The cost-benefit analysis for the project has been calculated using simple payback. This method determines the cumulative net cash flows and determines the point at which the initial investment has been repaid. The cost-benefit analysis appears to suggest a solid case for going ahead with the project on financial grounds, as payback is achieved in year two.

This method has its advantages, especially when the project is being managed by non-financial personnel, because it is easily understood. It allows those responsible to ensure that the initial funds invested will be paid back and quickly make a return on that investment.

However, the decision ignores all future cash flows after the breakeven point. It also does not take into account the time value of money, nor the risk involved in a project. These could be accounted for by using net present value techniques or discounted payback, incorporating both time value and risk into the discount factor used for the calculation.

Additionally, the method of appraisal, when used correctly, only incorporates actual cash flows. Whilst Andrew might be more concerned about the educational benefit of the restaurant, presumably the college would like to ensure that the returns are consistent with other capital projects. There is an element of capital investment which is likely to be depreciated over the duration of the project. It may be that calculating the return on investment would give a clearer indication to the college of whether this project was financially worthwhile, although that method also has its limitations.

Alternatively, if the evaluation is for Andrew’s purposes only, rather than for the approval of the college directors, it may be that a traditional investment appraisal, using financial measures only, may not fully provide the justification for the project. Even if there were to be a cash outflow overall, the benefit of enhanced student performance may be sufficient to justify the expense. (See part b for further discussion of this.)

Analysis of costs

The costs all appear to be relevant to the investment appraisal, although may vary in their level of accuracy. However, there appear to be some costs missing from the appraisal. For example, note 4 suggests that food costs are likely to be 80% of revenue, but these have not been included. Either the benefit needs to be reduced to show net cash flow from revenues or a separate item needs to be recorded for the food costs.

The hardware and software seems to have been sourced and costs applied accordingly. Therefore, these should be included in the appraisal. There is no allowance for an increase in the annual maintenance fee, so the college will need to confirm that the price will remain the same over the next few years.

The electricity and gas charges may be difficult to forecast as, when the lunchtime café is active, there are presumably other appliances and parts of the college using energy sources at the same time. Again, there has been no allowance for an increase in these, but energy prices are likely to fluctuate over time and therefore this should be taken into consideration. The forecast is based on a single year only, whereas an evaluation of previous years may give an indication of the average annual growth in prices.

Staff overtime seems necessary if staff are needed to observe and assess the students in the evenings. However, it may be worth considering whether this could be carried out as part of their routine duties, with an evening replacing a day’s teaching, for example. Even if the overtime is seen to be necessary, an increase of 10% in year three seems excessive, unless the restaurant is to be open for 10% more hours over the week.

Analysis of benefits

Ward and Daniel classify benefits as observable, measurable, quantifiable and financial. These effectively lie on a continuum from observable benefits, which cannot be objectively measured, to financial benefits, which can be fairly accurately forecast in advance, such as specific cost savings involved in the disposal of a building. None of the benefits included in the cost-benefit analysis for the restaurant appear to be financial, being at best quantifiable.

Increased revenue – It is unclear how the forecast for revenue has been calculated, but it could be assumed that it has taken into account the number of diners who could be served in each sitting and the average meal price, given that an annual increase has been based on the estimated increase in diners and meal prices. This is an entirely new initiative for the college and it would be difficult for them to accurately forecast the number of diners in advance. It is unlikely that the customer group would be the same as the lunchtime café, which is a service to students, whereas this is a restaurant open to the public. An additional problem with forecasting may be the distance from town and the public transport which stops running at 22:00 daily. This may limit the number of diners later in the evenings. Therefore, this should be considered either a measurable benefit, whereby the actual financial benefits can only be accurately quantified after they have taken place or a quantifiable one, if the college has done sufficient research to forecast the revenue reasonably accurately.

Reputation is an observable benefit, which can only be determined by experience, and should not be included in the financial analysis. Whilst an improvement in student experiences could indeed lead to an increase in student numbers, and therefore revenue from course fees, there is no experience of this or information with regards to how this reputational impact will be forthcoming. There is no evidence of increased capacity for student numbers, nor of the actual number of students expected to enrol as a result of this initiative. It is also an intangible benefit in that an increase in student numbers could be attributed to many factors, not just to this initiative.

Economies of scale – It is difficult to understand what the analyst is referring to with this benefit. The notes mention equipment and supplies, but given that neither of these have any cash outflows associated with them in the investment appraisal, presumably, there should be no associated benefit either. This should not be included in the investment appraisal.

Should the above considerations be taken into account, the investment appraisal may resemble the following, and fail to pay back its investment:

A robust benefits management process should ensure that the college sees the best outcome from the restaurant initiative.

The purpose of the process is to enhance both the identification and the delivery of benefits expected from a project. Thus, the outcomes of the project will be maximised. The purpose may also include the reduction in non-value-adding activities from the project.

A benefits management process will include the following stages, although these may be repeated or revised throughout the process:

– Identify benefits

– Plan benefits realisation

– Execute benefits plan

– Monitor and evaluate results

– Establish potential for further benefits

In the context of Tailia College, the above stages would ensure that Andrew was able to maximise the potential for a positive outcome on his stated benefits, but would also allow him to consider benefits which he had not previously identified.

Identify benefits – At this stage Andrew would agree project objectives for the restaurant proposal. It appears that he is currently considering the financial benefits to the college as a whole (maybe this has been demanded by the board of directors) but is concerned that his educational benefits may not be achieved. However, this suggests that there should be a wider range of formal objectives than simply revenue or increase in student numbers. The benefits should be linked to the business strategy of the organisation, which is clearly the case when considering educational benefits within a college environment.

It is at this stage that benefit owners should also be assigned. By assigning an owner who will be responsible for the delivery of the benefit, there is likely to be a greater focus on the delivery of each of them, rather than disproportional concern for a single benefit. For example, a benefit owner could be assigned to the benefit of the enhanced grades, being responsible for designing the learning outcomes from the restaurant experience such that there is a clear learning outcome associated with it. A different owner, maybe from the marketing department, could be assigned to the reputational benefits.

The measures to determine the success, or otherwise, should also be determined at this stage, as should the current performance levels. For example, the desired increase in the number of student applications should be clarified and compared to the existing level of enrolments.

Plan benefits realisation – A benefits realisation plan will involve the completion of a benefits dependency network to link the investment objectives, traditionally seen in the investment appraisal, and the benefits to the business. As Andrew stated, if they deliver the benefits of improved student experience and learning, then the investment benefits should be forthcoming. The plan will show how the benefits are interlinked and what needs to take place to enable those benefits to be delivered. For example, the booking system will be an IT enabler, allowing the change to take place. If this does not deliver its objectives, the rest of the network will suffer.

Within the plan, the benefit owners should also identify those issues which could prevent the benefits from being delivered. For example, if staff are not available to oversee the restaurant, then it will be impossible to deliver the experience. The transport issue could be another limiting factor, so the college may consider an enabling change in the form of negotiation with the transport provider, or in the form of provision of its own transport.

Execute benefits plan – This is where the plan is implemented. The overall project manager would oversee the benefits plan and communicate with the benefit owners to ensure they are being delivered. It is at this stage that problems must be dealt with and plans changed where appropriate.

Monitor and evaluate results – Although monitoring will take place during the execution of the plan, there should be a formal evaluation process after the execution of the project. The benefits realisation review would normally take place later than typical post-project evaluations as it can take a prolonged period of time for all the benefits to be realised. For example, there is no expectation of increased student numbers in year 1, as presumably, they would not yet be aware of the initiative. This stage will assess whether or not the planned benefits have actually been delivered.

Establish potential for further benefits – When the project is under way, it may be that the college recognises the potential for further benefits, which it was unaware existed prior to the project.

The benefits management process is therefore important to ensure that the full benefits are delivered and that any further gains which could be forthcoming from this project are identified. Without the process, the enablers may not be identified, leading to failure before the project is really under way.