Sources of Finance for Capital Projects

The assignment requires the student to analyze various sources of finance available for capital projects. It involves identifying and explaining different options such as loan, grants, venture capitalists, retained earnings, and share capital. The student needs to consider factors such as organizational culture compatibility and perceived outcomes when adopting management accounting innovations. This assignment is relevant to students studying financial management or business finance.

Finance and Funding in Travel and Tourism

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
A. Examine the concept of CVP analysis and its importance in financial planning....................1
B. Analysis of various pricing methods for ATC........................................................................3
1.3 Analyzing various factors influencing profit for travel and tourism business.......................4
TASK 2............................................................................................................................................5
A. Explaining different types of management accounting information.......................................5
B. Assessing the use of investment appraisal techniques as decision-making tool.....................6
TASK 3............................................................................................................................................9
A. Interpret the financial statement through ratio analysis..........................................................9
TASK 4..........................................................................................................................................10
A. Assess the source of funds to develop a new hotel...............................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Finance is the most crucial component of every business entity because due to lack of
money, none of the enterprise can survive in the market. Akaglo Tours Company (ATC) is
currently looking to plan a summer holiday trip at Maldives Holiday Beach lasting for one
month. This assignment critically emphasizes upon the key tools that might be useful for the
managers in prudent decisions. It also discusses the key source of information from where
company can extract required dataset. Moreover, investment appraisal methods will be
examining to discuss that how it helps in quality investment planning. Moreover, Thomas
Cook’s financial performance will be evaluating through ratio analysis for the two subsequent
years. Lastly, ATC will be suggested with various funding sources.
TASK 1
A. Examine the concept of CVP analysis and its importance in financial planning
Cost-Volume profit analysis is a planning process that business managers use for the
prediction of future activity volume, cost incur, quantum of sales and profits as well. The model
is based on a mathematical equation which application helps to assess that how fluctuating sales
as well as cost will affect the final outcome. It classifies all kind of costs into two, one is fixed
cost and another is variable cost. Former, as name implies, includes all those spending that don’t
fluctuate with the change in the volume produced (Lanen, 2016). However, later directly changes
with the change in production such as material, labor and others. ATC is looking to plan a
summer holiday trip, in this, it needs to charter a cruise to carry all tourists. Moreover, a number
of beach chalets has been booked to attract visitors costing £500,000 which is a fixed cost.
However, chalet organizer will charge £1,250 per tourist for meal that is a variable cost. ATC
decided to charge £7,500 each tourists for the one-month holiday trip. Here, its managerial team
can apply CVP analysis to assess the potential of these summer holiday trip. The analysis
facilitates managers by providing them important insight towards the interrelationship among all
the factors that affect profitability.
Importance of CVP:
Break-even analysis: The most important use of CVP is to compute break-even point
which is the point where fixed cost, variable cost and total sales intersects. It is a key concept
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which makes aware managers whether the project will cover all the costs or not (Edmonds and
et.al.,2016). It is necessary for the ATC to identify BEP because it is really beneficial to
determine the point of optimum resource utilization otherwise, so that managers of the business
can make justifiable decisions to achieve the same. However, sales volume below the BEP point
is a clear indication of loss.
Price fixation: CVP is extremely helpful for the pricing decisions because it helps in
good pricing decisions. It is because ATC must require achieving their breakeven point as soon
as possible, therefore, till its reach to the point, it needs to charge high price, however,
afterwards, additional units can be sale to a distinguishable segment of the market at a discounted
price to reap the benefits of incremental profits. Thus, it helps in fixing appropriate prices to
generate target volume, more importantly, in the depression period.
Activity level planning: It is useful in creating flexible budgets that measures cost at
various levels of activities. It is because; sales and variable cost are favorably and proportionally
related to each other which in turn, helps ATC in setting appropriate budgetary targets for both
the sales and expected cost.
Margin of safety: CVP analysis also finds out M/S by subtracting total sales from the
BEP sales volume, greater the sales beyond BEP level depicts favorable margin and is a sing of
profit. CVP helps to assess the risk and reward relationship and helps in quality decisions.
Higher the margin of safety is always preferable and shows greater sales beyond the BEP, in
turn, contributes towards greater return.
Net profitability: Excess of contribution over the fixed cost measures net profitability
earned by the firm, which is useful for the performance examination and quality business
decisions. It helps in controlling the overrunning cost occurrence and maximizing revenues
through efficient use of resources, rational pricing policies and others.
Thus, it becomes clear CVP model helps in forecasting, fixing selling price, better
controlling and sound business decisions.
B. Analysis of various pricing methods for ATC
Selling price decision: In order to reach the profit target of £100,000 at given sales
volume of 90 visitors, ATC may think to change its selling price. Although tourism products are
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not so identical still, components that build customer experience is useful to set prices. There are
many pricing methods that are useful for ATC to fix selling price for their planned holiday trip
that are explained below:
Cost-plus pricing: One of the simplest method to fix selling price is to first compute the
total cost of the tour package including both the fixed and variable cost. Thereafter, a specific
percentage of profit is added into the cost to decide selling price. Here, company must use BEP
analysis to make sure that it achieves BEP and gain sufficient yield.
Market-led pricing: As name implies, prices are set after evaluating similar kind of tour
package that competitors are offering in the market (Ax and Greve, 2017). Both these are
compared on the basis of facilities, accommodation, tour destinations and other services and
thereafter prices are set accordingly. It can be set either above or below the competitor’s price
with the motive to earn maximum sales & high return.
Discounted pricing: Tourism is a seasonal business in which, during holidays, many
people plan to visit different tours. However, during the rest period throughout the year, demand
falls down, in such circumstance, ATC can go for these pricing method wherein it should offer
discounts to attract more visitors and maximize sales.
Demand oriented price: It is also a practical method and often uses by companies to fix
charge for customers. In this method, tourism products which are extremely demanding by
people, premium prices can be charge, contrasting to it, products which are less demanded, firm
can keep prices low (Schaltegger and Burritt, 2017).
Considering all the pricing techniques, cost-oriented method is suggested to the ATC
because it fully recover total cost and also provide a return to the company through mark-up
added. A moderate level of profit margin added to the cost also values customer affordability and
they will be willing to visit the tour.
1.3 Analyzing various factors influencing profit for travel and tourism business
Profit is the financial surplus that is determined through the excess of total sales over
total cost. Various influential factors have a direct or indirect impact on the profitability that are
enumerated underneath:
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Economic conditions: Market fluctuations, sudden fall or rise in demand, technology
usage, consumers’ purchasing power, inflation, unemployment rate, economic fluctuations like
recession and book affect profitability directly. Looking to current market scenario of UK, there
is moderate rate of inflation which does not have a substantial impact over return.
Political factors: Tourism sector is controlled by various political rules and regulations
like minimum wages act, corporate tax rates and others. In UK, brexit had a significant impact
over profit due to devalued value of pound (Otley, 2016). Thus, political uncertainty affects
return strongly.
Social factors: Social mobility, change in lifestyle, people attitude towards luxurious
lifestyle, education level, changing demographics, consumerism and other factors have a direct
impact over demand and thereby affect sales volume & profit as well.
Number of visitors: As per the current forecasts, ATC expects 90 customers for the
planned trip if actual demand increases from that prediction, then it will indicate maximum
return or vice-versa (Schaltegger and Burritt, 2017).
Cost: Cost has a direct impact on profit because if hoteliers, cruises and others charge
premium prices then ATC need to incur high amount of spending, as a result, profit will fall
down. On the other side, if supplier’s prices declines then profit will rise.
Selling price: Likewise cost, selling price per tour charged by ATC also affects its net
return. It is because, greater the amount of profitability can be attained on high prices however,
there may be a possibility of lesser demand which must be considered while decides to increase
price.
Calculation of Break-even point:
Break−even point (Units)=Total ¿ cost /(Selling price – variable cost )
¿ BEP=TFC /Contribution
Contribution=selling price – VC
¿ £ 7,500−£ 1250
¿ £ 6,250
BEP(units)=£ 500,000/£ 6,250
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¿ 80
BEP( £ )=BEP (units)∗selling price
¿ 80∗£ 7,500
¿ £ 600,000
Above results highlighted that ATC need to make sure that atleast 80 tourists book the
trip so that it can recover total cost including both fixed as well as variable and do not face any
loss. Thus, it is the point of the best utilization of resources.
Target return: ATC had set minimum profit targets of £100,000 and the managerial
forecasts reveal that around 90 tourists will book the trip. At this level, profit can be determined
as follows:
Profit=Sales – TotalVariable Cost −Total ¿ cost
¿( 90∗£ 7,500) – (90∗£ 1,250)−£ 500,000
¿ £ 675,000−£ 112,500−£ 500,000
¿ £ 62,500
On the booking of the trip by 90 visitors, ATC will gain a yield of £62,500. The reason
behind this is company achieve its BEP point at 80 bookings hence, beyond that level, firm will
gain profit of £62,500. Still, it is below than the target profit of £100,000. Therefore, considering
this, it can be said that on 90 bookings, ATC will not be able to achieve target return and does
not seems viable.
Salesunits ¿ gaintarget return=Total ¿ Cost +Target profit /Contribution each tourist
¿(£ 500,000+£ 62,500)/£ 6,250
¿ 96 tourists
As per the results in order to gain a yield of £100,000, minimum 96 tourists will be
require to visit the trip.
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Profit-Volume ratio: Ratio of contribution on sales is called PVR is used to measure
firm’s profitability. CVP analysis helps to understand the relationship between sales and
contribution through PVR (Eldenburg and et.al.,2016).
PVR=Contribution /Sales∗100
¿(7500−1250)/7500∗100
¿ 6250/7500∗100
¿ 83.33 %
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TASK 2
A. Explaining different types of management accounting information
Managers in the business need to continuously track changes in their performance and
examine the reasons behind fall in performance. They require massive data and need to inspect
them to make decisive business decisions. As per the scenario, ATC wants to improve its
decision-making procedure by adopting modern management accounting systems. There are
numerous sources from where managers extract required data set, explained below:
Financial Statement: It is the ultimate source that provides the information about the
financial results of the regular trading activities and net worth (Hoyle, Schaefer and Doupnik,
2015). Income statement helps ATC’s managers to determine the pattern of their revenues,
segmental performance and spending plan whereas balance sheet provides information about the
financial health like leverage, liquidity and others. Finally, cash flow statement helps to know the
cash management mechanism to retain sufficient liquidity.
Budget: Budget is an estimation about future revenues and expenditures that sets as a
base line for the actual performance assessment (Rubin, 2016). It will facilitate ATC’s
managerial team in drafting suitable contingency plans like negotiation, cost-cutting strategies
and others to prevent the occurrence of any financial consequences.
Variance analysis: Variance analysis is referred to be a purely quantitative method to
assess the difference between actual and intended financial consideration and is thus useful in
terms of monitoring the business and any fluctuations (Bekaert and Hoerova, 2014). It is a
method wherein actual results are compared against budgets to know the level of deviation
between both and draw their attention towards unfavorable results. With this method, they can
put corrective action on a right time such as controlling excessive labor cost and others to reach
targets.
Trend analysis: Trend analysis is basically referred to be a method that permit the traders
to predict about the stock in future and is mostly based on historical information that are
considered to ascertain the past performances of stock (Edwards, Magee and Bassetti, 2007). It is
useful to assess financial performance or trend against previous year’s results. The method helps
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to assess the percentage increase in revenues and cost and warn ATC’s managers against sudden
rise in cost that needs to be controlled.
Ratio Analysis: It is a quantitative expression of the financial performance of the
enterprise wherein various ratios comprising profitability, efficiency, solvency and others
computed to assess entity’s financial performance (Uechi and et. Al., 2015). On the basis of this,
quality decisions including cost planning, marketing, liquidity management, capital structure,
credit policies and others can be created.
B. Assessing the use of investment appraisal techniques as decision-making tool
Investment appraisal are the methods which travel and tourism companies can use to
judge the attractiveness of a long-lasting capital project. It is crucial because huge sum is
invested in such projects and future is uncertain. Therefore, the methods help to assess the risk
and uncertainty associated with the project. The techniques may be of two kinds, discounting and
non-discounting methods. Some of the popular methods which ATC PLC can use are discussed
below:
Payback period: It is a non-discounted method that presents an estimation about the
amount of time that a project will take to get back the money invested (Häcker and Ernst, 2017).
Benefits
 Simple method
 Estimates recovery period considering cash flows
Limitations
 Takes no consideration of time value
 Avoids timing of cash flows
 Ignores the fact that some projects may have greater return
Accounting rate of return: It expresses the percentage of return on the capital employed
that ATC can gain on a project. It is calculated by dividing annual average profit by the average
or beginning outlay (Hicks, 2017).
Benefits
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 Easy method to calculate and understand
 Helps to determine return and meet shareholder’s expectations
Limitations
 Do not values time value
 It does not consider cash flows and uses accounting profit
 Profit computation is subjected with various accounting policies
 Public companies are subjected with certain regulatory requirements and follow corporate
governance standards
Net present value: It is a discounted method that examines profitability by assessing the
projected cash flows for the project life cycle. NPV is the amount of surplus left over after
paying off beginning investment required by ATC.
Benefits:
 It considers time value of money hence considers accurate measure
 Helps in assessing project profitability
Limitations:
 Do not considers the cash flows timing
 Difficult to determine an accurate measure of cost of capital
 Interest may take place adverse changes
Internal rate of return: It find out cost of capital which neither drives any profit nor
result in any loss, because the value of NPV at IRR shows zero (Hashmi and et.al.,2017).
Benefits:
 Simple to understand
 Considers time value
Limitations:
 Do not considers risks and uncertainty related with the project
 No need of hurdle rate
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TASK 3
A. Interpret the financial statement through ratio analysis
Ratios Formula FT 2015 FT 2016
Profitability ratios
Revenue 685,381 710,712
Gross profit 126,890 2,844
Net profit 68,886 -40,165
EBIT 88,891 -37,520
Gross profit ratio Gross profit/ revenue*100 18.51% 0.40%
Net profit ratio Net profit/ revenue*100 10.05% -5.65%
Liquidity ratio
Current assets 38,005 49,806
Current liabilities 136403 139909
Inventory 6389 5,632
Current ratio Current assets/ current
liabilities
0.28 0.36
Acid test ratio (Current assets- Stock)/
Current liabilities
0.23 0.32
Efficiency ratio
COGS 558,491 707,868
Debtors 13366 18782
Creditors 125388 121850
Stock turnover ratio Net sales/ Average
Inventory
107.28 126.19
Debtors receivable
period
Debtors/ Revenues*365 7.12 9.65
Creditors payment
period
Payables/ cost of goods
sold*365
81.95 62.83
Solvency ratio
Debt 30527 37882
Equity 283560 209437
Debt to equity ratio (Long – term debts/
Equity)
0.11 0.18
Weighed ordinary
shares
199,408 200,230,29
EPS Net earnings available for
shareholders/ Ordinary
shares
34.55 -20.06
Profitability ratios:
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FY 2016 remains tough and extremely challenging for The Restaurant Group (TRG)
mainly for the leisure brands whereas pubs & concession fueled growth. Although to increase
performance, TRG rose premium in the prices and change its menu offering but many of these
had never been tested by users. Moreover, complexities had raised inefficiency in the business
operating model and enhance cost. In 2016, sales grown by 3.7% still due to high, it gained gross
profit of just 0.40% and suffer net loss of 5.65%. Sudden rise in the cost mainly caused by
National Living Wages (NLM), revalued business rate, inflation and high rate of energy tax, still,
in future, it can restore profit through cost cutting measures and rebuild the leisure brand (Uechi
and et.al.,2015).
Liquidity ratios:
Both the liquidity measures that are current and quick ratio increased to 0.36 and 0.32
which is a clear signpost of strong liquidity than before. In spite of challenging market, TRG had
maintained strong cash inflow and diversification helps it to retain enough liquid funds (Vogel,
2014). Moreover, adequate reserves and surplus facilitates business to have enough liquidity so
as to pay-off short-term liabilities on maturity.
Efficiency ratios:
TRG’s days sales outstanding rose to 9.65 days is a clear indication of greater time lag in
credit collection from trade receivables. It shows that credit policies have been relaxed for people
to maximize sales. On the other side, inventory turnover ratio increased to 126.19 days reveals
efficient use of money in the business and faster movement. While, days payable outstanding
dropped to 62.83 that demonstrates that creditors tightened their policies and demands payment
soon. It is better for TRG to renegotiate with the suppliers for extending the credit period to
possible extent.
Solvency ratios:
Debt and equity ratios shows moderate increase as the ratio moved from 0.11 to 0.18. It
altered because this year, restaurant borrowed money from bank and repaid some equity
proportion (Lakshmi, Martin and Venkatesan, 2016). Although company is suffering loss that
shows that it will be tough for TRG to meet loan’s repayment, still, cash availability enable
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restaurant to pay lenders on time. As company suffered loss, therefore, EPS shows negative turn
as it turned to loss of 20.06 pence is a signpost of loss for investors.
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TASK 4
A. Assess the source of funds to develop a new hotel
ATC is looking for a future investment in construction project to develop its own hotel at
Maldives, so that, in future trips, it would not be requiring to hire beach chalets for the visitors.
No-doubt, the project incorporates huge investment of 250 million, ATC can raise money for
various sources, and some important sources are explained here as under:
Bank loan: ATC can raise money through external borrowing from financial institutions.
The best point of bank loan is funds can be raise for long-run duration and it can be repaid in
installments. However, the main issue with the external loan is that banks charges an interest rate
which is the cost for the ATC (Khan, 2015). Moreover, company needs to comply with the debt
covenants such as collateral security, guarantee and others. Firm needs to manage funds
accordingly to repay the installments inclusive interest as per the decided repayment schedule.
Another good point is interest is a deductible tax payment which means that firm can get tax
benefit on it.
Share capital: ATC can raise money through public by issuing shares in the market.
Shareholders purchase shares to gain stake in the business and as they invest funds and bear risk
therefore, they are paid with the return in the form of dividend (Peirson and et.al., 2014).
Although, unlike debt, dividend distribution is not a mandatory obligation for the ATC, still, if
investors do not get any return then they might prefer selling stock, therefore, in the practical
world, some dividend needs to be paid. There are no tax benefits on share capital and dilute
rights to the investors which they can use to alter business decisions.
Venture capitalists: They are investors who invest money with believe that company has
long-term growth potential. It includes investment banks, financial institutions and well-off
investors (Ferrando and Lekpek, 2018). Although it seems too risky for investors to put huge
money still, growth potential above average return seems as an attractive pay-off. Thus, ATC can
raise required funds through venture capitalist justifying the opportunity for great success in near
future.
Grants: Travel and tourism sector contributes towards economic growth and UK
government always takes initiatives to promote the industrial growth. Thus, for the construction
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project, ATC can get grant from government and meet their capital requirement (Bhattacharya
and Londhe, 2014). It can raise grants from the bodies like Department of Culture, Media and
Sport, European Social Fund, Regional Fund and others. The best strength of this is money does
not require repayment but needs to be used only for the given project.
Retained earnings: Every firm saves some profit proportion in their business to meet
future projects requirement. Thus, profits of earlier years can be reinvested in construction
capital project. The benefit of this is it does not require any financial cost and repayment.
CONCLUSION
The investigations discussed that CVP is a great tool for ATC that helps to make short-
term decisions. Its practical application evident that 90 visitors would not be enough for the
company to get a return of 100,000. Moreover, the report discussed various set of information
that managers can use including financial statement, budget, trend analysis, ratio analysis,
variance analysis. Despite this, investment appraisal methods found that discounting methods
provide a much better estimation about the return hence, it seems preferable. Lastly, ATC can
raise money by loan, grants, venture capitalists, retained earnings and share capital for the capital
project.
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