An Assessment of the Viability of a Project

The content discusses the importance of ratio analysis in evaluating a business's performance and making informed decisions. It highlights that giving extra time to pay debts may not be viable as it can lead to imbalance between cash inflow and outflow, affecting the supplier's business. Additionally, it emphasizes the need for managers to use project evaluation methods to ensure viability before selecting a project.

Accounting and decision
making

TABLE OF CONTENTS
INTRODCUTION...........................................................................................................................3
Part 1: Business performance analysis.............................................................................................3
Interpretation of statement of P&L.........................................................................................3
Market segment analysis........................................................................................................4
Part 2: Investment appraisal.............................................................................................................6
Sources of internal finance.....................................................................................................7
Part 3: Business report.....................................................................................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODCUTION
It is very difficult to access business performance accurately merely by looking at values
in the financial statements. In order to evaluate firm performance accurately ratio analysis
method is used by the managers. In this method ratio analysis technique is used to measure firm
performance and comments are done on same. Reasons behind firm performance in USA market
are also identified in the report. In end part of the report project evaluation method is used and
viability of project is identified.
Part 1: Business performance analysis
Interpretation of statement of P&L
Profitability ratio
On comparison of gross and net profit ratio of the firm it can be observed that value of
same declined in the FY 2015 relative to FY 2014. Gross profit ratio of the firm declined from
8.44% to 6.31%. It can be said that lack of control on direct expenses is one of the main reason
due to which direct expenses get declined (Allen, Qian and Qian, 2005). Net profit ratio of the
Bertie plc also get declined from 6.75% to 4.08%. This again reflect that firm does not have
control on indirect expenses and due to this reason net profit ratio of the firm also decline (Gross
profit ratio. 2015). Sales of the firm is consistently increasing then also decrease in both profit
percentage are validating the fact that lose control on expenses is one only reason due to which
firm is earning less profit in the business (Brealey, 2012). Impact of increase in cost can be seen
on the firm and its return on investment value decline sharply. In order to elevate profit level
firm can adopt control methods and by doing so it can reduce its cost and can enhance profit
level.
Efficiency ratios
Net asset turnover indicate the efficiency with which firm is efficiently using its asset to
generate sales. If value of this ratio decline then it means that firm is not performing well. Value
of this ratio is declining in case of Bertie plc which means that firm is not using its assets
effectively to generate sales for the business (Petersen, 2009). Thus, firm needs to identify the
way in which its assets like warehouse and machines are used to produce sale of the firm
product. On the basis of analysis it can identify the best way in which assets can be used in
business. By doing so net asset turnover ratio value can be improved in the business.

Liquidity ratio
Liquidity ratio indicate the current and quick ratio of the firm. Both ratios indicate the
proportion of current assets to current liability. On the basis of analysis of values of this ratio
firm capability to pay current liability by using current asset on time is measured by the
managers. Value of current ratio in FY 2014 was 0.46 but value of same ratio is 0.39 in FY 2015
(Ross, Westerfield and Jordan, 2008). Hence, it can be said that earlier case firm was to pay 0.46
of current liability by using its current assets but now for every one pound of current asset firm is
able to pay only 0.39 current liability. Similarly, in case of quick asset value of ratio decline
rapidly and this reflects that stock cover majority of portion of firm current assets. Means that if
stock is not converting in cash rapidly then firm will face more problem in paying its current
liability on time by using current assets (Campbell, 2006). Hence, firm will need to increase
proportion of cash and marketable securities in current assets in order to improve current ratio.
Solvency ratio
On evaluating figures of gearing ratio of firm it can be said that proportion of debt in the
firm capital structure increases in FY 2015 relative to FY 2014. Gearing ratio of the firm
increase which is not good from firm point of view. Hence, it can be said that firm must abstain
from taking further bank loans (Brealey, 2012). Instead of this it must issue shares and must raise
capital public or business firms. Interest coverage ratio of the firm also get declined which means
that firm have less amount of profit that cover finance cost number of times. Hence, it can firm
needs to control its finance cost and also require to form a business strategy that boost its cash
revenue of the business.
Market segment analysis
From facts it can be seen that Bertie plc is operating in the USA, UK and other nations of
the world. It can be observed from the table that firm revenue is low in case of USA market then
UK market and rest of world. Due to this reason firm is earning low gross profit in its business.
One thing on which due attention must be given is that in case of USA market there is very low
amount of revenue then UK and rest of world (Allen, Qian and Qian, 2005). But in case of
expenses in USA market relevant value rose sharply from 152 to 301 and its current expenses are
only just half of the UK market expenses. This reflects that expenses are make in the USA
market and firm is earning good amount of return on the invested amount. This is evident from
two fold increase in revenue of the firm in the USA market. In comparison to USA market in

other markets revenue decline to some extent but expenses get increased in the UK and rest of
the world. Hence, it can be said that even USA market is giving low return but it is giving good
return to the firm on invested amount. But still performance of USA market is lower then UK
and rest of world market. There may be many reasons due to which cash flow in the USA market
is low for the firm. One of the main reason responsible for small amount of revenue in the USA
market is that its economy is not in good condition and people are dependent on government help
to meet their big expenses. Unemployment rate is also high in case of USA market and this is
also responsible for slow growth of firm revenue in the USA market. The second reason due to
which Bertie plc is earning low amount of revenue in the business is that there are many
competitors of the firm in the USA market. Due to this reason firm sales are very low in the USA
market. Extravagance in expenses may be another reason due to which firm profit is low in the
business. Poor promotion strategy in the USA market may be another reason due to which firm
failed to earn higher amount of revenue in the mentioned market. If promotion of product will
not be good then less number of people will be attracted towards firm product and this may be
third reason due to which firm earn low revenue in the USA market.
Statements of cash flows
If we analyze cash flow statement of Bertie plc then it can be seen that there is minor
difference in most of items values if we compared them on the basis of two year cash flow
statement. The only big difference in the cash flow statement is in its investment section. In this
part of cash flow statement it is identified that investment in property, plant and equipment
increased from 2000 to 12000. This was heavy plunge in invested amount relative to previous
year. Due to investment in property, plant and equipment firm cash and cash equivalents value
reduced in FY 2015. It can be observed from the facts and figures that in financing section of
cash flow statement proceeds from issue of share capital increased for the firm from 0 to 1000
and long term borrowings increased from 857 to 7129. This reflects that firm take abundant
amount of money from the market to finance its business activities. Cash flow statement is
clearly showing that amount of investment made in plant and machinery is higher then the
amount that firm receive by issue of share. Hence, it can be said that this is the main reason due
to which firm earn cash and cash equivalents reduced relative to previous year. Less amount o
dividend is paid by the firm and it is also reason that acts as resistance to decline in the firm cash
and its equivalents value. Hence, it can be finally concluded that heavy investment in plant and

machinery is one of prime reason responsible for decline in cash and its equivalents in the firm
cash flow statement.
Part 2: Investment appraisal
Management forecast
It can be seen from the table that revenue of the firm increase at a rapid pace in the USA
market. These figures seems unrealistic because USA condition is not good and it is not possible
to make prediction that in future cash flow of the firm will increase rapidly. Revenue directly
increase from 6000 to 9000 and then it jump to 13,500. in next year sales increase from 13,500 to
20,250 and this huge increase in sales revenue is very difficult to achieve in the market for the
firm if we look at the revenue of two year income statement (Mandelbrot, 2013). Future of USA
economy is uncertain and in that situation prediction of sharp plunge in revenue on year on year
basis seem unpractical (Tirole, 2010). Hence, it can be said that changes are needed in the
budget.
Payback period
Payback period indicate the time period within which project can cover invested amount
(Mandelbrot, 2013). Life time for project is 8 years and it can be observed that project will cover
invested amount in 7 years. Hence, if this project is selected then firm will earn profit only three
years. On this basis this project is assumed non profitable for the firm. The main advantage of
this method is that it can be used by any person even he does not have finance background. The
main limitation of this method is that it does not use concept of present value to compute
payback period of the project. Hence, it can be said that this project is not viable for the firm.
Poor results of firm are influencing project return and due to this reason firm needs to improve
its performance in the business.
ARR (Average rate of return) method
It indicate average return that project can earn on the invested amount within a specific
duration (Petersen, 2009). ARR of project is 52% which can be termed as good return on the
invested amount. Most of projects ARR remain in range of 30-40% but same of this project is
52% which is very huge. Hence, it can be said that this project is viable for the firm. The main
merit of ARR method is that it give brief overview of the return that project can give on the
invested amount (Minsky, 2015). The only limitation of this method is that in same concept of

present value is not used and due to this reason it is not possible to know the average return that
project currently can give to the firm.
NPV (Net present value) method
NPV is also known as net present value method and under this method present value of
all year cash flows is taken and added. After doing this initial investment is deducted from the
sum of present value of these cash flows. By doing so net present value of the cash flow is
computed by the firm. Net present value of the project is positive and it means that project is
viable for the firm (Petersen, 2009). The main advantage of NPV method is that in its calculation
concept of present value is used which was not used in other methods of project evaluation.
Hence, this method indicate the present value of the project currently. The main limitation of this
method is that anyone can not apply this method because for calculation an analyst need to take
discount rate. It is very difficult to compute discount rate because for this in weighted average
cost of capital formula some estimations need to be made related to cost of equity (Ross,
Westerfield and Jordan, 2008). Hence, due to use wrong discount rate non profitable project can
be selected for the firm.
Sources of internal finance Reduce inventory holding- Under this method firm will reduce its inventory. By doing so
its storage cost will decline and economies of scale will be generated in the business.
Saved amount will be used to fund firm internal operations. Firm can reduce inventory
holding days and inventory in the warehouse (Tirole, 2010). By doing so it can to large
extent can reduce its inventory holding cost. Hence, this option is viable for the firm.
 Extending supplier payment terms- Bertie plc purchase raw material from suppliers and
due to non meeting of working capital needs it compelled to make purchase of raw
materiel on credit basis. Hence, this create liabilities for the firm. Firm can use this as a
source of finance and can take extension for supplier in terms of payment of debt to them.
By doing so it can finance its needs to some extent. But this option is not viable for the
firm because no supplier prepared to give extra time to the firm in terms of payment of
debt amount. This is because by doing so there may be a chances of imbalance between
cash inflow and outflow in supplier business. If extension on debt will be given to one
person then other person will also demand same which will not good from supplier point

of view. Hence, there are very little chances that any suppler give extension on debt
payment. Thus, this option is not viable for the firm.
Part 3: Business report
To
The Directors of Bertie plc
Date: 20th April 2016
Sir/Mam
On analysis of performance of firm it is identified that that its performance declined in current
fiscal year. This can be observed from values of all ratios of ratio analysis. All ratios are clearly
indicating that firm does not give good performance in its business. Moreover, its debt also
increase by large amount in current fiscal year which may create problems for Bertie plc in
future time period. Project is assumed viable for the firm because same is giving good amount
of average return to the investors. ARR of project is 52% and of NPV is 6,915 and on the basis
of latter parameter also project is assumed viable for the firm. Payback period of the firm
project is very long and on this parameter project proved non-viable for the firm. Hence, most
of parameters are indicating that this project is profitable for the firm.
CONCLUSION
On the basis of above discussion it is concluded that ratio analysis is very important
method that is used by the managers for evaluating a business performance. Managers must ratio
analysis method in order to identify company strong and weak points. By formulating suitable
business strategy weak points can be converted in to strong points and firm performance can be
improved. Manager must not use select any project randomly and they must apply project
evaluation methods in order to check viability of the project. Hence, instead of selecting any
project randomly, it will be better to select any project by using project evaluation method.

REFERENCES
Books & journals
Allen, F., Qian, J. and Qian, M., 2005. Law, finance, and economic growth in China. Journal of
financial economics. 77(1). pp.57-116.
Brealey, R.A., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Campbell, J.Y., 2006. Household finance. The Journal of Finance. 61(4). pp.1553-1604.
Mandelbrot, B.B., 2013. Fractals and Scaling in Finance: Discontinuity, Concentration, Risk.
Selecta Volume E. Springer Science & Business Media.
Minsky, H.P., 2015. Can" it" happen again?: essays on instability and finance. Routledge.
Petersen, M.A., 2009. Estimating standard errors in finance panel data sets: Comparing
approaches. Review of financial studies. 22(1). pp.435-480.
Ross, S.A., Westerfield, R. and Jordan, B.D., 2008. Fundamentals of corporate finance. Tata
McGraw-Hill Education.
Tirole, J., 2010. The theory of corporate finance. Princeton University Press.
Online
Gross profit ratio. 2015. [Online]. Available through: < http://www.accountingtools.com/gross-
profit-ratio>. [Accessed on 20th April 2016].