Calculation of Net Present Value and IRR
Formal Business Report
Marks & Spencer
Re: To provide information about the customer perception about the general merchandise division of Marks & Spencer and the relationship that exists between the total revenue of the company and the general merchandise division store.
This report aims at providing information to the Chief Executive Officer of the company Steve Rowe who succeeded Marc Bolland after his resignation in April 2016 on the basis of research proposed to be conducted for survey into the business problem of M&S that relates to the customer perception about the general merchandise division of company which include home ware, clothing and shoes sections. The analysis has also been included in this report that provides the information about the relationship between the total revenue of the company and the revenue from the merchandise store using the statistical tools such as representative values, measures of dispersion and charts, graphs and trend lines to forecast the revenues of future years. For the analysis the revenue of the company earned during the past years from 2005 to 2015 has been used for both total group revenue as well as revenue of merchandise store.
Plan for collection of primary and secondary data
Primary data: Primary data is the first hand data. When data is collected for the first time for a particular research, it is basically collected for fulfilling the research need. For the purpose of collection of primary data, the target customers are identified first and data is collected through a set of questions asked to them for determining their personal view. The methods which are used in the collection of primary data are Focus groups, Questionnaires, Interviews, Surveys.
In the present case, the determination of the current perception of customers regarding general merchandise division, primary data can be collected through questionnaires and interviews. A set of target customers can be identified to ask their perception then questionnaires can be prepared including all those questions whose answers can actually fulfil the research need and can be sent to customers through mail. Telephonic interviews can be conducted where company executives can call their customers and ask their perceptions orally. Through schedule method also, enumerations can be appointed at the store’s counters to ask customers about their perceptions. Even the customers can be awarded certain shopping rewards for responding to questionnaires and interviews so this will create an interest among them for their participation (Majumdar, 2014).
Secondary data: Secondary data can be called as second hand data which is the already collected data that can be used for a particular research. The sources through which the data can be collected are publications, newspapers, magazines, journals, public records and historical documents etc.
In the present case, the determination of the current perception of customers regarding general merchandise division, Secondary data can be collected through financial statements of the company which will clearly show the profit trends of the company and will be helpful in determining the areas of company’s sales and profits and even data can be collected through annual reports which shows the company’s strategic policies and business plans of company. Data can be collected from publications in newspapers and magazines so that current position of company in the market can be determined. Secondary data can be collected through feedback from dealers and retailers so that the current trend in particular department can be identified. Even the sales report of the company can be helpful for showing the trending department in the market that what actually customers are going for and in this way customers’ perception regarding general merchandise can be ascertained (Francis, 2016).
Survey methodology includes the process of sampling of individual units from the population and the techniques of collection of data for the research. The process of survey methodology is such that it consists of finding answers by asking the questions that may or may not be answered. The method of conducting the survey into the business problem of Marks & Spencer that relates to the customer perception about the general merchandise division of the company includes collection of primary and secondary data through techniques and method of data collection such as questionnaires and interviews and online publications and other information about the company. The survey will include distributing questionnaire to the customers who visit the store of company requesting them to fill the questionnaire and submit. The questionnaires will also be sent to the customers or prospective customers on mail and the responses received in reply of mails will be considered for the information. Also questions will be asked from the visitors to the store personally and the responses received them will be noted down for the extraction of useful information relevant for the research. The summary of the responses will be used for the analysis as part of survey.
Sampling frame refers to as the set of population which is used as the source to identify the sample for the statistical treatment as a part of research whereas the population is the complete set of human resources which are used for gathering the information about the subject matter of the research. The method of sampling can be used for the collection of data through the survey. The target population for the research will include the customers and other visitors who come to the store of the Marks & Spencer Merchandise store as well as other retail stores of the company. The method of random sampling will be used for the selection of sample from the target population so that each customer of the company has the same probability of being chosen at any stage of the survey. The sampling frame will represent 60% of the target population which is a justified sampling frame for the sample selected to represent appropriately the population (Enrique, 2011).
The questionnaire that will be administered to the retail customers of Marks & Spencer for the collection of data for the survey into the customer perception about merchandise division of company is as follows:
- Select your gender
- Select your age group
- 0-15 years
- 15-25 years
- 256-40 years
- 40-60 years
- Above 60 years
- How frequently do you visit Marks & Spencer general merchandise division store?
- Very frequently
- From which section of Marks & Spencer general merchandise store out of home ware, clothing and shoes do you shop the most?
- Home ware
- None of these
- All of these
- Marks & Spencer offers a variety of merchandise stuff for customers belonging to all age groups and all income classes. Do you agree?
- Highly agree
- Highly disagree
- How much do you spend monthly while shopping at the general merchandise store of Marks & Spencer?
- £1,000 – £10,000
- £11,000 – £25,000
- £ 26,000 – £50,000
- £50,000 – £100,000
- Above £100,000
- What is the quality of services offered by the staff at M&S stores to assist you in finding the appropriate products and getting the billing and payment done?
- Very Good
- Do you prefer shopping at Marks & Spencer general merchandise store over other retail stores at your location?
- Are you satisfied with the quality of Marks & Spencer products at the general merchandise store?
- Highly Satisfied
- Highly unsatisfied
- Rate Marks & Spencer general merchandise store on the scale of 5 on an overall basis.
Calculation of representative values
|Year||Total Revenue(£)||Merchandise Revenue(£)|
Mean – It is the value which represents the average value of all variables for a given set of data. The mean of the revenues of M&S can be calculated as follows:
Mean = Sum of values/ Number of values
Mean of total revenue = £101,819.5/11
Mean of merchandise revenue = £44,018.3/11
Conclusion – It can be observed that the mean of Total revenue is £9256.32 and the mean value of merchandise revenue is £4,001.67. It can be concluded that the average total revenue of M&S is £9,256.32 earned by the company during the last 11 years whereas the average revenue from merchandise for the last 11 years of company is £4,001.67. The revenue earned by the company during the year 2015 was more than the average total revenue however the merchandise revenue in 2015 was less than the average merchandise revenue for the past years (Manikandan, 2011).
Median – It is the representative value which represents the middlemost value of the given set of data. It is calculated by using n+1/2 th term when the number of values is an odd number and average of n/2th term and n/2 +1 term when the number of values represents an even number. The median can be calculated as follows:
Median of Total Revenue = n+1/2 th term
= 6th term
= Revenue during the year 2010
= £ 9,536.60
Median of Merchandise revenue = n+1/2 th term
= 6th term
= Revenue during the year 2010
Conclusion – From the above calculation it can be observed that the median of the Total Revenue of the company is £ 9,536.60 and the median of merchandise revenue of the company is £4,152 which is higher than that of the average value in both the cases. It means that the middle value of the data is more than its average value.
Mode – It is the representative value which represents the highest frequency for the given set of data. Thus mode of a set of data is the value is the highest frequency. The mode of the data can be calculated as follows:
Mode = Highest Frequency
From the table of revenues it can be observed that none of the value for the revenues of the company during the last eleven years has been repeated. Thus the mode cannot be calculated for the revenues of M&S. It can be calculated that the revenues for all the years are heterogeneous and none of the values have been repeated (Ricardi, 2011).
It is the measure of dispersion which is used to quantify the amount of variation or dispersion of the mean for the data series. A low standard deviation indicates that the data values lie close to mean whereas on the contrary higher standard deviation suggests that the data value are likely to be spread over a wider range of area. Standard deviation is also known as the square root of variance and is represented by sigma σ. Standard Deviation for the given set of data can be calculated by using the following formula:
The standard deviation of the data that relates to the total revenue and merchandise revenue of M&S for the last 11 years is as follows:
|Total Revenue||Revenue Merchandise|
It can be observed that the standard deviation of both the data values total revenue as well as merchandise revenue is higher which means that the data values are not close to mean but are spread over a wide area. The dispersion or variance is higher of the values from the mean (Mahajan, 2014).
Quartiles of total revenue and general merchandise division sales
Quartiles are the measures which divide the whole set of data into four equal parts. The 25th quartile also known as first quartile or lower quartile is the number which represents 255 of data. Second quartile is the median which divides the data into two equal parts and third quartile or upper quartile represents 75% of the data. The quartiles of the sales of the company of 11 years from 2005 to 2015 are as follows:
|Quartile 1 (25th)||8913.525||3970.875|
|Quartile 2 (50th)||9638.45||4074.8|
|Quartile 3 (75th)||10097.53||4162.775|
The above quartiles can be used to draw valid conclusions about the sales of Marks & Spencer as these quartiles represent the number which is 25%, 50% and 75% of the complete set of data. It can be observed from the quartiles so calculated that £ 8913.525 represent 25% of the total sales and similarly £3970.875 also represent 25% of the merchandise sales. The second quartile represent the middle point of the sales of company for 11 years and similarly the third quartiles for both sections of sales indicate the sales which is 75% of the total sales and merchandise sales (Kolacz, 2016).
Correlation refers to as the relationship between two distinct variables which are connected to each other. Correlation coefficient is the measure which is used to quantify the relationship between the variables or the correlation between them. If two variables Are perfectly correlated then the change in the value if one variable represent a proportionate change in the value of other and vice versa. The degree of correlation between the variables is identified by the coefficient of correlation. The coefficient 1 represents the perfect correlation. The positive correlation represents the movement of both the variables in the same direction whereas the negative correlation represents the movement of both the variables in opposite direction.
The correlation coefficient of which represents the measure of degree of correlation between the Total Revenue of Marks & Spencer and the revenue from the general merchandise division is 0.999738. it means that the total sales of Marks & Spencer as well as sales from the merchandise store are almost perfectly correlated and therefore change in one of them will result in corresponding change in other also and vice versa. Both the total revenue and merchandise revenue move in the same direction on the time series graph (Hirata, 2014).
The following graph shows the total revenue earned by Marks & Spencer during the different periods consecutively from 2005 to 2015:
Analysis – From the time series graph of total revenue of the company it can be observed that there is an increasing trend in the total revenue from 2005 to 2015 since it has been continuously increasing for all the eleven years of analysis. Thus it can be concluded that the company has increasing profitability and growth potential as the increase in revenues will also result in increase in profits.
Analysis – From the above time series graph of the merchandise revenue of company it can be observed that the revenue from the sales of merchandise stuff including clothing, shoes and home ware has been fluctuating during the period of analysis of 11 years from 2005 to 2015. There has been substantial increase in the revenue from 2005 and 2006 to 2007 and 2008 after which the revenue declined in the year 2009. From 2010 the merchandise revenues again started increasing for the next two years after which it decreased but at a lower rate than the previous substantial decline. It can be concluded that the merchandise revenues are fluctuating as compared to the increasing total revenue (Zabukovee, 2015).
The following graph shows the relationship between the total revenue and merchandise revenue of company:
From the above scatter graph representing the relationship between the total and divisional revenue of the company it can be observed that there is a linear and positive relationship between the two variables. Both the sales values move in the same direction however, the merchandise revenues are fluctuating whereas the total revenues are increasing during the period of analysis. It can be concluded that the changes in one variable will affect the other variable since the merchandise revenues are part of total revenues during all the years (Abid, 2016).
Forecast estimation for 2016, 2017 and 2018
y = 281.5x +7567
y (2016) = 281.5*12 + 7567
y = £10,945
y (2017) = 281.5*13 + 7567
y (2018) = 281.5*14 + 7567
y = £11,508
Revenue General Merchandise
y = 39.78x + 3763
y (2016) = 39.78*12+3763
y = £4240.36
y (2017) = 39.78*13+3763
y = £4280.14
y (2018) = 39.78*14+3763
y = £4319.92
The following table represents the forecasted revenue for M&S:
|Year||Total Revenue (£)||General Merchandise Revenue (£)|
The R² equation of total revenue of M&S is to R² = 0.930 which means that the linear forecast is reliable to some extent since it is almost near to 1. The R² equation of group merchandise revenue is R² = 0.437 which means that the linear forecast of the merchandise revenue is less reliable since the value of R² is less than 1 and also far from 1. Thus it can be observed that the forecast of revenues of total revenue of the company is more reliable as compared to that of the forecast of the general merchandise revenue section.
Conclusion and recommendations
From the above analysis of the relationship of total revenues and merchandise division revenues it can be concluded that the total revenues of the company have been increasing during the past years but the merchandise revenues have been fluctuating. From the survey conducted into the business problem of M&S it can be concluded that the customers of the company are satisfied with the quality of the products and services on an average basis.
The following table represents the duration of the activities and constraints to determine the critical path of the project:
|Task||Description||Duration (Working days)||Constraints|
|I||Handover and go live||5||H|
The different paths in the network diagram and their duration are as follows:
A-B-C-F-G-H-I = 5+15+25+10+10+5+5 = 75 days
A-B-D-F-G-H-I = 5+15+15+10+10+5+5 = 65days
A-B-E-G-H-I = 5+15+20+10+5+5 = 60 days
Critical Path – Critical Path is the path which represents the longest duration among all the paths of the project. It is the shortest time required to complete the project. The critical path of the given project is A-B-C-F-G-H-I which represent 75 working days to complete the project.
The planned duration of the project is 75 working days =75/5 = 15 weeks. Since each week has only 5 working days therefore the planned duration of the project will be 15 weeks.
Calculation of non-critical tasks and float
|Activity||Duration||Late Start||Early Start||Total Float(LS-ES)|
The activities of the project which are not on the critical path or which have a total float which is not equal to zero are known as non-critical activities. From the above table it can be observed that the non-critical activities are D and E with the total float of 109 and 5 days respectively.
Calculation of Net Present Value and IRR
|Project A||Project B|
|If cost of capital is 10%|
|If cost of capital is 60%|
Brief Memorandum Report
i Cost of capital is 10%
If cost if capital for the projects is 10% the projects shall be accepted by the company since the Net Present Value from both the projects is positive. Out of the two projects Project A has higher NPV amounting to £41,713.49 as compared to the NPV of Project B which amounts to £37,885.51. The Internal Rate of return from Project A is 50% which is higher than that of project B of 39% therefore on the basis of IRR also Project A is considered to be more profitable. Hence the management of the company is recommended to accept Project A since it is more feasible at the cost of capital of 10% (Bas, 2013).
ii Cost of capital is 60%
In case the cost of capital of project is 60% then both the projects will not be profitable since the net present value will be negative for both the projects. Thus the management of the company is recommended not to invest in any of the projects if the cost of capital is 60%. Also the IRR of both the projects is higher than its cost of capital therefore the project is not considered to be profitable.
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