Business Finance (Assessment 2) - Investment Techniques, Performance Indicators, and Pricing Strategies

This report discusses investment techniques like Payback period, IRR and NPV to analyze which project to invest in for good return. It also compares internal and external performance indicators and discusses various types of pricing strategies. The report includes subject Business Finance, course code not mentioned, course name not mentioned, and college/university not mentioned.

BUSINESS FINANCE
(Assessment – 2)

Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
Capital investment decision.....................................................................................................................3
Analysing and comparing the internal and external performance indicators..........................................9
CONCLUSION.............................................................................................................................................13
REFERENCES..............................................................................................................................................15

INTRODUCTION
Business finance refers to the funds necessary to implement retail operations. Mostly every
company activity necessitates some form of funding. Business finance is a broad phrase that
refers to a variety of operations and specialties centered on the utilization of resources and other
tangible resources. It's a broad phrase that refers to a variety of operations and specializations
centered on the liquidity management and some other tangible assets. To start a firm, run it,
modernize it, increase it, or broaden it (Althnian, 2021). It is necessary for the purchase of a wide
range of assets, both visible and immaterial, such as technology, companies, structures, and
workplaces. In this report consist of investment techniques like Payback period, IRR and NPV to
analysis in which project invest for good return. Along with compare internal as well as external
performance indicators and discuss various types of pricing strategies.
MAIN BODY
Capital investment decision
The payback period:
Project 1
Year Net Cash flows Cumulative cash flows
1 100,000 100,000
2 150,000 250,000
3 130,000 380,000
4 80000 460,000
5 50000 510,000
Initial Investment 360,000
Payback period = 2 years + [(360000 - 250000) / 130000 * 12
months
2 Years + (110,000 / 130000) * 12 months
2 years + (0.846 * 12 months)

2 years + 10.15 months
Project 2
Year Net Cash flows Cumulative cash flows
1 70000 70000
2 90000 160000
3 100000 260000
4 150000 410000
5 50000 460000
Initial Investment 390000
Payback period = 3 years + [(390000 - 260000) / 150000 * 12
months
3 Years + (130000 / 150000) * 12 months
3 years + (0.867 * 12 months)
3 years + 10.40 months
As per the analysis of both projects it is suggested that invest into project 1 because it
provides return in 2 years 1 month and project 2 returns in 3 years 9 months.
Net present value: The DCF assessment' net present value (NPV) tool calculates the npv of a
suggested initial investment. The net present value (NPV) is calculated by summing all of the
financial outputs and arrivals for the management reserve at the return on capital. Cash
withdrawals are unfavorable, whereas cash inflows are favorable. The present values price is the
amount of the present values of all financing costs from the business. As a result, the NPV equals
the purchase price (PV) of all plan cash flow equal to the present value (PV) of all program
income statement (MALIK and et.al, 2021).

For Project A:
Project A
Year Net Cash flows Discount Factor @
12%
Present value of net cash
flows
1 100,000 0.892 89200
2 150,000 0.797 119550
3 130,000 0.711 92430
4 80000 0.635 50800
5 50000 0.567 28350
Total Present value
=
380330
Initial Investment = 360,000
NPV = 20330
Project B
Year Net Cash flows Discount Factor @
12%
Present value of net cash
flows
1 70000 0.892 62440
2 90000 0.797 71730
3 100000 0.711 71100
4 150000 0.635 95250
5 50000 0.567 28350
Total Present value
=
328870
Initial Investment = 390000

NPV = - 61130
As a result of the business's analysis of the two proposals, it can be stated that initiative
A's Net Present Value is significantly higher and should be adopted by Beta Limited. The Net
Present Value of Project B has sunk to a negative level. The corporation should not approve
Project B.
Internal rate of return:
Period Inflows PV @ 12% Cash Flow
0 360,000 1 -360,000
1 100,000 0.892 89200
2 150,000 0.797 119550
3 130,000 0.711 92430
4 80000 0.635 50800
5 50000 0.567 28350
Residual value
at the end 380330
Net Present Value -20330

Period Inflows PV @ 14% Cash Flow
0 360,000 1 -360000
1 100,000 0.877 87700
2 150,000 0.769 115350
3 130,000 0.674 87620
4 80000 0.592 47360
5 50000 0.519 25950
Residual value
at the end 363980
Net Present Value -3980
IRR = 12 + { -20330 / (20330) - (-3980) } * ( 14 - 12 )
= 12 + { -20330 / 3980 } * 2
= 8.8 %.
Period Inflows PV @ 12% Cash Flow
0 390,000 1 -390,000
1 70000 0.892 62440
2 90000 0.797 71730
3 100000 0.711 71100

4 150000 0.635 95250
5 50000 0.567 28350
Residual value
at the end 328870
Net Present Value 61130
Period Inflows PV @ 14% Cash Flow
0 390,000 1 -390000
1 70000 0.877 61390
2 90000 0.769 69210
3 100000 0.674 67400
4 150000 0.592 88800
5 50000 0.519 25950
Residual value
at the end 312750
Net Present Value 77250
IRR = 12 + {61130 / 61130 - 77250) } * ( 14 - 12 )
= 12 + {61130 / (16120) } * 2
= 12 %.

By analyzing the internal rate of return both on the A and B projects. It can be concluded
that management A has a lower internal rate of return. In comparison to project A, project B is
just more. The industry rate of return is usually around 10%. As a result, project A should be
chosen because the IRR is lower than the standard worth (Durana and et.al, 2020).
Project A should be evaluated if the business decides to accept one of the two initiatives.
Project A has an upfront outlay of 360000, payback duration of 3.1 years, a larger and better Net
Present Value (NPV) approach, and an internal rate of return that is substantially lower than the
standard rate of return. In compared to project B, the Beta limited firm must select a first venture
in A.
Analysing and comparing the internal and external performance indicators
The below are the ratios that assist Beta Limited in determining the corporation's
responsibility. The following are the proportions:
Current ratio:
Current Ratio= Current Assets / Current liabilities.
Current assets 49000
Current liabilities 27000
Calculation 49000/270000 = 1.81:1
Thus, the Current Ratio for the Beta limited company= 1.81:1.
Quick ratio:
Quick ratio: Current Assets -Inventories- Prepaid/Current Liabilities
Quick assets 22000
Current liabilities 27000
Calculation 22000/270000 = 0.81:1
Thus, the quick ratio for the Beta limited company= 0.81:1

Debt to equity ratio: Calculating the debt-to-equity ratio will help you learn how accountable a
firm like Beta Limited is. The formula for determining the debt-to-equity ratio is:
Debt to equity ratio: Short Term Debts + Long Term Debt/ Stockholders equity
Debt 140000
Equity 79000
Debt to equity ratio 140000/790000 = 1.77:1
Working Notes:
All total debts of the company are: Bank loans + 5%Debentures
60000 + 80000
= 140000
Stockholders’ equity: Equity Share Capital + Reserve and Surplus + 6% Preference Share
Capital
= 50000+ 19000 + 10000
= 79,000
Interest coverage ratio: Users can also compute the interest coverage ratio to determine the
responsibility of a corporation like Beta limited. The method of determining the interest coverage
ratio is:
Interest coverage ratio= Earnings before interest and tax/ Expense of the interest
Earnings before interest and tax 95000
Expense of the interest 20000
Calculation 95000/20000 = 4.75:1

Thus, the interest coverage ratio for the Beta limited company= 4.75:1.
Stock turnover ratio
Net sales 700,000
Average inventory 125000
Calculation 700000/12500 = 56:1
Debtor’s turnover ratio
Net credit sales 700000
Average debtors 5000
Calculation 70000/5000 = 150:1
Creditor’s turnover ratio
Creditor’ turnover ratio= Net credit purchase/ Opening creditors + Closing Creditors/2
Net credit purchase 3750000
Average creditors 5000
Calculation 375000/5000 = 75:1
Net profit margin ratio
Net profit 90000
Net sales 70000
Calculation 90000/70000*100 = 12.86%

These would be the accounting ratios that a firm calculates in addition to assessing a
corporation's responsibility particularly when it comes to a business such Beta Limited. The
business's position is in solid hands overall.
Multiple operational elements have an impact on the Beta limited corporation. External
variables have a significant impact on how a company operates. External factors do not influence
the organisation; rather, external factors govern the organisation (Doan and Bui, 2020). External
elements that can have an impact on an organizational success, particularly beta restricted,
include:
 Credit facility: The payment process of the Beta limited business can be determined by
looking at the creditor turnover margin. The credit turnover ratio of a corporation aids in
determining trustworthiness. Beta limited is known for having a strong credit facility.
 Audience: The Beta limited corporation mainly targets people between the ages of 21 and
45.
Internal factors, on the other extreme, are those that have control over the organisation. The
organisation has control over these variables. The factors are:
 Resources: The availability of funds in the Beta limited corporation is sufficient.
Assessing a corporation's debtors and the debtor turnover ratio might help determine the
availability of materials.
 Capabilities: The Beta restricted capabilities are also adequate. The competencies are
sufficient for a corporation to earn a living (Debellis and Pinelli, 2020).
Every one of these elements has an impact on running a company.
Unless the study is done correctly, Beta Limited can be considered to be a steady company. The
corporation should not make many changes. They should concentrate on a few factors, such as
increasing their accounts receivable, which is defined as the typical borrowers and debtors'
turnover ratio.
Although various organizations have varied net profit margins, Beta Limited has an
aggregate net profit margin of 12%. Maintaining a profit margin ratio of more than 10% is

generally recommended. Beta Limited has also had a possibly the best debt place in the industry.
The corporation's debt-to-equity ratio has remained around 1.77:1, which is significantly higher
than the industry average. The corporation should strive to keep more market-appropriate debts.
As a result, by concentrating on a few key areas, Beta Limited will be even more successful in
this position future. By keeping track of their obligations and raising their trade receivables while
decreasing their interest expenses (Martins and Verona, 2021).
Different types of pricing strategies
A pricing strategy is a method for determining the profitability of a company or service.
It encompasses all strategies for determining the correct pricing, with the objective of retaining
demand and earnings as high as possible.
Cost plus pricing: Cost-plus pricing is amongst the most basic and often used pricing
models in the corporate world. Start adding a basis points premium to selling price with this
technique, and they'll know how much to pay (Procházka, 2021).
Value pricing: A value pricing approach considers the apparent price of a good or services,
frequently taking into account environmental cues. It encourages analyzing how and how much
consumers will profit from what they're selling, even while accounting for elements that aren't
immediately measurable.
Penetration pricing: For small startups enterprises who are still building their brand,
market penetration can be very beneficial. But it can be hazardous; it's a terrific approach to
attract customers who otherwise might overlook good or service (Li and et.al, 2020).
CONCLUSION
As per the above report it has been concluded that Finance is essential to conducting daily
operations financial transactions such as expanding financial, transferring money, salaries, and
receiving payments from consumers, and is thus required at all stages of a company's life cycle.
Each company requires funding. At the start of a firm, capital is essential. It's also required after
the company is up and running. Finance is required to develop a business as it increases in size
and develops. The borrowing costs for businesses are separated into two categories, as follows: -
Capital Expenditures and Fixed Capital. The accompanying section provides in-depth

information and an understanding of different financial ratios, methodologies for selecting the
best venture from a collection of two or more project, risk assessment evaluations, and the
numerous aspects that affect the running of a Beta limited corporation.

REFERENCES
Books and Journal
Althnian, A., 2021. Design of a Rule-based Personal Finance Management System based on
Financial Well-being. International Journal of Advanced Computer Science and
Applications. 12(1).
MALIK, Q. A. and et.al, 2021. Simultaneous Equations and Endogeneity in Corporate Finance:
The Linkage between Institutional Ownership and Corporate Financial Performance. The
Journal of Asian Finance, Economics and Business. 8(3). pp.69-77.
Durana, P. and et.al, 2020. Heads and tails of earnings management: quantitative analysis in
emerging countries. Risks. 8(2). p.57.
Doan, T. and Bui, T., 2020. Nonlinear impact of supply chain finance on the performance of
seafood firms: A case study from Vietnam. Uncertain Supply Chain Management. 8(2).
pp.267-272.
Debellis, F. and Pinelli, M., 2020. Board interlocks in SMEs and the formation of international
joint ventures. Piccola Impresa/Small Business, (2).
Martins, M.M. and Verona, F., 2021. Bond vs. bank finance and the Great Recession. Finance
Research Letters. 39. p.101583.
Procházka, D., 2021. Digitalization in Finance and Accounting. In 20th Annual Conference on
Finance and Accounting. Springer.
Li, M. and et.al, 2020. Blockchain-enabled logistics finance execution platform for capital-
constrained E-commerce retail. Robotics and Computer-Integrated Manufacturing. 65.
p.101962.
Ali, A., 2021. Firm size and supply chain finance in Indian pharmaceutical industry: Relational
firm analysis of size determinants and cash conversion cycle. Accounting. 7(1). pp.197-
206.