (NetMBA, n.d). Because we have found out that the critical paths for Co-op Supermarket in providing the new cafeteria is 38 weeks that means all the activities on these critical paths must be started and finished within 38 weeks. This is also the minimum time period that the company needs to complete Cafeteria Project so in order to complete the project in 38weeks, the company must ensure that 7 activities on the critical path each start on time and may not have their durations extended.
- Event times
There is another way to find out the critical path for a project. That is calculating event times for each event, and then show then on the network diagram.
There are two types of event times include earliest and latest event times:
- Earliest event time:
The earliest event time can be defined as the earliest time that any subsequent activities can start” (BPP Professional Education, 2004, pg 341). Or in other words, it is the dates of activities arrived through forward-pass (Ronda, 2010)
There are some policies to follow in order to calculate earliest event time for each activity in the project network. First, since the first activity is to begin the project, it always starts at event 1 with its earliest starting time of 0. The direction that people must follow to calculate these number is from left to right within the diagram. So, after the node of the event, the next activity which following in the right side of the event can start. For example, activity A, B, C, D, and L start from event 1 which has the earliest time is 0. That mean at the point of 0, those activities can start. After that, the calculating process keeps going with the direction to the right. For instant, event 2, which is after activity C, has the earliest time is 0 + 2 = 2 (0 is the earliest time of the previous event, and 2 is the duration of the last activity, C) that means the next step which is activity E can only start at week 2. Or at event 4, the earliest time can be calculated by 3 + 8 = 11 in which 3 is the earliest time of previous event (event 3) adds duration of activity E (8week) equal 11. That mean the following step which is activity F can only start at week 11. The process is kept going on till the final node which is event 10 with the earliest time that we can calculate is 38.
When more than one activity ends at the same node, the earliest event time can be identified by the highest number that we can get from all the calculations from different activities which end at this node. For example, at the node of event 5, there is a completion for activity A and F. That means activity G cannot start until both A and F are finished. The earliest time at event 5 is the highest from the following calculation:
- Event 1 + Duration activity A = 0 + 12 = 12
- Event 4 + Duration activity F = 11 + 3 = 14
By comparing those values, we can realize the earliest time for event 5 is 14, also mean activity G can start at 14th week.
Another example is at event 7, there is also a completion for activity B and H. therefore, the earliest time can be calculated as the highest value of the following:
- Event 6 + Duration activity H = 26 + 4 = 30
- Event 1 + Duration activity B = 0 + 3 + 3
We get the earliest time for event 7 is 30. That means activity I and J can only start at week 30 when both activity B and H are completed.
Finally, the highest value of the last is 38. So, the minimum completion time for the entire Cafeteria Project is 38 weeks.
- Latest event time:
The latest event time is the latest time by which all preceding activities must be completed if the project as a whole is to be completed in the minimum time (BPP Professional Education, 2004, p341). Moreover, basically, the latest time for an event is the dates of activities arrived through backward-pass (Ronda, 2010)
The way to calculate latest event times in clued some steps and notice as follow. Different from the calculation earliest event time, latest times are calculated with the direction from right to left. Usually, the desired completion time will be equal to the earliest possible completion time, so that earliest time and latest time for the final node is the same (Chris, 2008). In this situation, event 10 is the event when the entire project is completed, so it can be considered as the final event. Therefore, the latest time in this event must be equal to the earliest time which is 38. Since it is calculated from the final step backward, the following event can be calculated according to the next event and activity in the left side. For example, event 8 is the follow event of event 10. Therefore, the latest time can be calculated as 38 – 4 = 34 in which 38 is the latest time of event 10 and 4 is the duration for activity K. That means I and J activities must be completed at week 34, so that activity K can be finish at week 38
There is a problem while calculating the latest time is when different activities meet at one node. In this kind of situation, the latest event time is the lowest number that we can get from different calculations. For example, in node 9, both activity M and the Dummy are leading to it. Therefore, the calculations for node 9 as following
- Event 10 – Duration activity M = 38 – 2 = 36
- Event 8 – Duration dummy = 34 – 0 = 34
Since the latest time is the lowest value we can get, the latest time for event 9 is 34. That also means both activities I and L have to be finished before or at week 34 in order for the project to start activity M and K.
Another example, the problem may be raised in node 7 where I and J are both lead to it. Therefore, the latest times of event 7 can be calculated as follow:
- Event 8 – Duration activity J = 34 – 2 = 32
- Event 9 – Duration activity I = 34 – 4 = 30
Since the latest time is the lowest value, the latest event time for event 7 is 30. Therefore, activity H has to be completed at week 30, so that activity I and J can start.
At the event 1, which is the final stage of the process of calculating latest time for the project must be 0.Therefore, finally, the latest time to start the project is consider as 0.
- Float time:
After finding the critical path for the project, we can divide the activities into two catalogues, critical activities and non critical activities. With non critical activities, float is a spare time slot which is calculated in order to measure the amount of time an activity can be delayed before it becomes critical ((Mohammad, 2003). It is available in a to complete them which is adjustable and not a critical factor in full completion of the project and therefore do not affect the critical path assigned to the (Toolbox, n.d).
Since the critical path has been designed, we are now able to identify the non critical activities include A, B, C, L, J, and M.
The float can be calculated as the latest time for the next event minus earliest time of the previous event minus duration of the activity.
For example, the float for activity A can be considered as follow: the activity has to be complete by week 14 if the total project time is not to be extended. It cannot be started before week 0 (the starting point of the project). But it takes 12 weeks to be completed. So there is 2 spare weeks available for activity A. The float is: 14 – 0 – 12 = 2.
The table below shows the calculation and the float of all the non critical activities of the Cafeteria Project of Co-op Supermarket.
- Gantt chart:
A Gantt chart is a graphical representation of the duration of tasks against the progression of time. (KIDASA Software, n.d). Since Co-op Supermarket has a plan to replace the existing canteen to the new cafeteria, it is a very useful tool for planning and scheduling the project. They allow people to identify the period in which the project can be completed. Moreover, it can help to determine the resources needed and lay out the order in which tasks need to be carried out (Mindtools, n.d). The Gantt chart for Cafeteria Project can be shown as follow:
In a Gantt chart, each activity is represented with a bar. The position and length of the bar reflects the start date, duration and end date of the activity (Gantt, 2009). Moreover, through the Gantt chart, we can identify that an activity is shown to start when the activity above is completed. However, the bars may overlap in cases where a task can begin before the completion of another, and there may be several tasks performed in parallel (NetMBA, n.d). Since then, in order to keep the project within budget, it has been decided that ideally no more than six personnel should be involved in the project at any one time; the following Gantt chart can be produced as follow:
- Investment Appraisal Techniques
The Company estimates its cost of capital is 18%. Therefore, we can conclude the details of each capital expenditure project for Co-op Supermarket as following:
In order to evaluate the viability of proposed investments of Co-op Supermarket, two main financial tools are suggested to used include Net Present Value (NPV) and Internal Rates of Return (IRR) and some other financial tools.
- Net Present Value (NPV)
Since a dollar today is worth more than a dollar in the future (FinAid, n.d), therefore, the value of money and investment can change in the future and may affect the business of individual, also organization. So that it is necessary to evaluate and assess the investment of Co-op Supermarket to have the most benefit in each project.
NPV is one of the most useful tools which can be used to evaluate the viability of proposed investment. The Net Present Value (NPV) of an investment (project) is the difference between the sum of the discounted cash flows which are expected from the investment and the amount which is initially invested. (Value Based Management). It can be calculated as the following formula:
Where: S = Sum of investment in the future
r = interest per annum
n = time in year
Because Co-op Supermarket estimates its cost of capital is 18%.
Therefore, r = 18% = 0.18
We can measure the NPV for three projects A, B and C as follow:
- Project A:
The following table shows the net present value of Project A in the end of year 1,2,3,4 and 5 and the total NPV for the whole project:
Cash flow = - $200,000
Discount factor =
=
= 1
Net Present Value (NPV0) = -$200,000 * 1 = - $200,000
Cash flow = $80,000
Discount factor =
=
= 0.847
Net Present Value (NPV1) = ($80,000) * 0.847 = $67,797
Cash flow = $70,000
Discount factor =
= =
= 0.718
Net Present Value (NPV2) = ($70,000) * 0.718 = $50,273
Cash flow = $65,000
Discount factor =
=
= 0.609
Net Present Value (NPV3) = ($65,000) * 0.609 = $39,561
Cash flow = $60,000
Discount factor =
=
= 0.516
Net Present Value (NPV4) = ($60,000) * 0.516 = $30,947
Cash flow = $55,000
Since there is a scrap value expected at $10,000, the Cash flow of year 5 is
55,000 + 10,000 = 65,000
Discount factor =
=
= 0.437
Net Present Value (NPV5) = ($65,000) * 0.437 =$28,412
Therefore, the total of Net present value is
NPV = NPV0 + NPV1 + NPV2 + NPV3 + NPV4 + NPV5
= -$200,000 + 67,797 + 50,273 + 39,561 +30,947 + 28,412
= $16,990
Summary:
The net present value of project A has a positive NPV or NPV > 0, so it is acceptable because it is profitable and worth the risks of the company. The project offers a return of over 18% per year.
- Project B:
The following table shows the net present value of Project B in the end of year 1,2,3,4 and 5 and the total NPV for the whole project:
Cash flow = -$230,000
Discount factor =
=
= 1
Net Present Value (NPV0) = (-$230,000) * 1 = -$230,000
Cash flow = $100,000
Discount factor =
=
= 0.847
Net Present Value (NPV1) = ($100,000) * 0.847 = $84,746
Cash flow = $70,000
Discount factor =
=
= 0.718
Net Present Value (NPV2) = ($70,000) * 0.718 = $50,273
Cash flow = $50,000
Discount factor =
=
= 0.609
Net Present Value (NPV3) = ($50,000) * 0.609 = $30,432
Cash flow = $50,000
Discount factor =
= = 0.516
Net Present Value (NPV4) = ($50,000) * 0.516 = $25,789
Cash flow = $55,000
Since there is a scrap value expected at $10,000, the Cash flow of year 5 is
55,000 + 10,000 = 65,000
Discount factor =
=
= 0.437
Net Present Value (NPV5) = ($65,000) * 0.437 =$28,412
Therefore, the total of Net present value is
NPV = NPV0 + NPV1 + NPV2 + NPV3 + NPV4 + NPV5
= -$230,000 + 84,746 + 50,273 + 30,432 + 25,789 + 28,412
= $-10,348
Summary:
The net present value of project B has a negative NPV or NPV < 0, so it is unacceptable.
- Project C:
The following table shows the net present value of Project C in the end of year 1,2,3,4 and 5 and the total NPV for the whole project:
Cash flow = -$180,000
Discount factor =
=
= 1
Net Present Value (NPV0) = -$180,000 * 1 = -$180,000
Cash flow = $55,000
Discount factor =
=
= 0.847
Net Present Value (NPV1) = ($55,000) * 0.847 = $46,610
Cash flow = $65,000
Discount factor =
=
= 0.718
Net Present Value (NPV2) = ($65,000) * 0.718 = $46,682
Cash flow = $95,000
Discount factor =
=
= 0.609
Net Present Value (NPV3) = ($95,000) * 0.609 = $57,820
Cash flow = $100,000
Since there is a scrap value expected at $10,000, the Cash flow of year 5 is
100,000 + 8,000 = 108,000
Discount factor =
=
= 0.437
Net Present Value (NPV5) = ($108,000) * 0.437 =$55,705
Therefore, the total of Net present value is
NPV = NPV0 + NPV1 + NPV2 + NPV3 + NPV4 + NPV5
= -$180,000 + 46,610+ 46,682+ 57,820+55,705
= $26,817
Summary:
The net present value of project C has a positive NPV or NPV > 0, so it is acceptable because it is profitable and worth the risks of the company. The project offers a return of over 18% per year.
Conclusion:
In three above projects, one of them have net present value under 0, so unacceptable, two other have net present value are positive, so they are acceptable.
Higher income amounts make the net present value higher (Samuel, 2000). Therefore, in order to make the most benefit for the business, Co-op Supermarket have to consider both two projects and should choose the project with the highest NPV( Fluent in Finance, n.d) which can be assessed as the most effective plan. Project A and Project C can offer a return of over 18% per annum. However, the NPV of project C is larger than NPV of Project A. Therefore, the company should invest the project C because it can bring the highest net present value for the company.
- Internal rate of return (IRR) method:
Beside NPV, Internal rate of return (IRR) also can be used as a financial metric to evaluate and compare investment, business case scenarios, or other kinds of projected cash flow results (Solution Matrix, n.d). It is the interest rate that makes the net present value (NPV) of the investment’s income stream adds up to 0 for a series of future cash flows. That also means that IRR is the rate of return that makes the sum of present value of future cash flows and the final market value of a project (or an investment) equal its current market value (Visitask, n.d). Since IRR is a measure of the worth of an investment, higher IRR pay better means the company can avoid risks better.
The formula to calculate IRR is:
By using the formula above, we can measure and evaluate three projects of Co-op Supermarket as follow:
- Project A
With r = 47%, the total NPV is:
NPV is negative with -69,773. Therefore, Project A fails to earn 46.67% and IRR must be less than 46.67%.
Try r =21%
The NPV is positive. Therefore, Project A must earn more than 21% and less than 47%
IRR = a% + {A / [A – B] * (b – a)}
= 21% + {7,951 / [7,951 – (-69,773)] * (46.67% – 21%)}
= 23.63 %
The Internal rate of return of Project A is 23.63%. This rate is higher than 21%, so the project is viable.
- Project B
With r = 30.43%, the total NPV is:
NPV is negative with -55,153. Therefore, Project B fails to earn 30.43% profit and IRR must be less than 30.43%.
Try r = 0.15 = 15%, the NPV is:
The NPV is positive. Therefore, Project B earns more than 15% and less than 30.43%
IRR = a% + {A / [A – B] * (b – a)}
= 15% + {3,667 / [3,667 – (-55,153)] * (30.43% – 15%)}
= 15.96%
The Internal rate of return of Project A is 15.96%. This rate is higher than 15%, so the project is viable
- Project C
With r = 52.96%, the total NPV is:
NPV is negative with -69,986. Therefore, Project C fails to earn 52.96% and IRR must be less than 52.96%
Try r = 0.24 = 24%, the NPV is
The NPV is positive. Therefore, Project C earns more than 24% and less than 52.96%
IRR = a% + {A / [A – B] * (b – a)}
= 24% + {5,916 / [5,916 – (-69,986)] * (52.96%– 24%)}
= 26.26 %
The Internal rate of return of Project C is 26.26%. This rate is higher than 24%, so the project is viable
Conclusion:
The results of IRR are not exact since we just calculate with the random number for the trial value. However, during the process of calculating, I have chosen the closest approximation to maintain and improve the reliability factors. After comparing all the values of IRR, Project C has the highest number which is 26.26%. Therefore, Co-op Supermarket should better invest in project C to make highest IRR and the profit for the company.
- Other Financial tools
In real situations, in order to have the most effective plan and the most benefit, an organization must consider many different financial tools in order to invest in the right time and at the right business, not just only NPV and IRR. There are some other financial tools that can be used in order to make a fulfill decision of investment of the company.
First, the Modified Internal Rate of Return (MIRR) can be used to analyze the investment of the company. It is said to reflect the profitability of a project or investment more realistically than an IRR. The MIRR is used extensively in real estate financial analysis due to the nature and timing of cash flows and investments for real estate investments (Financial Modeling Guide, 2010).
Moreover, the benefit-cost ratio B/C is the ratio of the present value of gross benefit to the present value of gross cost (Fisheries and Aquaculture Department, 1980). In order to choose the most effective investment plan for the organization, the ratio between B/C should be greater of at least equal to 1.
IV. Conclusion
It can be seen that Co-op Supermarket has been using all the techniques very effectively. Relating to the report, all the techniques of forecasting future sales are provided to the company in order to compare and choose the closest and most reliable value for the business. That may help the company to control and develop the business in the future. Moreover, the company was able to use MIS – Management Information Systems- as a useful tool to manage all the tasks and performances in the business. In addition, the inventory control system, material requirement planning, project plan and financial tools are used very effectively. By doing so, Co-op Supermarket can ensure about the result of all projects and whole business performance. These techniques also take very important roles in the process of business decision making. It can help the company to control the risk, manage and safe time, human, money and other resources, also avoid the waste of irrelevant orders. By following the result of these methods, the company is able to achieve all the tasks at high achievement and be able to make improvement and development in the future.
- Recommendation:
Since Co-op Supermarket has been already one of the strongest organizations in Vietnam, the company has been doing well in its own position and achieves high performance for their business.
To develop in the future, Co-op Supermarket should improve it business by enlarge the business in larger market, and even international market. When the business is expanded, all of the techniques which related to the business decision must be improved as well. They must be able to calculate and apply all the technique in larger areas and larger amount of products and money to make decision on long term plan and decide on larger projects. Therefore, the company should improve the training systems to develop skills, experience and ability of employees in order to prepare for using all of these techniques in their own business to make the most benefit for themselves and the whole company.
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