Cost-Benefit Analysis For Starting A Travel Agency In Norman Gardens

He has contacted you to carry out a cost-benefit analysis and a payback analysis to determine the financial viability of the proposed travel agency plan in Norman Gardens area. As a business analyst, you will conduct a cost-benefit analysis by comparing expected costs with expected benefits over a period of 7 years and advise Mr. Joey whether it is worthwhile continuing with the proposed plan inquestion.
In this assignment, you will:
1. Conduct a cost-benefit analysis using Microsoft Excel
2. Write up a report using Microsoft Word to demonstrate how you evaluated costs and benefits and determined payback period and advise Joey Tribbiani how to develop a business plan to start a new business.

Set Up Costs
Items	Time period over 7 years
Hardware/software costs	Unit cost	Quantity	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Computers	1,400	4	5,600				3,920
Server	2,500	1	2,500				1,750
Backup system	2,200	1	2,200				1,540
Printer	1,200	1	1,200				840
Photocopy machine	3,500	1	3,500				2,450
Software license	1,500	4	1,500		1,500		1,500		1,500
One-off costs
Consultant fee			20,000
Business registration fee			2,500
Office fit out/furniture			30,000
Staff training			5,000
Total			74,000	-	1,500	-	12,000	-	1,500
Cost reduction after 4 years	30%
Software license renewal fee	1,500

 

Operating Costs
Items	Time period over 7 years
Fixed Costs	Monthly	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Office rent	1,600	19,200	19,200	19,200	19,200	19,200	19,200	19,200
Business insurance	100	1,200	1,200	1,200	1,200	1,200	1,200	1,200
Internet connection	80	960	960	960	960	960	960	960
Staff salary	6,000	72,000	72,500	73,000	73,500	74,000	74,500	75,000
Loan payment	761	9,129	9,129	9,129	9,129	9,129	9,129	9,129
Variable costs
Electricity	200	2,400	2,448	2,497	2,547	2,598	2,650	2,703
Stationery	200	2,400	2,400	2,400	2,400	2,400	2,400	2,400
Domain name and website	90	1,080	1,080	1,080	1,080	1,080	1,080	1,080
Phone charges	100	1,200	1,200	1,200	1,200	1,200	1,200	1,200
Miscellaneous expenses	500	6,000	6,000	6,000	6,000	6,000	6,000	6,000
Total	9,631	115,569	116,117	116,666	117,216	117,767	118,319	118,872
Salary rise	500
Electricity rates rise	2%
Loan calculation
Annual interest rate	0.60%
Number of months of payments	84
Loan amount	50,000
Monthly payment	761

 

Benefits
Time period over 7 years
Items	Sales/Month	Income/Month	Income/Year	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Ticket sales	70,000	7,000	84,000	84,000	84,000	84,000	84,000	84,000	84,000	84,000
Holiday travel packages	10,000	1,000	12,000	12,000	12,000	12,000	12,000	12,000	12,000	12,000
Hotel bookings	15,000	1,500	18,000	18,000	18,000	18,000	18,000	18,000	18,000	18,000
Total	95,000	9,500	114,000	120,840	120,840	120,840	120,840	120,840	120,840	120,840
Sales Profit	10%

 

Escape Travel & Tours Cost Benefit Analysis
	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Set up costs	74,000	-	1,500	-	12,000	-	1,500
Operating costs	115,569	116,117	116,666	117,216	117,767	118,319	118,872
Benefits	120,840	120,840	120,840	120,840	120,840	120,840	120,840
Cumulative costs	189,569	305,686	423,852	541,068	670,835	789,154	909,526
Cumulative benefits	170,840	291,680	412,520	533,360	654,200	775,040	895,880
Return on investment (%)	-9.88%	-4.58%	-2.67%	-1.42%	-2.48%	-1.79%	-1.50%
Payback in dollars	(18,729)	(14,006)	(11,332)	(7,708)	(16,635)	(14,114)	(13,646)
Payback period in years	5

Q1. Defining cost benefit analysis and briefly evaluating its key components, while indicating how cost benefit analysis help small business enterprises start a new business:

With the help of cost benefit analysis organisation are able to understand the level of expenses and income, which could be generated from a particular investment or project. Moreover, cost benefit analysis is a globally used method, which compares cost of the project with its benefits. This allows the organisation to gauge into the financial viability of the project and make adequate investment decisions, which could increase their product in the long run. The main key components of the cost benefit analysis are list of alternative scenarios, identifying benefits & cost, comparison of alternatives, and sensitivity analysis, which allows the organisation to detect the financial viability of the selected project. Boardman et al. (2017) mentioned that with the help of cost benefit analysis organisations are mainly able to detect the relevant cash outflow and inflow, which can be conducted by the project.

The implementation of cost benefit analysis directly allows small business entrepreneurs to gauge into the risk and reward attributes of the project. This eventually helps small entrepreneurs to save the investment capital and detect investment opportunity, which could improve return from investment over the period of time. The use of cost benefit analysis directly allows the organisation to improve the level of income from investment, while detecting the actual expenses and benefits which could be generated from the investment (Johansson and Kristrom 2018).

Q2. Indicating what is payback period, while indicate the payback period for the travel business and providing adequate advice:

Payback period is an investment appraisal technique, which allows the organisation to understand the number of years that could be taken by the project for returning the initial investment capital. The payback period is essentially calculated to be within the life of the project to make the investment option viable, where the investment will be collected as quickly as possible. From the calculation that is been conducted for Joey Tribbiani the initial investment will not be collected within the life of the project, as the cumulative expenses is higher than the cumulative income of the project. Hence, on the basis of payback period the overall investment does not indicate a profitable investment for Joey Tribbiani, as the payback period is greater than the project life. On the other hand, Jonker, Junginger and Faaij (2014) argued that payback period does not incorporate time value of money, which directly reduces the financial viability of the investment appraisal technique to detect the actual financial position of the project to generate higher returns from investment.

Q3. Providing adequate recommendation to Joey Tribbiani:

Business objective:

The main business objective is to attain higher sales of selling tickets, holiday travel packages and making hotel bookings, as it will positively affect income stratum of the travel agency. The further objective of the business is to improve the level of returns by reducing the level of expenses from operations.

Service and product description:

The travel agency will sell tickets, holiday travel packages and make hotel bookings, as it will be the main income stream for the organisation. In addition, the customized travel packages could eventually help the travel company to acquire the required level of income, which could raise their profits from operations.

Marketing strategy and target market:

With the implementation of marketing strategy, the travel business could flourish and built adequate customer base. In addition, the use of online marketing system with the television advertisements could eventually help in improving the level of marketing presence to generate adequate returns from investment (Solomon, et al. 2014). The main target market for travel business are households, businesses and experience seekers. The household is mainly targeted with holiday packages and hotel bookings, which eventually allow the organisation to acquire adequate revenue from selling packages. Moreover, the target of business can be conducted by selling tickets and holidays bookings, which are conducted by employees of the organisation. Lastly, the accommodation of individuals who seek experience could help in generating revenues by selling holiday packages for different exotic destinations.

Financial plan and requirements:

The financial plan prepared in the above table are accurate, while reduction in expenses of employees could eventually help in improving their income streams. This deduction in expenses from 72,000 per year to 60,000 would provide an immense boost on the financial stability of the project. Hence, the move will allow the organisation to reduce the payback period to 2 years, which might help in gathering the required investment funds. Therefore, decline in salary expenses will eventually allow Joey Tribbiani to conduct the business successfully and generate higher return on investment.

Boardman, A.E., Greenberg, D.H., Vining, A.R. and Weimer, D.L., 2017. Cost-benefit analysis: concepts and practice. Cambridge University Press.

Johansson, P.O. and Kriström, B., 2018. Cost–Benefit Analysis. Cambridge University Press.

Jonker, J.G.G., Junginger, M. and Faaij, A., 2014. Carbon payback period and carbon offset parity point of wood pellet production in the South?eastern United States. Gcb Bioenergy, 6(4), pp.371-389.

Solomon, M.R., Dahl, D.W., White, K., Zaichkowsky, J.L. and Polegato, R., 2014. Consumer behavior: Buying, having, and being (Vol. 10). London: Pearson.