Analysis of Capital Budgeting Techniques and External Sources of Fund Raising for K PLC

This report analyzes the capital budgeting techniques used by K PLC to determine the best project investment. It also discusses the external sources available for fund raising and their strengths and weaknesses. Qualitative factors of capital budgeting are also considered.

Business Report

Introduction......................................................................................................................................2
Task A…………………………………………………………………………………………....2
In this, company will determine its payback period for each of its project.................................2
To calculate Net present value of the projects.............................................................................3
Ranking the projects on basis of payback period and net present value....................................5
To choose the projects if they are mutually exclusive.................................................................6
Strengths and Weaknesses of Payback period and Net Present Value.........................................6
Qualitative Factors of Capital Budgeting....................................................................................8
Task B..............................................................................................................................................9
There are various external sources available to K PLC for the purpose of raising the funds.....9
Link between investing and financing activity :........................................................................10
TASK C..........................................................................................................................................10
Standard costing system............................................................................................................10
Explanations of the variances identified :..................................................................................12
TASK D.........................................................................................................................................13
Difference between centralised and decentralised purchase management :..............................13
Conclusion.....................................................................................................................................14
REFERENCES..............................................................................................................................15

Introduction
This report include the basic description of the company to complete the working and
manage the sources in the range of financial strategies that are associated to make budget,
effective financial management and accounting process. Furthermore the use of approaches for
procurement and contracting information are analyse within the use of organisation within the
company. In last the commercial context for the organisational operating activities are analyse
and discuss within the report.
Task A
This section focuses on determining the best project investment for k plc. In this various projects
are mentioned along with their duration.
Projects Initial investment(£) Annual cash inflow(£) Project
duration(£)
Payback period (£)
A 1000000 300000 6 3.33
B 400000 100000 4 4
C 700000 200000 5 3.5
D 614500 100000 10 6.15
E 500000 120000 7 4.17
F 560000 100000 10 5.6
In this, company will determine its payback period for each of its project.
It is a time frame organisation needs to recover its cost of initial investment. Moreover,
its a time period to reach the breakeven point. The best payback period is the one which recovers
its cost in the shortest time span. However, not all projects have same time period so, the shortest
one will be at the advantage. It is calculated by dividing the amount of initial investment / annual
cash inflow.
Payback period = Initial investment in the project
Annual cash inflows

Calculation for project G, in this cash flow on annual basis is not equal. So, by applying
formula it will the back period will be calculated.
Year Uncovered amount at start
of the year (£)
Investment done
(£)
Cash inflows
(£)
Uncovered
investment at year
end (£)
0 - -200000 - -200000
1 -200000 - 100000 -100000
2 -100000 - 100000 0
3 - - 20000
4 - - 20000
5 - - 20000
6 - - 20000
By applying, the formula,
Payback period for uneven cash inflows = Years before full recovery + uncovered amount
at the start of the year / cash flow during the year
Time taken to recover the amount of the project is 2 years.
To calculate Net present value of the projects
Company finds the difference between cash inflows and cash outflows. It is used for
capital budgeting purposes to measure which project will give higher returns.
Projects Initial
investment (£)
Cash inflow
(£)
Project
duration
Present annuity
value (£)
Net present value
(£)
A 1000000 300000 6 4.355 306500
B 400000 100000 4 3.170 -83000

C 700000 200000 5 3.791 58200
D 614500 100000 10 6.145 0
E 500000 120000 7 4.868 84160
F 560000 100000 10 6.145 -54500
Formula, Initial investment – (annual cash inflows*annuity value)
I = cost of capital
Project A = (300000*4.355) - 1000000
= 1306500– 1000000
= 306500(£)
Project B = (100000*3.17) – 400000
= 317000 – 400000
= -83000(£)
Project C = (200000*3.791) – 700000
= 758200 - 700000
= 58200(£)
Project D = (100000*6.145) – 614500
= 614500 – 614500
= (0)(£)
project E = (120000*4.868) - 500000
= 584160 – 500000
= 84160(£)
Project F = (100000*6.14) – 560000
= 614000 – 560000
= (54500) (£)

Project G, calculation as follows :
Year Investment
(£)
Cash inflows
(£)
Present annuity value Net annual
value (£)
1 -200000 100000 0.91 90900
2 - 100000 0.83 82600
3 - 20000 0.75 15020
4 - 20000 0.68 13660
5 - 20000 0.62 12400
6 - 20000 0.56 11280
Total {225860-
200000}
25860
So, net present value of the projects is determined to take decision regarding which
project to invest, in order to generate profits. It is helpful in taking the decisions to do profitable
investments to boost the productivity of the business (Belyansky and et. al., 2018). This net
present value method helps in determining which project is beneficial in the long run.
Ranking the projects on basis of payback period and net present value.
These are the methods which will be helpful in ascertaining the profitable projects. Payback
period showcases how much time a company needs to recover its cost of investment.
Furthermore, this will help to figure out which project gives us return in short span. Other than
this, net present value is used for capital budgeting and investment planning
Projects Investment (£) Ranking as per payback period Ranking as per present value
A 1000000 2 1
B 400000 4 7
C 700000 3 3

D 614500 7 6
E 500000 5 2
F 560000 6 4
G 200000 1 5
As per the analysis done above ranking has been done. In this the project which recovers
cost quickly is the most profitable one and the one which takes too much time in recovering is
the last one. So, as per payback period project G is the most profitable one because it recovered
cost in two years. And as per net present value the best one is Project A which is giving higher
returns.
To choose the projects if they are mutually exclusive
As per the analysis done above, the payback period shows Project G recovers cost quickly so, it
is profitable one. But after giving insight into future returns it is ascertained Project A will be the
best investment. Because in this returns are higher as compared to others and will return the cost
in just two years (Cheng and Radio, 2018). These technique of investment decisions is helpful in
evaluating various projects and useful in identifying all types of risks. Moreover, it helps to avoid
any over and under investment as well as control any extra expenses.
Strengths and Weaknesses of Payback period and Net Present Value
Capital budgeting: It is a method used to evaluate the profitable projects. If any company wants
to invest in any heavy projects which requires huge investment, all such decisions are taken after
doing the keen analysis of cost. There are various methods used for capital budgeting purposes,
for instance, internal rate of return, net present value, profitability index, accounting rate of
return, payback period. Moreover, this technique of investment is used for the purpose of taking
decision regarding long term investment.
Strengths of payback period:
Payback method is very simple to calculate and easy to understand. As in this, projects will be
compared on the basis of time span (Emerson, 2018). It helps in quick decision making which
projects are fruitful to invest in.

It helps in project evaluation easily. Two elements required to calculate payback period is annual
cash inflows and initial investment.
It also helps in reducing the risk of losses case of uncertainties. As the economy keeps on
changing so, to bear all such uncertain changes this method will be flexible.
Weaknesses of payback period:
It ignores cash flows after payback period. As there are chances that profits may not occur during
the payback period. So, this is a drawback of payback method.
Ignores time value of money concept – It does not take into consideration the concept of time
value of money. Two projects could not be compared on this basis as there are chances one
project generates cash in early years and other in later years. As this does not provide clear
analysis of which project to choose.
Strength of net present value:
It is beneficial as it uses the concept of time value of money. This computation requires
discounted net cash flows to determine the accurate results. It helps in analysis of which projects
will be profitable.
This method also enables organisation to take decisions of huge investment. It not only helps to
evaluate but also ascertains which investment is profitable and which incurs losses to the
business. Therefore, it helps the ventures to invest in the projects which would generate higher
returns.
Weaknesses of net present value: Although, it is one of the best method, but still cannot be used
to compare projects of different sizes. There are times when one project is profitable and other
one has higher returns (Engel and et. al., 2020).
Net present value method takes into account cash inflows and cash outflows . But does
not consider sunk cost or any other hidden cost while doing calculations therefore, the
profitability cannot be calculated with absolute accuracy.
It has difficulty in calculating required rate of return because determining the rate at
which cash flows are to be discounted might be difficult for the organisation. If a firm uses
wrong estimation it would give inaccurate results.

So, these two methods are used to ascertain in which project to invest. Both has its
advantages and disadvantages. Therefore, an organisation has to conduct deep analysis while
taking the decisions of investment.
Qualitative Factors of Capital Budgeting
Various qualitative factors to be considered before making any decision of capital budgeting. It is
the most important factor to be considered while making decisions as they are responsible for
shaping any business. Moreover, it helps in resolving many critical issues due to economic,
political or any other changes. It affects the operations and profitability of the concern.
Therefore, these decisions are to be considered before making any huge investment.
• Existing competition in markets: This factor is most important to be considered as it
affect the cash flow due to uncertainties in the prevailing market. There are lot of
uncertain actions which competitors took for instance, reduction in cost or coming with
the updated technology and so on (Helms, Salm and Wüstenhagen, 2020). Therefore,
these uncertain changes can cause serious issues and affect the cash flows of the
company.
• Human errors: This focuses on the errors committed by management in estimating
discount rates which are needed to be considered in capital budgeting decisions. It has
high importance in the success and failure of the concern. Moreover, time scheduling
issues, prices of the resources and other materials are major considerations which led to
success or failure of the business concern.
• Social trends: changes of the societal trends are an important qualitative factor to be
considered while making investment decisions. These trends keeps on changing with time
so, company's have to keep themselves updated as per the current market conditions in
order to make profits. In these organisations has to monitor what are the likes and dislikes
of the target audience, what are their goals and missions and how they keep on changing
with time. So, businesses have to do investments after a deep insight into customers
needs and wants.
• Environmental factors: as with growing concerns of society, businesses have started
taking societal responsibilities. Companies who have recognition and awards for

environmental stewardship stand apart from its competitors. It positively influences
stakeholders and customers as well as helps in acquiring new customers and creates
loyalty from existing customers.
So, these qualitative factors are considered while making capital budgeting decisions as these
investments are expected to generate long term benefits. This improves the efficiency,
productivity, revenues of the business concern. Not only the financial factors are rather all these
other factors considered before making any expenditure in order to capture large market share.
Task B
There are various external sources available to K PLC for the purpose of raising the funds.
• Bank loans: this is an external source which a business can use to raise funds. For
obtaining the funds having a good credit history is important for the concern. It
showcases the financial position of the company and provides assurance to the bank
regarding the payment of debts. So, banks ask for the financial statements before issuing
the loan to see the ability of the company to pay of its debts. These statements reflect the
profits and losses of the business concern and the current financial condition of the
company. Furthermore, this allows lenders to see whether your company would able to
make payment of the debts on time.
• Government loans and grants: this is another external source to raise the funds in order
to expand the business. In this government provide capital to the business in the form of
grant for the purpose of expansion. These grants are provided to promote the economic
growth of the industries. Alternatively, businesses can raise funds through micro loans
from government agencies. These will help the businesses to keep going and non profit
organisations provide help to the owners in boosting the growth of local economic
system. For the purpose of raising loans through grants businesses have to provide details
regarding the project description, a detailed plan with full costs, completed application
forms and all the relevant procedures are need to be fulfilled.
• Venture capital: Venture capitalist looks for the businesses with high growth potential to
invest in. This includes sectors such as information technology, communication,

biotechnology and so on. These take ownership position in the company and expect
higher return on their investments. So, this source not only brings funds for the expansion
but also, relevant experience and knowledge of the investors.
Therefore, these are the external source which businesses can opt for the purpose of its
expansion. Although it is expensive source because businesses have to pay high rate of interest
on the raised funds.
Link between investing and financing activity :
Financing and investing are two different activities of financial management to raise the
funds in the organisation. Financing is an act of raising funds through internal and external
sources. Internal sources are equity, retained earnings and so on which cost less to the businesses.
Alternatively, external sources are debenture, loans from banks and government etc. cost high to
the owners. It increases the risk of the organisation. On the other hand, investing is an act of
obtaining money by investing in the profitable projects. These are important for the long term
success of the organisation. To conduct financial planning these activities are considered. Or for
framing future corporate strategies various decisions are considered regarding from which source
to raise funds and whether that would be profitable for the business concern or not. So, these
decisions are taken with regard to finances of the company. These decisions are regarding the
acquisition of the assets, raising funds from different sources, investing in the profitable projects
and so on. This affect the assets and liabilities of the business concern. So, financing will help k
plc to raise the funds from various sources and later, invest the raised funds in profitable projects.
TASK C
Standard costing system
It is the process of estimating the expenses of production process. It is used by the
manufacturer to plan their future expenses in advance for instance, direct material, direct labour,
overheads and so on. It helps the management to control the expenses of day to day operations.
Moreover, it is system of cost control in which standard cost is compared with actual cost and
variances are identified by comparing the two. It can be used by any industry to make budgetary
control effective.

As per the production of 40,000 units in whole year, company is assuming 10000 units produced
on quarterly basis.
Particular Standard
quantity (£)
Standard
price (£)
Standard
cost (£)
Actual
quantity (£)
Actual price
(£)
Actual cost
(£)
Direct
material S
10000 3 30000 8500 3.5 29750
Direct
material T
10000 2 20000 18000 1 18000
Direct
labour
3 hours *
10000 units
10 300000 28000 10.5 294000
Variable
overheads
3 hours *
10000
18 54000 9000 units 18.3 165000
• Calculation of variances :
Material variances
For S, material cost variance = standard cost – actual cost
= 30000 – 29750
= (£) 250 (favourable)
For T, material cost variance = standard cost – actual cost
= 20000 – 18000
= (£) 2000 (favourable)
Material price variance = (standard price – actual price)* actual quantity
For S, = (3 – 3.5) * 8500
= (£) 4250
For T, = ( 1 – 1 ) * 18000
= 0
Material usage variance = (standard quantity – actual quantity) * standard price
For S, = (10000 – 8500)*3

= (£) 4500
For T, = (10000 -9000)*2
= (£)2000
• Labour variances :
Labour cost variance = standard cost – actual cost
= 300000 - 294000
= (£) 6000
Labour rate variance = (standard price – actual price) * actual hour
= (10-10.5)*28000
= (£)(14000) adverse
Labour efficiency variance = (standard hours – actual hours) * standard rate
= (30000 - 28000)*10
= (£) 20000
Variable overhead variance = standard variable overhead – actual variable overhead
= 180000 – 165000
=15000
Explanations of the variances identified :
As in this standard costing method is used to calculate the variances for the purpose of
controlling the cost. In this firstly, material variances are identified by categorizing them in
material cost variance, material price variance, and usage variance. This helps to compare the
cost by using the standards and actual. On the other hand, labour variances are calculated to
identify the cost of labour. So, this helps in controlling the cost of the organisation and improves
productivity. These will help the management in further decision making.

TASK D
Difference between centralised and decentralised purchase management :
Centralised purchasing management Decentralised purchasing management
• This means only single department
control all the purchasing activities of
the organisation.
• In this data is transparent regarding
how much money is spent on purchase
of material, who is ordering and where
it is going with central procuring team.
• Here, communication flow is vertical as
single department handles the activity
and later spread the communication.
• It is systematic and rigid as due to no
complexities.
• It is best suited for small organisations.
• While in this, activities are managed
and controlled by different
departments.
• In this it gives chances to department
buyer which complexes the procedures
at some level.
• In this communication flows in all the
directions as various departments are
involved in the purchasing process.
• It is flexible because different
department handle different activities.
• It is best suited for large organisations.
Benefits of centralised purchasing :
1. it helps in better material control because all the material management is done by central
procuring team.
2. As here the procurement team is highly skilled, which will keep better supervision of the
material usage. In this they maintain complete record of how much material is required,
where it goes and which department requires how much.
3. It reduces the chances of duplication as the central team has all the records of the
purchase.
4. It also facilitates storage audit and reduces the clerical work because single department is
managing and controlling all the purchases.
Merits of decentralised purchasing system-
1. as in this all the departments are involved so, they can purchase locally whenever they
need anything.

2. It helps in the timely availability of raw material as they can purchase material locally in
right quantity and quality easily.
3. There are very less chances of obsolescence because departments purchase material when
there is need instead of purchasing in bulk by centralised purchasing team.
4. Purchase orders can be make quickly and easily as all the departments purchase as per
their need.
Conclusion
As per the study done above, company identified various sources though which it can
raise funds for its business. These are internal or external sources for financing purposes. And
after raising the funds management take decisions regarding investment. After analysing various
projects through different techniques management take decision to invest in the profitable one.
At the last, variances are calculated by using standard costing method to keep control on the cost.

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