Assignment On Acceptance Of Bid

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1University of Edinburgh Business SchoolEMBA 2015-2016Finance Assignment
2About Boulton & Paul LimitedThe assignment is about an acceptance of a bid which is available to Boulton & Paul Limited,a company which was established in 1797 and which is an iron foundry also a wire nettingmanufacturer. Moreover, it is also a constructer of pre-fabricated wooden homes. It alsoconstructs huts for Robert Falcon Scott’s Antarctic expeditions. The firm has also becomefamous for manufacturing of aircrafts. The firm is responsible for manufacturing some iconicplanes involved in WWII which also includes Defiant NF MKII. The firm has also become amedium sized niche high-tech aerospace equipment manufacturer.Investment Appraisal TechniquesAcceptance of a bid or start of a new project by any firm requires many critical things to beanalysed first. The technique used commonly by every firm to analyse new projects areinvestment appraisal techniques. Investment appraisal techniques are the techniques toevaluate the project to be undertaken, its viability and profitability with respect to theinvestment to be made in the project. The project can be a long term or a short term project.Before starting or investing in a project, a detailed analysis of the project is necessary in orderto gain from the project. While analysing the project many critical parts are required to begiven importance to. The technique is advantageous as it allows the firms to estimate the longterm viability of the project. The important factors that are considered here are the investmentin new plant and machinery, cash flows that will be generated over years from the project,property related decisions, projects on research and development and advertising campaigns. There are many techniques used for the purpose of Capital Investment Appraisal. Some of thetechniques used are as follows:Net Present ValueAccounting Rate of ReturnInternal Rate of ReturnModified Internal Rate of ReturnAdjusted Present ValueProfitability IndexEquivalent AnnuityPayback PeriodDiscounted Payback PeriodReal Option AnalysisThe most commonly used technique to evaluate the project is the Net Present Value. NPV isthe technique where the cash flows of the projects are estimated and they are compared withthe initial investment to be made in the project at the start of the year. Proper discounting rateis used for the purpose of evaluating the project and assumptions are also made whileevaluating the project. The project or an investment plan is given assent when the NPV of theproject is positive. The project with positive NPV is accepted as the cash flows or therevenues which will be generated in long term recovers the initial cost of the project and thefirm ends up making profit with positive NPV. The technique of NPV is the most reliable
3technique among all other techniques of investment appraisal. Every technique has its ownadvantages as well as disadvantages. It may also happen that one technique of investmentappraisal may suggest different project and other technique also suggest different project. Thekey determinants for the NPV technique are the duration of the project, discounting rate ofthe project and the estimates of costs and benefits.The major assumptions made while using the NPV techniques are as follows.1.All the cash flows that are generated every year occur at the end of the period.2.Another assumption is that the cash flows occurred at the end of the year are re-invested at the project’s discounting rate of return.Net present value is used with assumptions and available information like cash flows,discounting rate and investment to be made. NPV allows the firm to estimate the cash flowwhich is not 100% accurate. It does not fully take into account the opportunity cost ofchoosing the project. For example, it may happen that after starting with the project based onNPV technique, it may happen that there comes a more advantageous opportunity for the firmwhich can’t be taken used now. So, this technique doesn’t take into account the futureinvestment opportunities. Another disadvantage of the project is that it doesn’t provide theinvestor with the true and correct picture of the gain or loss. There is always a kind ofuncertainty involved in the project being analysed. The bid in the given assignment is analysed using the NPV technique being the most reliabletechnique of investment appraisal.Analysis of the BidThe firm is in the running of a new ESA contract which would earn the firm at least revenueof 1.5$ million if the bid is accepted. The contract is a long term fixed contract of 5 years. Itinvolves supply of high-tech optical component for a continuous period of 5 years. 10 units ofcomponent would be supplied to the agency every year for 5 years and the selling price of thecomponent would be 300000$. According to the estimates made by the team, the selling priceset is a very competitive price and it is less likely to make any better offer. If the bid of B & P Limited is accepted by ESA, it would commit the firm a long term fixedprice contract. The initial investment required to be made in the project would be 1.5$ millionfor the purpose of purchasing the machinery and for refurbishment of the plant which is notused now by the firm situated in Great Yarmouth.The information useful for the purpose of evaluating the project is given as follows:1.The plant in Great Yarmouth was depreciated fully in the books of the firm except forthe value of the land which is 10,000$. 2.The land on which the plant stands was purchased for 10,000$ but it has now thevalue of 600,000$ due to its proximity to a reasonably high end shorefrontdevelopment area.

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