Assignment: Financial Analysis
Instructions
Business Background:
Country House Cuisine Ltd (CHC LTD) is a food manufacturer which was established in 2004 and experienced a steady growth in the past 15 years. The growth rate averaged at 4% in this period and the board of directors is confident that the company has a strong market position and is looking for opportunities to accelerate the rate of expansion.
The company is specialised in producing a variety of snacks which are sold by a large number of independent retailers across the country. Currently the board has recognised the growing trend amongst the health conscious customers who look for healthy snacks which would represent a substitute for traditional snacks such as chocolate bars or crisps. The company has a reputation for high quality products, however the product line has not been updated for five years. In the last financial year, the most popular product was sold in 130,000 units.
The company has appointed two business development consultants to investigate the changes to the market and create products which would be attractive for the health conscious customers. The cost of those appointments amounted to £21,000. The consultants created a range of snack bars made by using a combination of organic ingredients and ‘super-foods'. The products have been approved by the board of directors. Recently the branding and a sample were completed and the company managed to secure its first orders from a national supermarket chain. The cost of branding and producing the first batch was £12,000. The initial market reaction from customers is very promising.
The board of directors has decided to initiate the production of the new snack bars in a bid to increase profits and boost a stagnating sales growth. You have recently joined the business analysis and development team within the company. During your interview you discussed the project that you undertook at the university which concerned the investment appraisal process and the use of the balance scorecard to set targets and asses performance. You have been asked to prepare a business report for the board of directors which would consider a financial viability of the project as well as create a set of KPIs and targets using a Balance Scorecard. The project life cycle is predicted to be five years. After that the company is planning to upgrade its product line to reflect changes to consumer tastes.
The Task:
You have been assigned to work as a part of a small team which is required to produce a business report for the board of directors. Initiating the project would require investment in new machinery and working capital and managers require you to undertake the investment appraisal to assess the financial viability of the project.
The management accountant produced the following list of estimates to allow you to conduct the financial analysis of the project.
Year 1 Year 2 Year 3 Year 4 Year 5
Sales Volume 170,000 185,000 200,000 180,000 150,000
The company plan to sell the new products to retailers for £0.70 each but it is planning to increase the selling price by £0.05 per unit in year 2 and year 3 when the product is at the peak of its popularity before reducing the price by 4% in the final two years.
The management accountant estimates that the cost of raw materials will be £0.20 per unit in years 1 & 2 with a 5% increase for the final three years. Packaging costs will be £0.05 per unit for years 1 & 2 but due to the need to reduce packaging waste this cost is expected to reduce by one fifth for the remainder of the project.
The managing director is willing to provide an incentive to sales staff to exceed the current sales of company's most popular product by paying a £0.25 bonus per each extra unit sold above the target. However, the bonus of £0.25 will only be paid for the first two years and then will be reduced to £0.15 for the remainder of the project.
The company has to delegate two members of staff on a part time basis who are currently employed on other projects and are paid £30,000 per annum. They will be required to spend half their time supporting the project.
Four other members of staff currently paid £27,000 per annum each are expected to provide support for the project as a part of their current contractual duties.
Distribution costs are expected to increase by £1,500 per annum for every 20,000 units sold.
The company is planning to support the new product with a marketing budget of £15,000 in the first year, this will then be halved in year 2. In year 3 the marketing budget will be reduced by a further £2,500 and this level of investment will remain for year 4. There is currently no plan to market the product in year 5.
The production requires investment in new machinery and working capital. The machinery will cost £60,000 and will have a scrap value of £12,000. Working capital of £20,000 is required throughout the project.
The company's cost of capital is 12%. Currently the company generates ROCE of 20%. The board of directors is concerned with risk associated with this project as it requires a significant investment and has already incurred costs. CHC Ltd pays tax at 20% on all profits.
Requirements:
You have been assigned to work as a part of a small team which is required to produce a business report for the board of directors. The report should contain the following:
• Use the above information to undertake a financial analysis of the project using the main investment appraisal techniques. The board of directors expect to see summarised information of the annual unit contribution, the annual cash flow forecast and the results of the investment appraisal within the main body of the report, with supporting calculations/working referenced within the appendices.
• Provide an overview of the usefulness of the main investment appraisal techniques. The board expects information from the academic and industry sources about the reliability and application of investment appraisal in practice.
• Discuss whether the project should be approved. Use the context of the case study and your knowledge of investment appraisal techniques to support your arguments. Also identify and briefly discuss the main risks associated with this project, both financial and non-financial.
• Prepare a brief overview of the rationale of using balance score card as a management tool.
• Prepare a balance scorecard framework for the company which includes the four perspectives. Use the information provided in the brief to create a framework which lists of the objectives, measurements, targets (KPI's) and initiatives. Your balance scorecard framework should be included as an appendix and summarised within the main body of your report.
• Format and presentation, see below for more details.
• Relevant referencing is required use UWE Harvard referencing, however remember that this is a business report and not an academic article.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.