Business Management HL

Internal Assessment

Research question: Should ‘KKA BUILD- TECH’purchase two full sized excavators to

increase profits?

Intended for: KKA BuildTech

Session: May 2020

Word count:

Research proposal: 467

Executive Summary: 176

Body: 1933
Research Proposal:

● Research question:

Should ‘KKA BUILDTECH’ purchase two full sized excavators to increase

profits?

● The rationale for study:

‘KKA BUILDTECH’ is a construction business based in India, which constructs

buildings offering them for rent. It is a partnership between two people based in Chennai,

namely Ajay Agarwal and Kiran Agarwal. Established in 2007 and since then has been

facing a shortage of machinery and labor resulting in lower efficiency. KKA BuildTech is

unable to meet the high levels of demand they are receiving due to shortage of

excavators: Machines that use a hydraulic system in order to generate a force that controls

the mechanical arm of the machine in order to lift heavy objects (Hitch 2016). This causes

the demand to shift to other construction firms. Therefore, research will be conducted to

investigate if purchasing 2 excavators would be beneficial to KKA BuildTech.

● Areas of the syllabus to be covered:

1) 1.7 Organizational Planning Tools:

The Force Field Analysis

2) 1.7 Organizational Planning Tools:

Decision Tree

3) 3.8 Finance and Accounts:

Investment Appraisal

● Possible source of information:

 Primary Research

- Interview with Mr. Ajay Agarwal(Partner)

- Interview with the Mr. Ravi Chandresaker(Accountant)

Secondary Research

- List of Construction Equipment

- Profit and Loss Account and Balance Sheet of ‘KKA BuildTech’

Organizations and individuals to be approached:

- Organization: KKA BUILDTECH

- Mr. Ajay Agarwal - Partner

- Mr. Ravi Chandresekar - Accountant

Reasons for Choice of Method

○ Force Field Analysis – To assess the driving/restraining forces to determine the

viability of the change.

○ Decision Tree – To determine whether the investment in the machines would be

beneficial to the firm or not, in terms of an expected value formulated from the

calculations.

○ Investment Appraisal – to evaluate the decision of an investment and to measure

the attractiveness using payback period, net present value and average rate of

return.

○ Interview with a partner - Overview of the different aspects of the business and

various implications of the decision to be made.

○ Interview with Accountant - To obtain financial reports of KKA BuildTech and

discuss the financial feasibility of the decision.

○ Profit and loss account - To obtain financial condition of the firm in order to

assess the financial feasibility.

● Anticipated difficulties:

o Biased information could be received however this will be cross checked using

other sources and secondary information

o No information is available on the internet as it is a small company. Intricate

details can be obtained through frequent communication with either one of the

partners.

● Action plan:

July July July July August August Septem

15th 16th - 19th – 22nd - 8th – 29nd – ber 19th
 -18th 19th 21st August August Septem -
2019 7th 28th ber 18th Januar
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Word Count:467
 Business Management HL

Internal Assessment

Research question: Should KK BuildTech invest more money in capital to increase

profitability?

Intended for: KKA BuildTech

Session: May 2020

Acknowledgment

I would like to express gratitude towards Mr. Ajay Agarwal and Mr. Ravi

Chandresakar for trusting me with information and permitting me to conduct my study. I

would like to thank the employees for being cooperative and lastly, I would like to thank my

supervisor for motivating me and guiding me through my research.

TABLE OF CONTENT

1.INTRODUCTION 1
1.1. COMPANY BACKGROUND 1
1.2. CURRENT SCENARIO 1
 1.3. NEED FOR ANALYSIS 1
2. METHODOLOGY EMPLOYED 2
2.1. PRIMARY RESEARCH 2
2.2. SECONDARY SOURCES 2
2.3. TOOLS 2
2.4. DATA VALIDITY 2
2.5. LIMITATIONS 3
3. MAIN FINDINGS 4
3.1 PRIMARY DATA 4
3.1.2. Collated data charts 5
4. ANALYSIS & DISCUSSIONS 6
3.2. FFA (Force Field Analysis) 6
4.2 - DECISION TREE 8
4.3 INVESTMENT APPRAISAL 10
4. CONCLUSION 14
6. RECOMMENDATION 15
6. APPENDICES 17
6.1. LETTER OF AUTHENTICATION 17
6.2. INTERVIEW TRANSCRIPTS 18
6.3. SECONDARY P&L 23
EXECUTIVE SUMMARY

KKA BuildTech has always tried to scale since the beginning of its operations but has

never managed to meet the customer demand despite the extended marketing that they have

successfully performed(Agarwal) and this is because they are more labour intensive than

capital intensive so they are unable to achieve economies of scale(Agarwal) and therefore it is

necessary for KKA BuildTech to know the feasibility of the question ‘Should KKA

BuildTech purchase 2 full sized excavators?’. The tools used are force field analysis to

provide a perspective upon the restraining and driving forces of the operation and to check if

the driving forces outweigh the restraining forces. Then, the decision tree is used to help

figure the more profitable option by calculating the opportunity cost and lastly investment

appraisal is used to provide a perspective upon the company's profits.

The company should purchase the excavators to be more profitable in the long run if

they can afford the initial high investment.

1
 1.INTRODUCTION

1.1. COMPANY BACKGROUND

KKA BuildTech is located in Chennai and has been operating since 2007. It is in the

construction business(Agarwal) The company runs in a partnership. They are a small startup

and require heavy machinery to reach their target (Agarwal).

1.2. CURRENT SCENARIO

KKA BuildTech is unable to cope with demand and lacks the capacity to fulfill 41.20% of

their orders (Agarwal).This is due to insufficient machinery. This led to a decrease of 19% of

returning customers.The expense of the equipment is making the company unsure of whether

or not they should invest (Chandrasekar).

1.3. NEED FOR ANALYSIS

A full-sized excavator will cost around $250,000 (Chandrasekar). Purchasing both

machines would require opting for a long term loan but it would increase profitability in the

future. However, there is a possibility that the business might dissolve due to a limited

number of customers if they were to not purchase the machines.

Therefore, there is a need for analyzing the following research question-

“Should KKA BuildTech purchase two full sized excavators to increase profits?”

1
 2. METHODOLOGY EMPLOYED

2.1. PRIMARY RESEARCH

1. Interview with Ajay Agarwal (partner) of KKA BuildTech to gain an

insight to the functionality of the business.To discuss their aspirations

and vision.

2. Interview with Ravi Chandresekar (chartered accountant) to

understand the financial capabilities to support the decision.

2.2. SECONDARY SOURCES

- Profit and Loss account to cross check and validate the primary information obtained

from the interviews.

2.3. TOOLS

- The Force field analysis was conducted to gain an in-depth study of the various

driving and restraining forces.

- Decision tree was used to present the alternative scenario and see which is more cost

efficient.

- Profitability ratios to assess the overall profitability of the investment.

2.4. DATA VALIDITY

The information from the interviews was appropriate according to the financial

documents that were provided and the survey of employees went hand in hand with the

information provided. Since all of the information is valid, it can be said that the sources

contacted were reliable and clearly affiliated with the investment decision to be made.

2
2.5. LIMITATIONS

It was difficult to get the employees to open up about the problems as they felt

uncomfortable talking about the shortcomings of resources. Along with this, the profit

and loss account along with the balance sheet was difficult to obtain due to privacy

constraints.

3
 3. MAIN FINDINGS

3.1 PRIMARY DATA

3.1.1. Knowledge gained from interviews with Ravi Chandrasekar

(Chartered Accountant) and Ajay Agarwal (Partner).

Positives-

1. Gathered from Mr Agarwal

- Along with the purchase of the machines there will be timely execution to meet

demands of customers

- Increase in productive efficiency.

- Greater capacity for building and construction.

- Increase in sales revenue as demand would be met.

- Incentive for employees.

- Quality of construction sites would improve.

2. Gathered from mr Chandrasekar

- The business at the moment has Rs1,209,827.4 as savings.

- Financial Gain of one machine Rs 20,00000 and two machines Rs 40,00000.

- Average LifeSpan of excavators: 16 years.

- Predicted net cash inflow over 16 years: 680,00000 INR

- If they do not buy the excavators then they would continue to have profit of Rs

12,09,827.40.

- Excavators are purchased with a probability of 80% that increases sales by 40% and

expected profit would be Rs - 3,16,10,922.2.

Negatives-

1. Gathered from Mr Agarwal

4
 - Initial investment is high.

- KKA BuildTech is a small business so putting in such a large amount of money is a

difficult decision.

- Due to the pressure of making the business profitable again, harmony and teamwork

could be a concern to the business.

2. Gathered from Mr Chandresaker

- Two machines will cost a total of $250,000 (Rs 3,43,80,000.00).

- The machines have high maintenance costs and are prone to eventual damage.

- Salaries for new employees would be an additional cost.

- Excavators are purchased with a probability of 20% that sales increase by 25% and

expected profit would be Rs - 3,22,11,672.5.

Opinionated input of interviewees about purchasing the excavators

- Capacity to meet demand will increase.

- Initial investment is high and therefore extremely risky

- Efficiency will increase

- Excavators might get damaged by the employees due to lack of experience.

- there is an 80% chance that the sales would increase by 40%. Likewise, there

is a 20% chance that the sales would only increase by 25%

3.1.2. Collated data charts

Net cash flow made from rentals of excavators- Rs 7,487,650

Net cash flow made per machines of excavators in the same duration as rentals- Rs 2,600,000

5
 4. ANALYSIS & DISCUSSIONS

3.2. FFA (Force Field Analysis)

The force field analysis tool measures the driving forces against the restraining forces to

compare them. This allows the assessment of whether the decision should be made or not

(Hoang 2014).

6
 The forces against change (restraining ) have fewer points i.e. 11 compared to forces for

change (driving) i.e. 17. Each aspect was scored on a scale of 1-5. Greater capacity of

production is important as this means that they can fulfill the demand they receive. This

increases customer loyalty and prevents decrease in demand(Agarwal). Therefore, this has

scored 5. This also increases sales revenue as they are able to supply more and therefore

receive more orders and increasing sales revenue is one of the main objectives of the business

and therefore it is given a score of 4. The increase in equipment gives an incentive to

employees to work harder and a happier workforce always leads to a more successful

business and so the score of 3 is given. The inflow of better equipment will improve quality

which is extremely essential and that is why the score of 5 is given. (Agarwal)

These machines are high maintenance as they are full sized excavators so this increases

their costs and is rated 3. The initial investment is extremely high and therefore it is very

risky as it could be a make or break decision for the business and that is why the high score of

4 is given to this factor. The equipment is prone to damage as it will be in a rigid environment

but this is given a low score of 2 because with proper maintenance the damage can be

minimal. The labor cost for employees to use the excavators will add to the cost but this is

not such a great factor due to the minimal amount and is therefore given a score of two.

After comparing both forces it can clearly be seen that the driving forces are greater than

the restraining forces and therefore through this tool it can be said that KKA BuildTech

should purchase two full sized excavators. However, one limitation of the tool is that the

score is given by the objectives of the firm so there might be personal bias. And so there is no

accurate measure to identify the qualitative factors in an unbiased manner and so the decision

tree was created to analyse quantitative factors, in this case the expected outcome of the

purchase.

7
 4.2 - DECISION TREE

The decision tree is a decision-making tool which helps guide businesses in making

choices. It represents the choices with their expected outcomes in the form of numerical

values (Hoang 2014).  The decision tree shown below is subtracted from all costs and

shows net values.

8
 The decision of buying the excavators is represented by Node ‘A’. Node ‘B’ shows

the profits the business would have if the decision was made and the probabilities through

which later the expected value was calculated. If KKA BuildTech decides not to make the

decision then profits would be of Rs 12,09,827.40(Chandresaker). The two possible

scenarios if they buy the excavators are shown. The increase in sales and probability of

those increases were obtained through primary information. The increase in sales by 40%

has a probability of 80 % while increase in sales by 25% has a probability of 20%

(Chandrasekar).

Table 1: Decision tree calculations

Excavators are not purchased Profit of Rs 12,09,827.4

probability of 80% that sales increase by (0.40 * 4,005,002) + 4,005,002 -

40%. (2,795,175 + 3,44,22,100) = Rs -
3,16,10,922.2

probability of 20% that sales increase by (0.25*4,005,002) + 4,005,002 - (2,795,175

25% + 3,44,22,100) = Rs -3,22,11,672.5

Expected value (-3,16,10,922.2) + (-3,22,11,672.5) = Rs -

6,38,22,594.7

Through the use of a decision tree it can be seen that profits before investment are

higher than the expected profits after investment in the two excavators and therefore

according to this tool, the decision of buying the two excavators should not be made.

However, time is not considered a factor in decision trees and so the investment appraisal

was conducted in order to further evaluate the returns of the possible decision at hand.

9
 4.3 INVESTMENT APPRAISAL

This tool can assess the financial performance by calculating the financial outcomes

of the potential decision (Hoang 2014).

1. Payback period

PBP calculates the amount of time that the investment will take to return the funds

invested (Hoang 2014).

Table 2: PayBack Period Basis

Formula: Cost Anticipated Anticipated gain

gain from one from two

excavator excavators
initial investment Rs Rs 20,00000 Rs 40,00000
¿
contribution per month
3,43,80,000.00

Table 3: PayBack Period Calculations

Time period Net cash inflow ( INR) Cumulative cash inflow

( INR)

Year 1 4,000,000 40,00000

Year 2 4,000,000 80,00000

Year 3 40,00000 120,00000

Year 4 40,00000 160,00000

Year 5 40,00000 200,00000

Year 5 40,00000 240,00000

Year 6 40,00000 280,00000

Year 7 40,00000 320,00000

Year 8 40,00000 360,00000

Year 9 40,00000 400,00000

Year 10 40,00000 440,00000

10
 Year 11 40,00000 480,00000

Year 12 40,00000 520,00000

Year 13 40,00000 560,00000

Year 14 40,00000 600,00000

Year 15 40,00000 640,00000

Year 16 40,00000 680,00000

Table 4: Final Payback Period

Calculation
343,80,000 - 320,00000= 23,80,000

Year 8 net cash flow = 40,00000 / 365 = daily cash inflow = 10,958.904

2380000 / 10958.904 = 217.17

PBP - 7 year and 217.7 days

2) Average Rate of Return

This tool shows the profits as a percent of the whole amount invested (Hoang 2014).

It is a quantitative tool showing average profits from the investment.

Formula:

ARR = (total profits during projects lifespan / number of years the project lasted for) / Initial

investment amount (Hoang 2014).

total profits duringlife span

number of years project lasted
ARR=
Initial Investment

The average lifespan of both the excavators are 16 years(Chandresaker).

The total predicted net cash inflow through the 16 years is 680,00000 INR(Chandresaker).

The profit would be 680,00000 - 3,43,80,000 = 33620000 INR

11
Profit per year in accordance to symmetry would be 33620000 / 16 = 2101250 INR

Table 5: Average Rate of Return Calculations

Life Span Predicted Net Cash Total Profit Profit per year

flow (16 years)

16 years 68,000,000 68,000,000 – 33,620,000/16

34,380,000 = 2,101,250

= 33,620,000
Calculated ARR:
2101250
Χ 100 = 6.111%
34,380,000

3) Net Present Value

NPV calculates the present value in accordance with the discount factor (6% in this case) and

balances it out through cost of investment (Hoang 2014). For this study, the predicted rate was

6% calculated in accordance with the interest rate (Chandrasekar).

Table 6: Average Rate of Return Calculations

Year Net cash inflow Discount factor present value

1 40,00000 0.9434 37,73,600

2 40,00000 0.8900 35,60,000

3 40,00000 0.8396 33,58,400

4 40,00000 0.7921 31,68,400

5 40,00000 0.7473 29,89,200

6 40,00000 0.7050 28,20,000

7 40,00000 0.6651 26,60,400

8 40,00000 0.6274 25,09,600

9 40,00000 0.5919 23,67,600

10 40,00000 0.5584 22,33,600

12
 11 40,00000 0.5268 21,07,200

12 40,00000 0.4970 19,88,000

13 40,00000 0.4688 18,75,200

14 40,00000 0.4423 17,69,200

15 40,00000 0.4173 16,69,200

16 40,00000 0.3936 15,74,400

TOTAL 64000000 ---- 40424000

40424000 - 34380000 = 6044000 INR

The PBP is 7 years and 217.7 days which is about half the lifespan of the excavators and

therefore promotes the purchase of the excavator. The ARR is low for the investment and the

return it will get but the net present value is 6044000 which also advocates for the business and

promotes the purchase of the machinery. So according to investment appraisal, KKA BuildTech

should purchase two full sized excavators.This can be said due to the values of the PBP which

leads to long term profits and Net present value would still increase.

4. CONCLUSION

The focus has been to answer research question : ‘Should KKA

BuildTech purchase two full sized excavators to increase profits?’

The driving forces had a total of 17 points whereas the restraining According

to the force field analysis, KKA BuildTech should purchase the excavators as the

driving forces have weighed more than the restraining forces. This implies that they

will benefit in terms of qualitative factors which focus on the vision and goals of the

business.
13
 The decision tree goes against the decision as it shows great loss of profits

compared to the other alternative scenario which is not to purchase the excavators.

The investment appraisal tells us to go for the decision as the PBP is half the

lifespan and the NPV is impressive so in the long term there will be a financial gain.

6. RECOMMENDATION

Therefore, KKA BuildTech should invest in the excavators as it will increase revenue in

the long run within the products’ lifecycle. However, it would be beneficial if they were to

also increase brand awareness and let people know about their existence. The company can

use many methods to increase profits and expand the business which could have also been

studied in this investigation and the different aspects of the purchase of the machines such as

the motivation of workers could be studied.

14
 5. BIBLIOGRAPHY

Primary sources

- Agarwal, Ajay. Personal Interview. July 25th. 2019.

- Chandresaker, Ravi. Personal Interview. July 26th. 2019.

Books

- Hoang, P., 2014. Business Management. 3rd ed. Victoria Australia: Paul

Hoang, pp.176, 174, 172, 40.

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 Date Accessed : November 2019

References

Websites

- Hitch, Rotary, et al. “Use of Excavator in Construction.” Basic Civil Engineering, 21

Sept. 2016, www.basiccivilengineering.com/2015/04/use-of-excavator-in-
construction.html.

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 6. APPENDICES

6.1. LETTER OF AUTHENTICATION

6.2. INTERVIEW TRANSCRIPTS

8.2.1 - Interview with Ravi chandrasekhar , accountant , of KKA buildtech

1) What is the current financial situation of the business?

The company is not big yet so the finance is limited. We are doing well with the

available resources but if we want to see bigger numbers we will have to grow.

2) What do you do when you face a financial emergency?

We face financial emergencies very rarely and usually are filled through company

finance but rarely do we take loans from banks at interest rate.

3) How can the business become a big scale company?

We have demand but we are unable to meet the demands due to an inability to produce at

such large scales as we have less capital and therefore it takes more time to be efficient. We

are losing customers as we are not able to provide a good turnover rate. If we want to grow

then we have to invest a hefty sum of money into expanding our workforce and purchase

heavy construction equipment. This is a very big investment but if we want to grow and

become a big scale company then we will have to expand our equipment. We have good

business sense and knowledge so we just need the equipment to execute these.

17
4) Can you verbally perform a small SWOT analysis for us?

The SWOT analysis is something we’ve been updating since the past 3 years. The most

important strength of the business is its quality. We are a very premium quality brand and this

attracts more customers but here we are presented with a weakness as well which is the

inability to produce at that demand so we are unable to meet the demand which leads to loss

of customers and ultimately loss of customer loyalty. Another strength is that the business has

been active since 2007 and therefore we are engaged with the environment around us and get

help from people around us which can also be considered as an opportunity. At the same

time, a weakness is an inability to expand from this area and hence we are not well

recognized in other areas. We have good businessmen as part of our team and that helps take

the best decisions which is a very big strength. At the same time, a weakness is less labor

force to achieve efficiency. A few opportunities are familiarity with the location as this gives

us a degree of power in the area that we operate. We also have good relationships with big

construction companies and therefore it provides us with great expertise. A few threats are

the water scarcity in Chennai, the extremely hot weather in the city which dehydrates the

workers.

5) Would purchasing 2 excavators help the business?

Yes, this would definitely help as we will be able to meet the demands and improve quality.

This would increase the credibility that we have and make us more efficient. It will make the

burden on the workforce less and allow them to think openly without being stressed. It is an

investment for the long run. It will also provide an incentive to employees. Ultimately,

increasing sales revenue.

6) What will the cost of these excavators be?

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Both the excavators together will cost us around 500 thousand dollars. In addition to this

there would also be high maintenance costs.

7) Will there be any running continuous costs?

Yes, the maintenance costs will be high and the labor cost for running the machines will also

be recurring monthly. Another cost would be increased labour costs to run the machinery.

8) Are you in favor of buying the excavators and state the reason?

I think we should not purchase the excavators now because it is a very big risk which as a

small business we are not ready to take. Of course, it will surely increase revenue and status

but we should plan to purchase them in the long run when we have a stable amount of

finance. The investment at the moment, in my opinion, is too high.

9) How much finance does the business currently have and what is the expected gain from the

machines?

The business currently has Rs 1,209,827.4 and the expected gain from one excavator is Rs

20,00000 and from two excavators is Rs 40,00000. Currently we possess 2 pick up trucks

costing Rs 10,42,720, 10 Swanson squares costing Rs 4,468 and 1 rental crane costing Rs

33,516 per month.

10) Provide us with a perspective of the basic finances covering and resulting from the

purchase of the excavators.

Okay, so, the approximate lifespan of the machinery is expected to be sixteen years and the

net cash inflow is expected to be Rs 680,00000 over the course of the 16 years. Sales could

19
increase by 40% through an 80% probability or increase by 25% only which has a 20%

probability.

11)What discount factor should be used in the investment appraisal analysis?

Looking at the interest rates and the basic financial background of the situation, a 6%

discount factor would be appropriate.

8.2.2 - Interview with partner Ajay Agarwal

1) Could you introduce the business to us?

We are in the construction industry and real estate. We build buildings and apartments

according to our plans and then give them out for rent for malls. For example,

Bergamo mall in Chennai is one of our most successful projects. We have been

operating since 2007 and are running with good quality production. We are unable to

do as many projects as we would like to in one year due to a lack of equipment. We

have good laborers who are happy working for us with the salary they receive. We

have a good experienced team and a good known location in Chennai.

2) What are the strengths of the business?

We have a good team as I stated and they are all happy. We have good experience on

our side and harmony exists between the partners which is always very important and

happy partners always make more money.

3) What are the weaknesses of the business?

A few of the weaknesses include a lack of resources and an inability to meet demands

so therefore we are losing customer loyalty which is a very big problem for a business

that is trying to grow.

20
 4) How do you think that buying new excavators will help?

This would help because we will be able to scale and become big in a short time so it

would solve all the problems that the business is currently facing. We will have

greater capacity for building.

5) What are your opinions on buying the two excavators?

I think it would solve the problems but it is extremely risky as it is a very very high

investment. We would have to think thoroughly before making the decision as it could

make or break the business. It could also cause conflict in the company due to conflict

in opinion.

6) Do you need to hire more workers?

If we purchase the machines then we would have to hire a very small workforce as we

need sufficient workforce only to operate the excavators but if we do not buy the

machines then we will need massive amounts of labour to scale. And, the workforce

that we possess would be extremely motivated due to the technological revolution.

21
6.3. SECONDARY P&L

22