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

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