Analysing and Interpreting Management

BUSINESS
STUDENT ID:
[Pick the date]

PART 1: Presenting, Analysing and Interpreting Management
Question 1
a) The companies in the Upper Quartile for 2016 are as follows.
b) The companies in the Upper Quartile for 2017 are as follows.
c) The companies that appear in both lists are as follows.

d) The table for the comparison of social and environmental performance score for
companies identified in part c between 2016 and 2017 is shown below.
The graphical illustration for the above table is given below.

Question 2
a) Based on the comparison of performance between 2016 and 2017, it can be stated that
broadly there has been an improvement in the performance. However, there are certain
companies whose performance has declined in 2017 as compared to performance in 2016.
This variation in performance is not considered to be fruitful over the long run and hence
such companies need to take urgent measures to improve their social and environmental
performance going forward.
b) The company which has made the best improvement in performance from 2016 to 2017 is
Company 5.
c) There are some companies which have witnessed a decline in performance from 2016 to
2017. These are Company 50 and Company 12.
d) The information provided with regards to social and environmental performance is not
sufficient to make an investment call. This is because the current performance index
captures the value only for two years i.e. 2016 and 2017. In order to track social and
environmental performance, a longer track record may be deemed necessary. This is
because it is often the case that companies may perform well in such indices for a couple
of years but fail to continue the same over the long run. Thus for the companies that fall in
the upper quartile for both 2016 and 2017, past performance of atleast five years would be
required to finalise an investment.
Question 3
The requisite diagram is known as scatterplot and is shown below.

Considering that the slope of the best fit line (also called trendline) has a positive slope and is
sloping upwards, hence it can be concluded that the relationship between advertisement
spending and revenue generated is positive. This is on expected lines as high advertisement
spending should lead to higher sales and revenues for the business. Also, the points do not
seem to be significantly deviating from the best fit line which implies that the strength of
relationship between the given variables is quite strong. As a result, it is possible for the
company to realise a higher sales revenue by increasing the advertising spending.
PART 2: Probability and Uncertainty
Question 1
a) Mean amount = 110 ml
Standard deviation = 5 ml
Minimum amount = 108 ml
Z value = (108-110)/5 = -0.4
P(Z<-0.4) = 0.3446 (From Z table)

There is a probability of 0.3446 that the liquid in the container is less than the specified
amount. This is a cause for concern for the company as the underlying probability associated
with this event is quite high which implies that this event is not unusual.
b) P(Content<X) = 0.05
The associated Z value with the above probability of 0.05 is -1.645
Let the minimum amount printed on the label be X
Hence, (X-110)/5 = -1.645
Solving the above, X = 101.78
The new label for the minimum amount should be 101.78 ml.
c) Clearly the current situation is unacceptable and needs to be altered. This is because there
is high incidence of the bottles containing lower than the minimum amount specified on
the label. While one change could be to alter the minimum amount but it is not prudent
considering that average is 110 ml. A better alternative would be to improve performance
(through automation or outsourcing) whereby the standard deviation is reduced to
significantly lower value. This is because high deviation implies that the quality is not
complied with by the company. Thus, a multi-pronged approach would be suitable for the
company whereby the label is changed to a lower value (about 105-106) and
simultaneously standard deviation is brought down.
Question 2
Number of people who are healthy =30
Number of people who are unhealthy = 70-30 = 40
Let the people have high blood pressure as well as high cholesterol be X

Then, 20 + 35 –X = 40
Solving the above, X = 15
a) People having only high blood pressure = 20-15 =5
b) People having only high cholesterol = 35-15= 20
c) People having both = 15
d) P(Healthy) = 30/70 = 3/7
e) P(High BPI High Cholesterol) = P(High BP and High Cholesterol)/P(High Cholesterol)=
(15/70)/(35/70)= 3/7
f) P(High Cholesterol I No High BP) = P(High Cholesterol only)/P(No high BP) =
(20/70)/(50/70) = (2/5)
g) The food served at the cafeteria does not seem to be healthy. This is because less than 50%
of the sample seems to be healthy. This is apparent since 40 out of the 70 people chosen
are unhealthy and have atleast one issue i.e. high blood pressure or high cholesterol. It is
highly likely that the food served at the cafeteria would be a contributor to the current
health status. However, individual factors such as lifestyle, level of stress, exercise etc
would also determine the extent to which the incidence of high BP and cholesterol are
caused. Considering that there are people which have these issues, it is imperative that the
food served to them should be prepared considering their problem which currently does
not seem to happen.
Question 3
a) Probability of hiring the latest surfboard = 0.45
Total VIP customers = 10
Total surfboards hired = 5
The given situation is binomial distribution.
Requisite probability = 10C5(0.45)5(1-0.45)5 = 0.2340
b) Requisite probability = P(8) +P(9) + P(10)

This is because there are 7 surfboards available and demand would exceed the available
surfboards only when 8, 9 or 10 VIP customers choose surfboard over ski.
P(8) = 10C8(0.45)8(1-0.45)2 = 0.0229
P(9) = 10C9(0.45)9(1-0.45) = 0.0042
P(10) = 10C10(0.45)10(1-0.45)0 = 0.0003
Hence, requisite probability = 0.0229 + 0.0042 + 0.0003 = 0.0274
PART 3: Financial Decision Making
Question 1
a) In order to determine which option is the most superior, it is imperative to determine the
EAR (Effective Annualised Rate) for the three options.
Option 1: EAR = 4.5% (as annual compounding only)
Option 2: EAR = [(1+(4.48/400)4 -1]*100 = 4.56%
Option 3: EAR = [(1+(4.45/1200)12 -1]*100 = 4.54%
Option 2 offers the highest EAR amongst the given three choices and therefore would be
considered the best investment deal.
Amount of money invested = £3000
Amount of money after 3 years or 12 quarters = 3000*(1+(4.48/400)12 = £3428.99
b) The above example clearly illustrates how the use of effective interest rates tends to
simply the investment decisions. If the investment decision would have been taken based
on nominal rate, then it would have been incorrect as the impact of compounding
frequency would have been ignored. However, with the effective rate computation, all the
different nominal rates were brought to a common time period of one year and then
through a simple comparison, the superior option may be decided.

Question 2
In order to determine which company is offering a better machine, it is imperative to
determine the Net Present Value (NPV) associated with each of the machines. A key
assumption for the given computation is that there is no tax and hence depreciation on the
machines has been ignored.
Machine from Company A
The expected cash flows from this machine is summarised in the table below.
It is known that the discount rate is 4%
Hence, NPV = -15000 + (1500/1.04) + (2500/1.042) + (2450/1.043) + (3450/1.044) +
(8450/1.045) = £ 826.1
Machine from Company B
The expected cash flows from this machine is summarised in the table below.
It is known that the discount rate is 4%
Hence, NPV = -11000 + (0/1.04) + (2000/1.042) + (2000/1.043) + (2000/1.044) + (6500/1.045)
= -£ 320.76
The objective of the given exercise was to determine the better option for the firm to purchase
machine since there are two vendors that are offering. As the useful life of both machines is
five years (i.e. same), hence NPV approach has been preferred to narrow down on one of the

machines. Based on the information provided about each machine, the expected cash
inflow/(outflow) has been prepared for the whole useful life. These cash flows have then
been discounted at the given rate of 4% to obtain the NPV. With regards to NPV, the decision
rule is that a projects having positive NPV should be selected as they are value accretive for
the shareholders of the business. However, in case of mutually exclusive projects, the project
having the highest positive value of NPV ought to be selected. In the given case, a positive
NPV value has been obtained only from Machine from A. This implies that the only viable
option for the business is to purchase the machine from Company A as it would increase the
value of the business.
Question 3
I am quite confident of my advice since there is only one machine which is leading to a
positive NPV. However, the conclusion may change if there is any significant increase in the
discount rate which leads to a negative NPV even for machine from Company A. In this case,
neither of the machines would be accepted. Further, any discount in selling price being
offered by Company B can potentially change decision. Also, a built in maintenance service
for a couple of years by Company B can also save £2,000 for the business and hence result in
NPV of machine B to exceed that of machine A.