Business Decision Making: Coursework 2

This document provides solutions for Business Decision Making: Coursework 2. It includes calculations for payback period, accounting rate of return, net present value, and internal rate of return. The document also includes a report to senior management and an analysis of Tesco plc's performance and position.

BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
Module Title Business Decision Making
Module Code BA4008QA
Assessment Project 2
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
TASK ONE
QUESTION 1(a) :
i. Payback for Duke
Year Cash inflow(£) C.F.(£)
1 120000 120000
2 50000 170000
3 50000 355000
4 25000 245000
5 60000 305000
6 50000 355000
cash outflow(cost of investment)
cost of investment £250000
Table of calculations
Payback Period of Duke= 4+(250000-245000)/60000= 4.0833 years
ii. Payback for Earl
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
Note: Due to the lack of proper information, this machine is not evaluated. As cost of
investment is less than the scrap of machine which is practically not justified.
iii. Accounting rate of Return for Duke
Year Cash inflow(£)
1 120000
2 50000
3 50000
4 25000
5 60000
6 50000
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
Net income 355000
Table of calculations
Accounting rate of return
(net income / initial investment)
£(355000/250000)= 1.42
iv. Accounting rate of Return for Earl
Note: Due to the lack of proper information, this machine is not evaluated. As cost of
investment is less than the scrap of machine which is practically not justified.
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
v. Net Present Value for Duke
Year Cash flows(£) PV Factor Present Value
1 120000 0.926 111120
2 50000 0.857 42850
3 50000 0.794 39700
4 25000 0.735 18375
5 60000 0.681 40860
6 50000 0.63 31500
6(scrap
value) 10000 0.63 6300
Total 290705
Table of calculations
Net Present Value(NPV) £(290705-250000)= £40705
vi. Net Present Value for Earl
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
Note: Due to the lack of proper information, this machine is not evaluated. As cost of
investment is less than the scrap of machine which is practically not justified.
vii. Internal Rate of Return for Duke
Year Cash flows
PV Factor at
10% Present Value
1 120000 0.909 109080
2 50000 0.826 41300
3 50000 0.751 37550
4 25000 0.683 17075
5 60000 0.621 37260
6 50000 0.564 28200
Total 270465
Year Cash flows
PV Factor at
12% Present Value
1 120000 0.893 107160
2 50000 0.797 39850
3 50000 0.712 35600
4 25000 0.636 15900
5 60000 0.567 34020
6 50000 0.507 25350
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
Total 257880
Note: 250000/59167= 4.225 ( approximate at 10% to 12%)
Table of calculations
Internal rate of return(IRR) 10+(20465/12585)*2= 13.25%
viii. Internal Rate of Return for Earl
Note: Due to the lack of proper information, this machine is not evaluated. As cost of
investment is less than the scrap of machine which is practically not justified.
QUESTION 1(b) : Report to senior management (of around 500 words)
Business decision making covers determine goals, discovery of necessary relevant
data and comparing alternatives to get best outcome (Bagga and et. al., 2019). Decision
making is one of significant factor which helps a business entity to outgrow effectively.
These decisions are required to be made with help of varying techniques which will help to
evaluate risks and returns prevailing before organisation. Senior management should evaluate
various alternatives in order to reach at optimum decision. Decision making is an essence to
business therefore, Wonderland has made use of various techniques like payback period, net
present value, etc. in order to make a better decisions in the long term. These techniques
include advantages as well as disadvantages which can be discussed as follows:
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
1. Payback: It is an element of capital budgeting which states required time for return
on an investment. This method is mainly used for projects in small investments (Blewitt and
et. al., 2018). It is easy to apply and understand by comparing various investments of similar
nature to draw an appropriate decision. This analysis is helpful to discover organisation's
financial feasibility in regard with investment projects. Therefore it is required to know that
in how much time your project needs to recover your investments. This method is used
widely but includes various advantages and disadvantages.
Advantages: This technique is easy and simple to implement and use to ascertain
payback period of a project. Method provides rapid solutions and quick liquidity in order to
reinvest in other investment opportunities. It is also useful in uncertainty where technology
upgrades rapidly. This process makes it convenient to outline future cash inflows.
Disadvantages: Though it is a beneficial process still has various disadvantages. It
neglects time value for money which can be threatening for a business entity. As it is
believed that sooner the money received it becomes more worthy. It has also covered non-
realistic approach where it is not considering normal organisation scenarios.
2. Accounting rate of return(ARR): As all capital budgeting methods relies on cash
flows but ARR considers expected net operating income to be bring forth by investment and
not considering cash flows for investment evaluation (Meng and et. al., 2020). This method
has various advantages and disadvantages which can be discussed as follows:
Advantages: It is easy to understand method which view total profits over an entire
project life. This technique provides clear picture of project's profitability. It is owner-
oriented method as it signifies return on investment which satisfies their interest.
Disadvantages: Major drawback of this method is that it ignores time factor in regard
to the investment return. Also it does not consider external factors that may affect project
profitability.
3. Net Present Value(NPV): It refers to a method where managers are to engage in
projects or transactions which will yield positive NPV. Their motive is to ignore negatively
valued projects in order to provide organisation growth based development. Though it has
advantages and disadvantages that can be discussed as follows:
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
Advantages: This method is helpful in measuring risks involved in a project that
gives overall picture of it. Here, cash flows are not expected to be reinvested as it is in
method of internal rate of return.
Disadvantages: It is dependent on discount rates so even a little change can change
entire outcome. It is not useful for comparing differing size of projects therefore varying
projects are not compared here. It is based on estimations so it may result forecasting errors.
4. Internal rate of return(IRR): It is term of financial analysis which figure out
profitability of potential investment. It is discounting rate of return where Net present value is
equivalent to zero. This tool is useful in identifying most worthy project amongst various
alternatives.
Advantages: It is advantageous in measuring time value for money. This technique
gives each cash flow equal weight-age by considering all future years of cash flows. It has
easy as well as simple usage by comparing various projects. This method also diminishes use
of hurdle rate so the risk of determining wrong rate is eliminated.
Disadvantages: This method disregard the size of project while comparing projects
which may be unrealistic approach of equivalence. It also ignores recognition of reinvestment
rates. IRR furnish incomplete picture of future and struggles to keep up various cash flows.
QUESTION 1(c) : Decision and explanations (in around 200 words)
Various techniques of cost budgeting were executed in order to conclude most efficient
investment. These techniques is used to identify various factors in relevance with investment
in a project. In this manner most beneficial option can be adopted which will help an
organisation to increase its productivity in the long run.
Senior Management at Wonderland Plc has known that a strategy is needed in order to
replace old machine for its production department. Therefore, two machines namely, Duke
and Earl were evaluated in order to reach at an appropriate outcome. With the use of various
capital budgeting techniques, the company is advised to adopt machine Duke as the other
machine namely Earl does not contain appropriate content. As Earl has less cost of
investment and more scrap value of machine. Being practically it is not possible to have more
scrap value than cost of a machine. Therefore, by calculating payback, accounting rate of
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
return, net present value and internal rate of return a conclusion can be drawn that the
company should replace its old machine with the Duke machine as it can be used in an
effective manner which will produce maximum as well as optimum outcome in favour of the
company.
TASK TWO
QUESTION 2(a): (Tesco plc performance and position)
Performance and position analysis is a discipline which includes organized observations
which enhance organisation's overall performance and amend its decision-making power.
Tesco being large supermarket chain headquartered in UK has made huge impact in retail
industry. It is one of fastest growing organisation in UK and also in various parts of world. It
has adopted effective strategic policies which helped to provide efficient and effective
performance outcome. It is holding unshakable position in the industry which means Tesco
grew from core to become one of market leader in current times. The organisation is
following some Key Performance Indicators(KPI) which will help to to outgrow even more.
These KPIs are profitability, increase sales, modify operating cash flows, customer
satisfaction, employees satisfaction and to develop trusted partners. Therefore its overall
performance analysis can be conducted on the basis of various accounting ratios as follows:
Gross profit margin: It is financial tool which is used to assess efficiency of
company's productivity. This ratio indicated company's productivity at managing its various
operations. It is based on cost of goods sold by company (Kotze and et. al., 2020). Being a
profitability ratio it is used to compare company's gross margin with its revenue. Tesco has
showed positive results in regard to its gross margin. It has increased margin to 6.5% in 2019
which is regarded as immense development in its strategic policy formulation.
Return on total assets: It is used to compare organisation's total assets with amount
of return is provided to its shareholders. It is referred as profitability ratio as it aims at
generating higher level of return by increasing its productivity. It is believed at higher the
return on total assets, the better it is. Tesla has been achieving target goals in order to sustain
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
longer in market. It has provided optimum returns in the frequent years by reaching at
favourable place.
Return on capital employed: This ratio is determined to interpret company's
profitability as well as capital efficiency. It is generally used ratio by various financial
analysts, stakeholders as well as investors for making an investment in an organisation.
Tesco's return on capital employed is not much fluctuating in the given years. As it has
increasing trend in regard to rate of return. It performed well in financial terms by achieving
5.90% return in 2019.
Current ratio: It is used to analyse company's liquidity to pay back short term
liabilities or current liabilities in the given period of about a year. Tesco has decreasing trend
of current ratio which reflects that the company has low level of liquidity. It had 0.61:1 ratio
which is less as compared to ratio of 2018. Therefore it should develop optimum strategies
which will enable it to achieve appropriate liquidity level. The ratio suggested that
organisation has more debts than its assets.
Liquidity ratio: This ratio is considered as liquidity ratio because it evaluates
organisation's capacity to pay off its short term obligations (Ghenimi and et. al., 2020). It
includes both current ratio as well as quick ratio as they measures company's ability to repay
short term debt. Tesco being a largest retailer, has decrement in its liquidity ratio throughout
three years. This made company's liquidity position unstable in the industry. In order to
compete with heavy competition in industry it is required to overcome the shortage of
liquidity by applying effective policies and managing levels of assets and liabilities within the
organisation.
Efficiency ratios: These ratios are helpful in analysing company's effective use of
assets and liabilities in order to increase its efficiency (Lan and et. al., 2019). It is used to
measure company's performance in short term or at current. This would help organisation to
meet productivity levels and achieving profitability. Tesco has performed outstanding as per
its efficiency ratios as it reflected that the company is paying off its creditors in a while and
recovering from its debtors much quickly. This way company stands with more liquid funds
which will enable it to provide more effective and efficient results.
Gearing ratio: It is a financial tool which suggests comparison between owner's
equity to funds borrowed by the company (Siebert and et. al., 2018). It measures company's
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
financial leverage which tells how much it is being funded by shareholders and creditors.
This means the lower is ratio, company has more financial stability. Because higher ratio
means company has more borrowed funds as compared to owners funds. Tesco has proven its
efficiency by owning low borrowed funds as compared to owners funds. It has been
continuously improving its gearing ratios which reflects its high sustainability.
QUESTION 2(b): limitations in the use of accounting ratios
In regard to various accounting ratios, they reflected with various advantages but also
has limitations in reference to inflation in prices, operational changes, accounting policies and
various business conditions. Tesco has faced various ups and downs in regard to such ratios
which made it difficult for organisation to outgrow in market. Though the organisation has
performed well in regard to FTSE(Financial Times Stock Exchange) 100 in 2019. Its prices
were opened at approximate at £1.91 in December 2018 which a year later traded at £2.53.
therefore company hiked at increase of about more than 31% to those who did their trading
on time. Organisation had huge change in its trading price which reflected that it has
implemented adequate changes in its operations. As company was lacking at liquidity which
made it short in sources to pay back short term loans. This created negative impact on
company's performance, but it managed to modify its policies which give boost to company's
shares trading over FTSE platform. The organisation has used various accounting ratios
which provides historic results i.e. they are not based on practical base. Therefore Tesco
needs to improvise their use of traditional ratios which are not realistic as it is based on
assumptions over which organisation is operating. The base to be taken by organisation
should be more realistic than just being in the books. It should improvise its strategic
planning and evaluation of using techniques of accounting which will provide more accurate
results so that it would become easier to provide efficient and effective results to the
organisation in the long run.
QUESTION 2(c): (other factors affecting Tesco in 2019)
It is important for an organisation to improvise its performance on the basis of various factors
like gross profits, net profits, sales, etc. This way a company can compete with its
competitors in more effective manner. Tesco is operating on a large platform across the globe
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BA4008QA – Business Decision Making: Coursework 2 (Individual
Coursework)
and majorly in UK. It has outperformed in the year 2019 which includes increase in sales,
optimum operating profits as well as increased pre-tax profit. Chief Executive of Tesco has
expressed his joy by addressing that the company has achieved its ultimate turnaround score
after almost 4 years. Organisation has improved its wide based business across the world. The
company has attained huge volume of customers by introducing “Exclusively at Tesco”
which made a sustainable grounds for profitability in the industry.
References
Books and journals
Meng and et. al., 2020. Smart recovery decision-making of used industrial equipment for
sustainable manufacturing: Belt lifter case study. Journal of Intelligent
Manufacturing. 31(1). pp.183-197.
Blewitt and et. al., 2018. Business forums pave the way to ethical decision making: The
mediating role of self-efficacy and awareness of a value-based educational
institution. Journal of Business Ethics. 149(1). pp.235-244.
Bagga and et. al., 2019. QoS based Web Service Selection and Multi-Criteria Decision
Making Methods. International Journal of Interactive Multimedia & Artificial
Intelligence. 5(4).
Ghenimi and et. al., 2020. Liquidity risk determinants: Islamic vs conventional
banks. International Journal of Law and Management.
Lan and et. al., 2019. Corporate sustainability on causal financial efficiency model in a
hierarchical structure under uncertainties. Journal of Cleaner Production. 237.
p.117769.
Siebert and et. al., 2018. A hill-type muscle model expansion accounting for effects of
varying transverse muscle load. Journal of biomechanics. 66. pp.57-62.
Kotze and et. al., 2020. FINANCIAL SUSTAINABILITY AND PROFITABILITY OF
HIGH PERFORMANCE TRAINING CENTRES. South African Journal for
Research in Sport, Physical Education & Recreation. 42(2).
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