Capital Budgeting Techniques and Long-Term Financing for S Plc

Business Report

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
A.......................................................................................................................................................3
1. Explaining the importance of capital appraising process........................................................3
2. Calculating cash-flow analysis statement...............................................................................3
3. Calculating Payback period.....................................................................................................4
4. Determining Net Present Value for new investment...............................................................5
5. Explaining logic behind Net present value and relationship to cost of capital.......................5
6. Computing Internal Rate of Return and its impact on investment..........................................6
7. Discussing the superiority of NPV than IRR..........................................................................6
B.......................................................................................................................................................7
Critically contrasting bank loan with equity issue in long-term finance....................................7
C.......................................................................................................................................................8
1. Calculating break even sales revenue.....................................................................................8
2. Calculating the changes in BEP if prices changes..................................................................8
3. Discussing the assumption of Cost-volume-profit analysis....................................................9
D.....................................................................................................................................................10
1. Explaining the difference between three categories of suppliers..........................................10
2. Comparing the advantages of single-sourcing and multiple sourcing..................................11
3. Describing Cross-sourcing with example and benefits.........................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
Capital investments require lot of funds by company so that it can enhance its business
operations and can achieve higher goals and objectives. It can be done through various sources
such as raising a loan or equity shares, utilizing company's retained earnings, etc. The present
report is based on S Plc which deals in computer games and wants to broaden its product line.
The study will outline various techniques of capital budgeting which can be used by organization
to analyse profitability of proposal.
Further, the report will highlight the contrasting views on equity issue and bank loans. It
will also calculate break even sales revenue and will provide useful insight about cost-volume
profit analysis. In addition to this, report will also distinguish between different categories of
suppliers and will compare single source and multiple sources of procurement. Lastly, study will
explain cross-sourcing along with example and its benefits to buyers.
TASK
A
1. Explaining the importance of capital appraising process
 Evaluating the capital investment with different techniques helps company identifying the
optimum proposal that will give company maximum output with minimum input and
risks.
 Large amount of money is invested in capital resources that makes it necessary for S Plc
to analyse investment proposals in depth (Alles and et.al., 2021).
 Investment decisions are linked to S Plc's strategic business decisions that have direct
impact on shareholders' wealth. Therefore, to maximize shareholders' wealth capital
decisions are important if taken with the help of different techniques.
 S plc is involved with no. of long term investment proposals which leads to greater risks
than return. In such case, cash flows may be affected badly. Hence, capital appraisal is
beneficial for business entity.
2. Calculating cash-flow analysis statement
Initial Investment
Particulars Amount (£)

Production equipment 1000000
Staff training provision 100000
Advertising & promotion costs 20000
Incremental working capital 180000
Total 1300000
Cash Inflow
Year Amount (£)
1 600000
2 1000000
3 1200000
4 1000000
5 800000
total 4600000
Cash Outflow
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cost of sales 180000 300000 360000 300000 240000
Operation costs 100000 100000 100000 100000 100000
Depreciation 260000 260000 260000 260000 260000
Total 540000 660000 720000 660000 600000
Cash-flow statement
Year Cash inflow Cash outflow Net Cash flow
1 600000 540000 60000
2 1000000 660000 340000
3 1200000 720000 480000
4 1000000 660000 340000
5 800000 600000 200000