Business Finance

This article discusses varied investment appraisal methods, measures to mitigate risk and cost in inventory management, and different options for raising debt capital. It includes examples, advantages, and disadvantages of each method. The article also highlights the importance of effective inventory management and the role of production and sales departments in achieving it.

Business Finance

TABLE OF CONTENTS
Q.1 Comparing and contrasting varied investment appraisal methods that can be used by financial
managers to measure viability..........................................................................................................3
Q.2 Evaluating the different measures to mitigate risk and cost so as to get reduction in cost of
inventory level..................................................................................................................................5
Q.3 Comparison and contrast of different options for raising debt capital......................................7
REFERENCES.....................................................................................................................................9

Q.1 Comparing and contrasting varied investment appraisal methods that can be used by financial
managers to measure viability
Every organization works with a motive to choose the best investment proposal so as to
achieve economies to scale. Therefore, they can use different methods according to the need and
policies of companies.
Net present value method: This takes into consideration cash flows of each year which are
invested in a particular period and they are discounted in present time. However, it is used to access
the business value, capital project, investment security etc. It also explains how worthy the proposal
is and takes under consideration sales revenue, expenditure, and cost of investment (Net present
value, 2021). The discounting factor is generally used to measure the investment risk opportunity. It
can be inferred from the above statement that higher the NPV, the better investment proposal it is
considered.
For example:
Year Cash flows (in £) Discounted cash flow Present value (in £)
1 10,000 0.909 9,091
2 10,000 0.826 8,264
3 10,000 0.751 7,513
4 10,000 0.683 6,830
Notes
1) net present value= (9091+8264+7513+6830) 31698
2) discounted value= 1 / (1+rate%)^n
3) present value= discounted cash flows*present value
Advantages:
 It uses concept of time value of money which leads to better decision -making.
 True value of investment is easily accessed.
Disadvantages:
 It is difficult to compare projects when size of projects is different. No fixed criteria are set to evaluate required rate of return.
Internal rate of return: This method is used for comparison and ranking different projects
along with idea that how much returns such projects generate. A company should accept the
proposal only when IRR is more than cost of such projects.
Advantages:

 IRR is very easy to calculate.
 Rough estimate is made of required rate of return (Internal rate of return, 2021).
 Time value of money concept is taken into consideration
Disadvantages:
 If time period of projects is different than this method is not effective.
 Economies of scale are not taken into consideration.
Payback period: In this method, the project manager can easily determine the number of years
in which firm will take in order to recover the amount that is invested initially. Generally, the
company follows the criteria of choosing that investment proposal which have shorter payback
period (Payback period, 2021).
Advantages:
 It is widely used to measure risk associated with projects.
 Basically followed by companies where full return from investment is required to be
recovered.
Disadvantages:
 This concept doesn't explain the situation of additional cash flows which is invested after
recovering full payback.
 The primary focus of such concept is only on payback it ignores the profitability of projects.
 Time value of money concept is not used in such method.
Accounting rate of return: Instead of focusing on cash flows it gives emphasis on net
operating income to find out the worth of investment proposal. We can easily calculate it by
dividing operating income by initial investment (Accounting rate of return, 2021). After ARR is
calculates then its compared with management desired rate of return and if ARR is higher than such
proposal is selected.
ARR = Average earning after tax / Average investment
Advantages:
 This method is easily understandable.
 It lay emphasis on net earnings which is key factor to choose investment proposal.
Disadvantages:
 This doesn't take into consideration concept of time value of money.
 It ignores the external factors which has impact on its profitability.
After evaluating all the concepts, it can be inferred that company must consider project proposal
that has higher NPV and IRR as both this method is based on concept of time value of money.

Q.2 Evaluating the different measures to mitigate risk and cost so as to get reduction in cost of
inventory level.
Inventory management refers to the method in which manager checks how much stocks they
have to keep with themselves. Further, it also places emphasis on time within which company have
to reorder inventory so that smooth functioning of business operations can be ensured (EZE and
UCHENU, 2021). Customers are the key persons for any business, and to meet their demand on
time managers required to keep effective control on inventory management system.
Different types of risk and cost involved in inventory management
Cost
 Holding cost: It includes all the cost that are associated with storage of inventory like
warehousing, labour, transportation, depreciation, damaged stocks etc. All this expenditure
are added to get value of holding an inventory. Ordering cost: This involves expenses pertaining to transportation, clerical and receiving
cost etc. Carrying cost: All the expenses related to unsold stocks are count under the category of
carrying cost which in turn mainly includes storage, handling, insurance etc.
Risk Obsolescence’s: Referred as dead inventory because market demand for such product is
quite lower. Decrease in sales and profitability: If sales order for companies are high and departments
do not check the reorder period. Then, it has drastic decline in the value of its revenue and
customers demand are also not meet on time.
Measures taken to control inventory management:
 Production department along with marketing and sales department decides among
themselves that what is the demand for products so that they maintain minimum level of
inventories.
 Deciding re-order level is also an important task as sometimes demand for product is
extremely high and vice-a-versa. Selecting an effective control method to control inventory helps in achieving economies to
scale.
Inventory control methods:
There are various controlling methods used by organization for controlling cost of
inventories like ABC analysis, just in time approach, EOQ, fast slow and non-moving methods etc.
1) Economic order quantity: It is the most effective inventory controlling method used by

many companies which explains that how much ideal quantity that a company have to
purchase in order to minimize their cost of inventory. This also helps in avoiding stock out
situations (Ahmed and et.al., 2021). However, the product demand under this method are
based on assumptions which in real life doesn't give true picture.
2) Just in time approach: It means stocks are ordered only when they are required. This is the
efficient way to keep the smooth working of units. However, such methods are not suitable
for organisation which are operating at larger level.
After evaluating all the key factors to mitigate risk and cost associated with stocks, it is
concluded that inventory management is the most important task for every business. In order to be
successful, Production and sales department must work hand in hand to manage effective inventory
management system. If system is efficient then there is less chances of obsolescence’s, over
stocking and customers demand will be highly satisfied.

Q.3 Comparison and contrast of different options for raising debt capital
There are many reasons for which entity needs to inflow the sources of fund in the company
on frequent basis. Moreover, the demand that arises for increase the finance are, capital asset
requirement, expansion of business, diversification towards new product line, mergers and
acquisitions, etc. Various sources available to organisation are capital market, debentures,
government sources, venture capital, etc. According to the case study we will look into the
various options present to increase debt capital.
 Debentures
 Bank loan Venture capital, etc.
Debentures: It is an instrument issued by financial institutions by acknowledging its
obligation to pay back the same amount at specified redemption value with mentioned interest rate.
Further, debentures have various types on which they are compared are secured debentures,
unsecured debentures, convertible debentures and non-convertible debentures (Kalam and Khatoon,
2021). Generally, secured debts are backed by the securities against such loan taken by the firm
with both fixed and floating charge interest rate. Whereas, unsecured debentures are provided on the
credibility of the company without securities against such credit.
Subsequently, convertible debentures are mixed financial tool with advantage of converting
its debt into equity in contrast to non convertible debt. However, in the category of debenture that
do not allow their holders to transform into owners capital undergo debt only.
Bank loan: This are also one of the kind to inject the pool of funds in the business so that
they can meet with their requirements. Bank loans can be for both short term as well as long term
purpose in comparision to other sources of large span period of finance. The interest charged are of
two types floating and fixed, these depends on the choice of loan with willingness of customer to
take (Haralayya, 2021). Banks also provide additional facility of insurance to its account holder. In
debenture, the public infuses the flow of money to firm in return of debt certificate and in bank
loans commercial banks credit the businesses with funds. Subsequently, debentures do not ask for
any collateral from the company but there is an obligation to keep securities in case of financial
institutions. Transferability is only possible in case of debentures in respect to the bank loans as
they are not obliged to pass on.
Venture capital: Venture capitalists are the wealthy investors that suffuse money in the start-
ups if they believe that to be the most profitable one. However, the venture capital investments are

made as and when they become participating debenture holder enhance the financial partnership
(Marx and et.al., 2021). Wealthy investors also provide funds to the organisation that want to do
acquisition or buyout, expand their business line, etc. Whereas, on other side by comparing this
with other sources like bank loan they give greater opportunities to early start-ups to grow.
Consequently, banks hesitate to provide credit facility to start up as their increases the chance of
credit risk and various market risks.

REFERENCES
Books and Journals
Ahmed, E. R. and et.al., 2021. The Inventory Control System’s Weaknesses Based on the
Accounting Postgraduate Students’ Perspectives. JABE (JOURNAL OF ACCOUNTING
AND BUSINESS EDUCATION). 5(2). pp.1-8.
EZE, A. and UCHENU, C. A., 2021. INVENTORY MANAGEMENT TECHNIQUES OF SMALL
AND MEDIUM SCALE ENTERPRISES IN ANAMBRA STATE. UNIZIK Journal of
Educational Research and Policy Studies. 3. pp.295-307.
Haralayya, B., 2021. Study on Loans and Advances for DCC Bank Main Branch Nayakaman,
Bidar. Iconic Research And Engineering Journals. 4(12). pp. 232-242.
Kalam, K. K. and Khatoon, A. N., 2021. The Determinants of Capital Structure Choice: Evidence
from Bangladeshi FMCG Companies. Asian Journal of Economics, Business and
Accounting. pp. 92-106.
Marx, B and et.al., 2021. Special purpose acquisition companies as a vehicle for providing venture
capital to small and medium size enterprise. Journal of Economic and Financial
Sciences. 14(1). p.9.
Online
Accounting rate of return. 2021. [online]. Available through:
<https://www.myaccountingcourse.com/accounting-dictionary/accounting-rate-of-return>.
Internal rate of return. 2021. [Online]. Available through:
<https://www.sciencedirect.com/topics/engineering/internal-rate-of-return>.
Net present value. 2021. [Online]. Available through
:<https://www.myaccountingcourse.com/accounting-dictionary/net-present-value>.
Payback period. 2021. [Online]. Available through
:<https://www.myaccountingcourse.com/accounting-dictionary/payback-period>.