Relationship Marketing on Customer Loyalty †MyAssignmenthelp.com

Question: Discuss about the Relationship Marketing on Customer Loyalty. Answer: Introduction: The company chosen for the purpose of the assignment is Tesco PLC. Tesco PLC, which is trading in market with the name Tesco, is a listed company on the London Stock Exchange. Tesco is essentially a general merchandise and grocery retailer and is headquartered in Welwyn Garden City, Hertfordshire, England, United Kingdom. Tesco tops the chart both in terms of revenue and profits incurred in a particular financing year. To be clearer Tesco is the third largest retailer firm in terms of incurring profits and the ninth largest retailer firm in terms of incurring revenues in the world. It is a public limited company and has stores in over 12 countries all over Europe and Asia. Tesco PLC also holds the position of being the leader in the grocery market in United Kingdom. Tesco alone has a retail market share in groceries of 28.4% in UK. Jack Cohen founded Tesco in the year of 1919. Since 1919, Tesco has expanded its business rapidly and has spread its retailing business over a vast range of diversified products like electronics, toys, software, petrol, telecoms, financial services and furniture. The core competencies of Tesco that has enabled the company to reach such a height are that it has the ability to achieve commendable operational efficiency. The management of the retailer firm has an in-depth knowledge about the customer base that it handles along with the skills to employ suitable methods in order to grow and nurture business in accordance to the changing needs and preferences of the consumers (Wood, Wrigley and Coe 2016). Tesco as a firm believes in developing the required talent from within the organization instead of hiring skilled workers from the outside. This proves that the firm holds a great passion for the business it upholds and therefore manages the highly complex and critical environment of the organization with the help of motivated and self-driven teamwork. The philosophy of the firm lies in the fact that it believes not only in generating enough profit but also in providing quality products to its customers by meeting the needs of the customers through necessary product innovation. The firm also believes in providing a healthy working environment to its employees by developing a culture of mutual respect and trust within the organization (Imrie and Dolton 2014). The major improvisations and undertakings by Tesco in the last five years can be listed as follows: In 2013, Tesco opened its sixth Grocery Dotcom Centre in Erith. This centre has the latest technology and features installed in order to support the delivery business for home grocery by Tesco. In 2014, Tesco entered into a joint venture with the Tata Group in India in order to enter the Indian food and grocery market. Tesco re-launched its premium food brand Tesco finest in UK with over a range of 400 new products also in the year of 2014. In the recent years, Tesco also has contributed to its corporate social duties in a huge way and has successfully been able to become an inspiration for the corporate world. For instance, the firm in the year of 2016 did launch a new scheme of offering free fruits to children during the course of shopping in order to develop healthy food habits among them (Tescoplc.com, 2017). The same day delivery of grocery made Tesco the worlds first retailer in the world to achieve such a commendable task. Lastly, the year of 2017 also marked 20 years of service provided by Tesco Bank. The annual report produced by Tesco PLC for the financial year of 2016 gives a detailed overview into the health of the entity as a group and the current action plan of the group. As provided in the annual report Tesco, in order to match up with the constantly changing needs and preferences of the customers and to regain its competitive edge has undergone certain changes (Ismail 2017). Tesco after enough research has arrived at the fact that the three major demands brought forward by its customer base are that they want their shopping trip to be easier. Secondly, they are in need of better availability of diversified products on a daily basis and thirdly the consumers want lower and stable prices of the products. Highly fluctuating prices confuse the customers and restrict them from trusting the firm. Tesco, in order to meet up to these demands of its customers have undertaken certain changes in the business operations. The firm has taken an initiative in order to make the store structure more simplified. It has invested in more than 9000 customer-oriented roles in their stores (Anon, 2017). In order to measure the effectiveness of the firm, it has been compared with another of the edge retailer firm, Sainsburys. Sainsburys also has its headquarters in UK and is the owner of the second largest chain of super markets in United Kingdom. John James Sainsbury founded the company of Sainsburys in the year of 1869. Previously before Tesco had emerged in the market, Sainsbury ruled the retail market of groceries in United Kingdom (Khan and Korac Kakabadse 2014). Both Tesco and Sainsburys has been facing a hard time in terms of profitability and other related issues but the turnaround plan and the implementation of such a plan has not been so much effective in Sainsburys as it had been in Tesco (Brannen, Moore and Mughan 2013). It is obvious that none of the companies are expected to deliver an excellent performance in the current year but the percentage by which Tescos earnings are forecasted to increase in the future financial years to come is much higher than that of Sainsburys. The major reason behind this is that the CEO of Sainsburys has been internally promoted to such a position. Therefore, he would lack the necessary skills to restructure the entire business operations that are essential in boosting the profitability of the firm. Moreover, the turnaround plan chalked out by the Sainsburys management team does not appeal much to its shareholders. It does not motivate its employees to work for the interest of the firm in order to boost its profitability. Therefore, though both the companies shares are listed on the London Stock exchange, the much more appealing growth prospects and the license to cut, sell and change up to whatever lengths are necessary make the shares of Tesco a preferred choice in the present times. Thus, as it is apparent from the above discussion that Tesco is at a much better position in comparison to its fellow competitor both in terms of current and future profitability and goodwill (Liu, Luo and Yuan 2015). As stated in the question a critical analysis of the financial performance of both Sainsburys and Tesco has been carried out. The ratios that have been calculated are the following: Profitability Ratios:- Particulars Details Tesco Plc:- Sainsbury Plc:- 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Revenue A 64,826 63,557 62,284 54,433 55,917 23,303 23,949 23,775 23,506 26,224 Gross profit B 4,089 4,010 (2,112) 2,854 2,902 1,277 1,387 1,208 1,456 1,634 Net profit C 124 974 (5,741) 138 (40) 614 716 (166) 471 377 Operating profit D 2,188 2,631 (5,792) 1,046 1,017 820 943 76 606 427 Total assets E 50,129 50,164 44,214 43,904 45,853 12,695 16,540 16,537 16,973 19,737 Current liabilities F 18,985 21,399 19,810 19,714 19,405 3,115 6,765 6,923 6,724 8,573 Gross margin B/A 6.31% 6.31% -3.39% 5.24% 5.19% 5.48% 5.79% 5.08% 6.19% 6.23% Net margin C/A 0.19% 1.53% -9.22% 0.25% -0.07% 2.63% 2.99% -0.70% 2.00% 1.44% Return on capital employed (ROCE) D/(E-F) 7.03% 9.15% -23.73% 4.32% 3.85% 8.56% 9.65% 0.79% 5.91% 3.82% The above table depicts three ratios that have been calculated on the basis of the financial performance by Tesco and Sainsbury for the past five financial years. As evident from the table the gross margin ratio of Tesco show a stagnant rate for the financial years of 2013 and 2014, but drop unprecedentedly in the year of 2015 to a negative percentage of 3.39% but the firm manages to turn around in 2016 by incurring a positive gross margin ratio of 5.24% and 5.19%. The gross margin ratio essentially refers to the rate of sales of inventory. Therefore, it is evident from the rates mentioned above that though Tesco had undergone a huge setback in the year of 2015, but the group had enough resources to turnaround and be back in business in the next financial year. In case of Sainsbury the scenario is not so much grueling as the firm has maintained a stable and upward increasing trend of gross margin ratio (Brannen, Moore and Mughan 2013). Next, the net margin ratio refers to the rate of revenue incurred by a firm that is converted directly into profit. The net profit margin ratio of Tesco shows a negative percentage in the financial years of both 2015 and 2017 but the percentage rates differ by a huge amount. In 2015, Tesco incurs a net profit margin ratio of 9.22% indicating the financial turmoil in which the retailer firm has been in. In 2017, Tesco again incurs a negative net profit margin ratio of 0.07%. This indicates that though the firm has incurred revenue in the financial year of 2017, the conversion of such revenue into profit has been over casted by the expenditure incurred on cost of goods sold or other issues like technology disruption. Sainsbury on the other hand also show a negative net margin ratio of - 0.7% in the year of 2015 after which the net margin ratio shows a positive but gradually declining rate indicating a decreasing trend in the rate of conversion of revenue into profits (Mollah 2014). The return on capital employed refers to the return from the investment projects that a particular company has undertaken. In case of Tesco as it is evident from the table the year of 2015 has marked negative returns indicating no turnover from the investment project but the in the following years the company has obtained low but positive return from its investment projects. In case of Sainsbury the financial year of 2015 has marked a positive but minimal return, following which the company has incurred desired returns from its investment projects or undertakings. In the current financial year of 2017, the return on capital employed of Tesco seems to be more by a percentage of 0.03% than that of Sainsbury. This proves the fact that in spite of the hardships faced by Tesco the firm manages to obtain optimum return from the capital employed (Jones, Comfort and Hillier 2016). Liquidity Ratios:- Particulars Details Tesco Plc:- Sainsbury Plc:- 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Current assets A 13,096 15,572 11,958 14,828 15,417 1,901 4,362 4,421 4,444 6,312 Inventories B 3,744 3,576 2,957 2,430 2,301 987 1,005 997 968 1,775 Current liabilities C 18,985 21,399 19,810 19,714 19,405 3,115 6,765 6,923 6,724 8,573 Current ratio A/C 0.69 0.73 0.60 0.75 0.79 0.61 0.64 0.64 0.66 0.74 Quick ratio (A-B)/C 0.49 0.56 0.45 0.63 0.68 0.29 0.50 0.49 0.52 0.53 The above table shows the current ratio and the quick ratio of Tesco and Sainsbury for the past five years. The current ratio essentially refers to the liquidity position of a company that is the ability of the company to pay off its short term obligations with the help of its current assets. In case of Tesco as it is evident from the above table the liquidity position of the company though is positive but is not high enough. A good sign about the liquidity position of Tesco is that it shows an increasing trend indicating that the firm is moving towards a healthy financial and liquidity position. In case of Sainsbury, the liquidity position of the company is not enough high and shows a stagnant rate, the year of 2017 only being an exception. The quick ratio also known as the acid-test ratio reveals a more focused view into the liquidity position of the company as it does not include components like inventory that is more difficult to liquidate. Even in case of quick ratio as it is evident from the above table, Tesco has a sturdier liquidity position in comparison to Sainsbury. Efficiency Ratios:- Particulars Details Tesco Plc:- Sainsbury Plc:- 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Cost of revenue A 60,737.00 59,547.00 64,396.00 51,579.00 53,015.00 22,026.00 22,562.00 22,567.00 22,050.00 24,590.00 Opening inventory B 3,598.00 3,744.00 3,576.00 2,957.00 2,430.00 938.00 987.00 1,005.00 997.00 968.00 Closing inventory C 3,744.00 3,576.00 2,957.00 2,430.00 2,301.00 987.00 1,005.00 997.00 968.00 1,775.00 Average inventory D=(B+C)/2 3,671.00 3,660.00 3,266.50 2,693.50 2,365.50 962.50 996.00 1,001.00 982.50 1,371.50 Opening payables E 11,234.00 6,036.00 5,831.00 5,076.00 4,545.00 2,740.00 1,908.00 1,846.00 2,089.00 2,082.00 Closing payables F 6,036.00 5,831.00 5,076.00 4,545.00 8,875.00 1,908.00 1,846.00 2,089.00 2,082.00 2,685.00 Average payables G=(E+F)/2 8,635.00 5,933.50 5,453.50 4,810.50 6,710.00 2,324.00 1,877.00 1,967.50 2,085.50 2,383.50 Inventory turnover 365/(A/D) 22.06 22.43 18.51 19.06 16.29 15.95 16.11 16.19 16.26 20.36 Payables turnover 365/(A/G) 51.89 36.37 30.91 34.04 46.20 38.51 30.37 31.82 34.52 35.38 The above table shows the efficiency ratio of Tesco and Sainsbury for the past five financial years. Efficiency ratio refers to the ability of a company to utilize its assets and liabilities internally. Efficiency in terms of usage of inventory or inventory turnover and repayment of liabilities or payable turnover has been used as a scale of measurement of the efficiency of the firms in the above table. Therefore, as it is evident Tesco represents a decreasing trend of efficiency revealing that the company has not achieved the desired turnover from inventory or has not ensured the optimum utilization of the inventory. In case of Sainsbury the efficiency ratio of inventory turnover has been increasing since the last five years with an increasing trend indicating that the company has ensured obtaining the desired turnover from inventory (Cushman and Burke 2014). In case of repayment of liability or the payable turnover ratio Tesco has observed a decreasing trend indicating the inabilit y of the firm to pay off its suppliers or other stakeholders. However, the year of 2017 has been an exception displaying a turnaround for Tesco as the efficiency ratio has increased to a 46.2%. However, in the case of Sainsbury the percentage has been moving around a stagnant 35% indicating no improvement in the efficiency in paying out its stakeholders. Solvency Ratios:- Particulars Details Tesco Plc:- Sainsbury Plc:- 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Total liabilities A 33,486 35,449 37,143 35,278 39,415 6,962 10,537 10,998 10,608 12,865 Total equity B 16,643 14,715 7,071 8,626 6,438 5,733 6,003 5,539 6,365 6,872 Operating profit C 2,188 2,631 (5,792) 1,046 1,017 820 943 76 606 427 Interest expense D 445 447 499 498 517 128 131 123 120 114 Gearing ratio A/(A+B) 0.67 0.71 0.84 0.80 0.86 0.55 0.64 0.67 0.62 0.65 Times interest earned ratio C/D 4.92 5.89 -11.61 2.10 1.97 6.41 7.20 0.62 5.05 3.75 Gearing ratio refers to the ratio that compares the owners equity with the funds borrowed by the company. This means that lower the gearing ratio of a company, more is the financial stability of the company. As is evident from the table the gearing ratio of Tesco has been high with an increasing trend through the last five financial years indicating increased debt borrowing of the firm. However, in case of the latter, Sainsbury maintains a high but stagnant gearing ratio indicating that Sainsbury has exercised control over the amount of borrowed debt through the past financial years. The times interest earned ratio refers to the ability of a company to pay off its debtors and stakeholders. Therefore higher the times interest earned ratio, more is the probability of the firm to pay off its stakeholders. Thus, as it is evident from the above table the ability of Tesco to pay off its stakeholders is much lower than that of Sainsbury. However, if critically analysed the times interest ea rned ratio of Tesco seems to increase after the negative percentage value incurred in the financial year of 2015 but in case of Sainsbury the ratio seems to decrease with a decreasing trend indicating that Sainsbury is gradually entering a concerning phase. Thus, after analysing the above-mentioned ratios the conclusion that has been arrived at is that Tesco in spite of facing a dreadful financial year of 2015 has been able to turn around business and take serious initiative to restructure the entire business operation in accordance to the changing demands and preferences of the consumers. However, the company is still in turnaround phase and has not been able to reap the benefits of the implemented plan yet, the forecasts of the significant ratios show that Tesco as a group is again emerging as a leader in the retail market of UK. In case of Sainsbury, though the significant ratios indicate that the firm is entering a bad financial phase and immediate steps should be taken in order to mitigate the upcoming disaster (Aluko et al., 2017). The management at Tesco already has implemented the turnaround plan that is yet to reap the required benefits. For instance, Tesco in order to win back the trust of the consumers have restructured its stores, simplified the system, increased the availability of the products that are popular among the customer base and introduced a reporting system in the stores for critically analysing the customer feedback. Tesco also in order to gain the trust of its customers has introduced a policy named Brand Guarantee. Brand Guarantee as a policy has fetched Tesco enough trust and goodwill from its consumers (Alam 2013). Brand Guarantee is a norm imposed by Tesco that if a customer gets a Tesco product at a cheaper rate in comparison to the rate at which it is sold in a branded shop then the company would not charge that particular customer anything, that is, the customer would get the product free. According to the disclosure provided in the annual report such restructuring of policies and bus iness operations have led to significant positive changes in business in the financial year of 2016. The sales volume went as high as up to 3.3% and the transactions reached a mighty 2.8%. However, the management of Tesco should also look into cost reduction techniques so that the revenue gained can be directly converted into profits. This will boost the significant ratios and the firm has to depend less on funds borrowed from outside, thus, lowering the gearing ratio. Tesco as a group has enough resources in order to be back in business and be the largest groceries retailer in (UK Mller 2015). However in case of Sainsbury though the recent financial performance by the firm indicate a stable environment but the trends in the significant ratios indicate an upcoming financial disaster that Sainsbury is about to face. The management at Sainsbury should consider techniques that will provide enough boost to the financial structure of the firm and lift it from the phase of stagnation that the firm is currently in. Sainsbury should consider restructuring of the entire organization. For instance, it should consider appointment of a CEO from outside so that a new outlook is applied to the proceedings of the company, which will ultimately help in preparation of an effective turnaround plan (Cuthbertson, Furseth, and Ezell 2015). Though the above analysis has been done based upon the significant ratios, it should also be noted that there are certain limitations up to which the ratios can be accurately forecasted. For instance, the year of 2015 has affected forecast for Tesco. Therefore, certain seasonal factors or economic inflations restrict the forecasting ability of the significant ratios. Usefulness of accounting rate of return (ARR): ARR is explained as the return or profit, which an organisation could expect depending on the investment made. This method of capital budgeting is useful for an organisation in the following ways: This method is simple to understand and easy to compute. It takes into account the overall profits or savings over the total period associated with the economic life of the project. As pointed out by Ahmed (2013), this method realises the concept pertaining to net earnings, which is earnings after tax and depreciation. This is considered as a critical factor in the appraisal associated with an investment proposal. ARR helps in facilitating the contrast of a new product project with that of cost minimising project or other projects having competitive nature. ARR provides a clear depiction associated with the profitability of a project. ARR takes into account the accounting profit concept to compute the rate of return and the accounting profit could be computed readily from the records of accounts. ARR helps in fulfilling the owners interests, as their intention is to gain an insight on the return on investment. Finally, ARR could be used to gauge the present performance of an organisation. Usefulness of payback period (PBP): The payback period is a method of assessment used in ascertaining the time needed for the cash flows from a project to repay the initial outlay in the project. This method is extremely useful on certain occasions and they are depicted briefly as follows: The PBP concept is highly simple to compute and understand. When involved in a rough evaluation of a proposed project, the payback period could be computed probably without the use of an electronic spreadsheet or a calculator. This evaluation is concentrated on the amount of time the money could be re-earned from an investment and this is primarily a measure of risk. Hence, the payback period could be utilised in contrasting the relative risk of projects with changing payback periods (Andor, Mohanty and Toth 2015). NPV is the method, which computes the current value of future cash inflows in excess of the current value of the initial outlay. The most significant benefit of this method is that it considers the basic idea that a future currency is worth less in contrast to a currency today. In each period, the cash inflows are discounted through another period of cost of capital. In addition, NPV method depicts whether an investment would develop value for the organisation or an investor and the amount in terms of any currency (Burns and Walker 2015). In the provided case, it has been found that an investment of 1,112,000 in G120 would raise the value of the organisation by 284,864 at the time the cash flows are discounted back now. The final benefits are that the method of NPV considers the capital cost and the risk present in making future projections. From the general perspective, an estimation of cash flows 10 years into future is less certain inherently in contrast to the projected cash flows next year. The cash flows, which are estimated further in future, have lower influence on NPV in contrast to the predictable cash flows occurring in earlier periods. Usefulness of internal rate of return (IRR): Internal rate of return (IRR) is a metric utilised in capital budgeting gauging the profitability of potential investments. It is the rate of discount, which makes NPV of all cash flows from a specific project equal to zero (Chittenden and Derregia 2015). The IRR is useful for an organisation in a number of ways, which is discussed as follows: The most significant advantage of this method of investment appraisal is that it takes into account the time value of money in analysing a project. This is a big drawback in case of accounting rate of return. The most attractive stuff regarding this method is that it is very easy to interpret after the computation of IRR. In addition, it could be easy to visualise for the managers and this is the reason it is preferred until the time they come across various occasional situations like mutually exclusive projects. The hurdle rate is a complex and subjective stuff to decide. In IRR, the required rate of return or hurdle rate is not needed to determine IRR. It is independent of the hurdle rate and thus, the risk of an incorrect determination of hurdle rate is mitigated. Required rate of return is a rough projection being made on the part of the managers and the IRR method is not completely dependent on the required rate of return. After the determination of IRR, it could be compared with the hurdle rate. In case, the IRR is far away from the anticipated hurdle rate, the manager could undertake the decision safely on either side while keeping a room for the errors of estimation (Daunfeldt and Hartwig 2014). Based on the provided table, it could be stated that the ARR of G120 has been 18%, while the same for Z125 has been 14.7%. This depicts that SD Limited could earn higher profit, if it decides to invest in G120 machine. On the other hand, the payback period of G120 has been 2 years 10 months, while the same for Z125 has been 3 years 8 months. The lower the payback period, the better it is for the organisation to recover its initial investment within shorter timeframe (Hasan 2013). However, the economic life of the project is not present in the provided information and hence, this measure would not be adjudged appropriate solely to arrive at the outcome. The NPV for G120 has been 284,864, while the same for Z125 has been 420,194. The higher the NPV, the better is the overall return on investment for the organisation and greater profit margin. In this case, both the machines have positive NPV; however, the NPV for Z125 has been greater in contrast to G120. Thus, based on this measure of capital budgeting, Z125 would fetch better return and higher profitability for SD Limited. On the other hand, the IRR for G120 has been 25%, while the same for Z125 has been 20%. If the value of IRR is greater than the hurdle rate or required rate of return, the investment or project is considered feasible for the organisation. In this case, both the machines have greater IRR compared to the required rate of return. However, the IRR for G120 has been greater, which denotes that investment in this machine would fetch better returns for SD Limited. Based on the above evaluation, it could be advised to SD Limited to go ahead with the Z125 machine due to its higher NPV compared to G120. This is because NPV is the most superior measure of investment appraisal and it considers the capital cost and the risk present in making future projections. In addition, the cash flows, which are estimated further in future, have lower influence on NPV in contrast to the predictable cash flows occurring in earlier periods. According to the provided information, it could be stated that both NPV and PBP gauge the financial feasibility of capital projects. Therefore, PBP favours the G120 option, while NPV favours the Z125 option. In order to evaluate this statement, it could be stated that PBP is the amount of time needed to recover the overall investment cost. The PBP of a provided project or investment is a significant determinant of whether to undertake the project or position, since longer payback periods are not feasible for investment options (Hise and Strawser 2013). However, this method ignores the time value of money unlike the other measures of investment appraisal like internal rate of return, net present value or discounted cash flow. In addition, it has been observed that majority of the capital budgeting techniques consider the time value of money. The time value of money is of the notion that the cash in hand on the current date is valued more in contrast to what it would be in future, since it could be invested for generating returns. Hence, if an investor is paid on a future date, it might take into account opportunity cost. However, the payback period does not take into account the time value of money. In fact, there is full disregard of the time value of money in the payback method, which is computed by counting the number of years it takes to gain back the invested cash. In case, it takes five years for an investment to regain the cost, the payback period would be five years (Lam and Oshodi 2015). Some analysts favour the payback method due to its simplicity, while others utilise it as additional point of reference in the framework of capital budgeting decision. In this case, the payback period for G120 has been given as 2 years 10 months, while the payback period for Z125 has been 3 years 8 months. As evaluated above, a shorter payback period is always favourable, as the initial investment could be recovered before the economic life of the project. In case of SD Limited, although the economic life of the project is not given, the payback period for G120 has been lower compared to Z125. Thus, this method favours the first option for SD Limited. On the other hand, NPV is based on cash flows; thus, it is a better measure than payback period, which is dependent on accounting profit. This is because accounting profit could be subjective (Levin and Hallgren 2017). In addition, the time value of money is considered in this method, which is a basic concept to investment appraisal. Hence, it is superior to the payback period, since the latter does not consider the time value of money. Moreover, this measure gives absolute outcomes and such information is extremely useful while considering the large investment projects. Furthermore, this measure needs special knowledge in computing and it needs special skills as well in understanding this method. Hence, this method is considered difficult to compute and understand. Finally, it considers the discount rate, which is sometimes complex to calculate. However, such consideration of discount rate helps in providing the accurate outcomes. Since the Z125 option has greater NPV compared to G1 20, this method favours the first alternative. It has been observed that the computation of IRR is extremely difficult. This is because the IRR is the rate of discount, which would lead to a zero NPV. As the NPV of a project has inverse correlation with the rate of discount, if the latter rises, the future cash flows become uncertain. Thus, the worth of the future cash flows is minimised. The yardstick for the computations of IRR is the actual rate used on the part of the organisation in discounting after tax cash flows. An IRR greater compared to the cost of capital denotes that the capital project is a profitable endeavour and vice-versa. The basic advantage of implementing IRR as a tool of decision-making is that it provides a yardstick figure for each project, which could be assessed in relation to the capital structure of an organisation. As laid out by Lima et al. (2017), the IRR would produce the identical kinds of decisions like the models of NPV and this allows organisations to contrast projects based on returns on inves ted capital. However, the IRR does not provide a true overview of the value, which a project would add to an organisation. It provides a yardstick figure for what the projects need to be accepted depending on the cost of capital of the organisation. In addition, this measure does not enable for an effective comparison of mutually exclusive projects; thus, the managers might be able to ascertain that both the projects are advantageous to the organisation. However, they would not be able to decide the better option, if only one is accepted. Another error associated with the utilisation of IRR evaluation is that the cash flow streams from a project are unconventional, which implies that there are additional cash outflows following the initial investment. The unconventional cash flows are inherent in capital budgeting, as many projects need future capital outlays for repairs and maintenance (Mbabazize and Daniel 2014). Under such situation, there might not be any existence of IRR or the internal rates of return might be multiple. The IRR is a useful measure of valuation at the time of evaluating individual capital budgeting projects, not the mutually exclusive projects. It provides a better alternative of valuation to the payback method; however, it lacks in several major requirements. Based on the provided situation, it could be observed that the Finance Director of SD Limited has been confident that the IRR for both the options would exceed 15%. This is because both the options have positive NPV and accounting rate of return. This denotes that the IRR of the two options would be greater compared to the cost of capital. In addition, the hurdle rate is a complex and subjective stuff to decide (Mukherjee, Al Rahahleh and Lane 2016). 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