Business Finance: A Case Study

This document provides a case study on business finance, focusing on topics such as payback periods, net present value, and ratio analysis. It includes solved assignments and essays, making it a valuable resource for students studying business finance. The document also discusses the suitability of projects and the use of capital budgeting strategies. It is suitable for business finance courses at the college or university level.

Business finance
(Assignment 2: A Case Study)

Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
REFERENCES..............................................................................................................................10

Question 1
i) The payback periods.
Payback Period = Initial Investment / Annual Payback
year
project
1
project
2
initial cost 360000 390000
1 100000 70000
2 150000 90000
3 130000 10000
4 80000 150000
5 50000 50000
pay back
period 0.71 1.06
ii) Net present value at a 12% cost of capital
year
project
1
project
2
Discoun
t rate
(12%)
Pv of
project
1
Pv of
project
2
initial
cost 360000 390000
1 100000 70000 0.893 89300 62510
2 150000 90000 0.797 119550 71730
3 130000 10000 0.712 92560 7120
4 80000 150000 0.636 50880 95400
5 50000 50000 0.567 28350 28350
380640 265110
net present value -20640 124890
Suitability of the projects
The optimal rate of return is the level where the cost of debt as well as the current value of
potential cash flows are equal. A venture that does this would be profitable. In other terms, the
financing activities and current value of inflows are identical at this point, making the work
appealing. If indeed the costs are the same across all programmes, the project is acceptable IRR
would be chosen. If a company must choose between several investment opportunities for the

same cost of capital, the IRR would be used to rate the ventures to include the most successful
project. The IRR should ideally be greater than the cost of money.
In real-world settings, because any project would need a huge increase and it would have a
result and discussion, a company will use a mix of capital budgeting strategies such as NPV,
IRR, as well as payback time to choose the right project. The length of the project is not taken
into account by the IRR. For example, if an organisation would choose among two projects,
Project A with an IRR to 12% and a period of one year, and Project B with just an IRR of 12%
as well as a period of five years, and then a cost of money of 10%, both initiatives are profitable.
If the corporation chooses Project B but it does have a higher IRR, it is wrong since Project B
does have a longer length (Massa, Tucci and Afuah, 2017). The IRR is typically used to
determine the feasibility of financial products or ventures. The greater the IRR, it’s most
lucrative a financial system or enterprise is to participate throughout. Assuming that all financial
goods need the same initial investment, the item with both the acute Stress will be the better. Of
necessity, until investing, one must be aware of the risks involved. The net present value (NPV),
that is calculated by taking the present value (PV) of a project's cumulative costs and profits and
downplaying it to match potential working capital, is a critical element in determining the
crossover rate. Often businesses use present value models or diagrams to aid in decision-making.
One of two future projects is more lucrative is determined by the crossover rate. The estimation,
in particular, provides insight into another success of various programmes and balances their
future profits against risks.
The IRR is calculated using the same equation as the NPV. The NPV, on the other hand, is
replaced with zero, as well as the IRR is used in place of either the discount factor. In addition,
however unlike NPV, the IRR assumes that all cash inflows from a project is invested back in the
IRR instead of price of funds. Positive cash balances are assumed to be allocated to the IRR
throughout the formula. The IRR may recover the program's return on equity if the NPV is
exactly zero. Or, unless the return on capital is 8.5 percent as well as the NPV of the a company
is zero, their IRR for such a project would be 8.5 percent. As a result, the current value of all
currency inflows would only be enough to cover the cost of money. A negative net present value
(NPV) or an IRR well below return on capital equals zero value for the owners (Merton, 2016).
Another drawback of that same IRR would be that it takes into account the time worth of
currency and the national economy including its cash flow. IRR, on the other hand, cannot be

scaled or added to the valuation of owners. So, if three schemes have IRRs of 10%, 13%, and
22%, the overall IRR is indeed not exactly 45 percent. Alternatively, most of the projects' cash
flows can be averaged to calculate the right IRR, which, such as the NPV, gives no indication of
the scale of the initial investment (Nair and Reddy, 2017).
Question 2
Ratio analysis
 Net Profit Margin
Net Profit Margin (NPM) BME Luxury Care Industry Average
Net Income £57,881.00
Total Revenue £32,69,404.00
NPM = Net Income / Total Revenue 1.77% 3.50%
This ratio main aim is to determine how well an organisation converts profits into gains. As a
measure, gross profits have been divided by net profit. The stronger it really was, that greater it
really is considered to somehow be. The retail share is stronger than the firms, implying that
perhaps the company's profit margins per GBP of revenue are slipping.
 Total Assets Turnover
Total Asset Turnover (TAT) BME Luxury Care Industry Average
Total Revenue £32,69,404.00
Total Assets £25,02,992.00
TAT = Total revenue / Total Assets 1.31 1.50
The purpose is to examine how efficient a corporation is at extracting revenue from its assets.
As a consequence, the gross reserves is divided by the net profits. It is assumed that the stronger
it really is, the better it is. The median income is above than, indicating that the firm's resources
are not being used sufficiently to generate revenue.
 Equity Multiplier
Equity Multiplier (EM) BME Luxury Care Industry Average
Total Assets £25,02,992.00
Shareholders' equity £3,57,842.00
EM = Total Assets / Shareholders' equity 6.99 2.50

It must have been a contributing factor for determining how much of a company's assets is
funded by capital. As a result, equity and net reserves have been divided. A greater spending
ratio indicates that the investments were repaid with a substantial amount of debt. The sector
average is lower than that of the industry median, indicates that a company relies more on debt,
which really is expensive but also can contribute to bankruptcy (Naumovski, Taneski and
Dojcinovski, 2018).
 Return on Equity
Return on Equity (ROE) BME Luxury Care Industry Average
Net Income £57,881.00
Shareholders' equity £3,57,842.00
ROE = Net Income / Shareholders' equity or,
NPM*TAT*EM 16.18% 13.10%
The objective is to explore a company's profitability in relation to its investment. As a
consequence, net gains have divided the money of the owners. The exchange cost is lower than
that of the national average, indicating that the firm is effectively using its properties to generate
higher earnings.
 Return on Assets
Return on Assets (ROA) BME Luxury Care Industry Average
Net Income £57,881.00
Total Assets £25,02,992.00
ROA = Net Income / Total assets 2.31% 5.20%
The purpose is to determine how efficient a total profitability are at generating revenue. As a
consequence, the gross revenue is divided by the net assets. It is assumed that the stronger it is,
that higher it really is. The industrial median outstrips business productivity, indicating that the
firm is falling behind due to greater resource utilisation and does have a number of room for
growth.
 Current Ratio
Current Ratio (CR) BME Luxury Care Industry Average
Current Assets £6,08,992.00
Current Liabilities £4,45,150.00
CR = Current Assets / Current Liabilities 1.37 2.00

The goal is to assess firm’s actual short-term profitability as well as the efficiency at which
existing funds are paying off new liabilities and other receivables. As a consequence, accounts
receivable divides current properties. The current Ratio ought to be comparable to other ratios or
higher than the industry average. The firm's purchase price outclasses market performance,
indicating that this is deteriorating its short-term economic security and is at risk of default.
 Days Cash on Hand
Days cash on hand (DCH) BME Luxury Care Industry Average
Cash and cash equivalents £1,05,737.00
Operating expenses £31,80,356.00
Depreciation Expenses £85,000.00
DCH = Cash Available / (Operating Expenses -
depreciation) * 365 12 days 22 days
Its step is to determine how long a business can continue to cover its running expenses with
current liabilities on hand while there is no actual income from sales. As a consequence,
accessible cash has been used to break operating expenses. Since it is written in, depreciation
appears to be a non-cash gain. Since the return on assets is smaller, it is easier to calculate.
Average Collection Period
Average Collection Period BME Luxury Care Industry Average
Accounts Receivable £2,15,600.00
Total revenue £32,69,404.00
ACP = Accounts Receivable / Total revenue
*365 24 days 19 days
The objective is to explore however long it would take for a business to claim payment from
accounts payable. As a consequence, trade receivables have broken net profits. It is believed that
the smaller it is, the better it would be. The sector standard outstrips market productivity,
meaning that either customer repayment standards are poor or the firm is inefficient at managing
its total collection performance.
 Debt Ratio
Debt Ratio BME Luxury Care Industry Average
Total debt £21,45,150.00

Shareholders' Equity £3,57,842.00
Total Capital = Debt + Shareholders' Equity £25,02,992.00
Debt Ratio = Total Debt / Total Capital 86% 69%
The main aim is to determine that however much liability a business has in its financial
performance. As a measure, gross revenue has been divided by net debt (both short and long-
term). It is assumed that the stronger it's really, the more risky that was majorly impacting
company. When the business average outclasses the competition, that means the firm is more
debt-financed that equity-financed, and therefore has a greater probability of loss.
 Debt-to-equity Ratio
Debt-to-equity Ratio (DER) BME Luxury Care Industry Average
Total liabilities £21,45,150.00
Owner's equity £3,57,842.00
DER = Total Liabilities / Owner's equity 5.99 2.50
The intent is to see how privately held assets will offset public spending in the event of a
market decline. As a method, net liabilities and investors' equity are mixed. It is assumed that the
further it rises, more the volatile it gets. The market average outperforms sector performance,
implying that the company is heavily indebted and presents a higher risk to shareholders.
Internal and external performance indicators and the role of pricing on performance.
 KPIs are really an effective method for monitoring success, so when someone is
accountable for gathering and monitoring on them, they are much more implementable.
An additional bonus is that the accountable party is more likely to wish the plan to work
instead of tolerate poor results. And if the person's sole responsibility is to report on your
KPI, they could guarantee they'd still report great news than negative things, which
would only inspire them more.
 They will get a better understanding of what actions are really pushing the needle in the
correct direction if you really can clearly see how all the components of the strategy—
objectives, plans, and KPIs—fit together. You will see all of the goals that are connected
to their KPI throughout ClearPoint. So, if a KPI improves when the associated target
stays untouched, it's possible that the KPI just does not have the impact they felt it did,
but it's ready people initiate again.

 they will get a better understanding of what actions are really pushing the needle in the
correct direction if you really can clearly see how all the components of the strategic
plan, plans, and KPIs—fit together. They will see all of the goals that are connected to
their KPI throughout ClearPoint. So, if a KPI improves when the associated target stays
untouched, it's possible that the KPI just does not have the impact they felt it did, but its
ready people initiate again.


REFERENCES
Books and Journals
Massa, L., Tucci, C. L. and Afuah, A., 2017. A critical assessment of business model research.
Academy of Management Annals. 11(1). pp.73-104.
Merton, R., 2016. Manifest and latent functions. Social theory re-wired: new connections to
classical and contemporary perspectives (2nd edition). New York: Routledge. pp.68-84.
Nair, J. and Reddy, D. B. S., 2017. Leveraging Enterprise Resource Planning Systems to Digitize
Business Functions. In Enterprise Information Systems and the Digitalization of
Business Functions (pp. 20-46). IGI Global.
Naumovski, T., Taneski, N. and Dojcinovski, M., 2018. Supporting Critical Business Functions
by using Public Key Infrastructure (PKI).
Schade, M. and et.al., 2016. The impact of attitude functions on luxury brand consumption: An
age-based group comparison. Journal of business research. 69(1). pp.314-322.
Steinbart, P. J. and et.al., 2018. The influence of a good relationship between the internal audit
and information security functions on information security outcomes. Accounting,
Organizations and Society. 71. pp.15-29.
Wollschlaeger, M., Sauter, T. and Jasperneite, J., 2017. The future of industrial communication:
Automation networks in the era of the internet of things and industry 4.0. IEEE
industrial electronics magazine. 11(1). pp.17-27.
Yeoh, W. and Popovič, A., 2016. Extending the understanding of critical success factors for
implementing business intelligence systems. Journal of the Association for Information
Science and Technology. 67(1). pp.134-147.