Learning Outcomes:
After completing the module you should be able to:
1. Critically evaluate the role and function of finance, including the presentation and analysis of financial information, in sustaining and contributing towards the competitive advantage of organisations;
2. Critically analyse information, from a number of perspectives, contained in published financial statements ranging from public, not for profit and private sectors;
3. Select, apply and critically evaluate financial decision making techniques to critically appraise projects and complex investment decisions.
4. Problem-solve and deal with complex issues of management and in doing so interpret and abstract meaning from a variety of financial and nonfinancial data.
Question
New York Limited is considering one of two new projects, A or B. It cannot carry out both projects, and therefore must choose which of the two is likely to yield the best financial results. The investment which is required in both projects is £250,000. This will be made up of £200,000 debt and £50,000 equity. The equity-holders will require 10% return and the debt holders will require a 5% return on their respective investments. The inflows and outflows for each project vary as follows:
Project A: Inflows £75,000 per annum for 4 years; outflows of £10,000 per annum for 4 years
Project B: Inflows of £275,000 in year one, and £25,000 in year 3, no other inflows exist; and outflows of £40,000 in year 4.
As noted above, both projects have a life of four years, after which time, both projects will be closed. The scrap value / residual value of the investments in both projects at this juncture is zero.
Requirements
Calculate the following:
a) The project lifetime surplus or net value for both projects
b) The undiscounted payback period for both projects
c) The NPV (Net Present Value) for both projects, you will need to calculate the WACC (Weighted Average Cost of Capital) here too
d) Given your answers above, which project is preferred - explain your decision?
e) Critically discuss the utility of the techniques used above, and whether these can be relied upon to make sound investment decisions. Draw upon academic sources where possible
Requirements:
a) Using the financial statements above for Next PLC, calculate a ratio for each of the four areas of Liquidity, Profitability, Efficiency and Investment. You should calculate each ratio for both 2014 and 2013.
b) Using your results to the ratios above, analyse the performance of the company over the two years, from the perspectives of i) the equity investors and ii) suppliers?
c) Discuss the advantages and disadvantages of the ratio analysis technique
Question Three
"Until relatively recently it would have been heresy to suggest that budgeting was not of central importance to any business .... However, there is increasing concern that, in today's harmful dynamic and competitive environment, budgets may actually be harmful to the achievement of business objectives." (Atrill, P. and McLaney, E., 2012:216)
Atrill, P. and McLaney, E., (2012), Accounting and Finance for Non-Specialists, 8th Ed., Pearson
Requirements:
a) Analyse the statement above, describing, with examples, the pitfalls of budgeting which may deem it to be harmful to the achievement of business objectives.
b) Conversely, present an argument for the ongoing use of budgeting in its traditional form within an organisation.
c) "The traditional model is based on the use of fixed targets, which determine the future actions of managers. The 'beyond budgeting' model on the other hand, is based on the use of stretch targets that can be adapted. The traditional hierarchical management structure is replaced by a network structure." (Atrill, P. and McLaney, E., 2012:218)
Analyse the key differences between traditional budgeting and 'beyond budgeting' models.