Declining Investment Ratio

The assignment discusses the financial performance of a travel and tourism firm, TUI. The company's investment ratios show an increase in return on investment (ROI) and return on equity (ROE), indicating that it is generating more profit from its investments. The firm can use various sources of funding to construct its own hotel, including equity shares, loans, retained profits, and sale of assets. The conclusion emphasizes the importance of cost-volume-profit analysis in measuring a company's profit and making decisions.

FINANCE AND FUNDING ON
TRAVEL AND TOURISM
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INTRODUCTION
Finance is lifeline of every enterprise whether it operates in any industry. Without finance
the business can not exist in market. In the present case the travel and tourism company is
presented. To describe about the finance and funding the Carib happy hours company is to be
selected. The present report describes that the cost and volume profit analysis is very important
to derive the cost and it describes about various pricing strategies. The present case is describes
about the various information appraisal techniques which helps to choose the project. The report
describes about the financial ratios of TUI group which operates in travel and tourism industry as
well as it describes about the various management accounting informations.
A.)
According to the given scenario, the Carib happy hours (CHTC) is a travel company
which is planning a holiday trip to a holiday resort in summer lasting month. CHTC will charter
only its tourist and it also look to book the for in a hotel at the resort to accommodate its tourist.
Further company charge airplane and hot5el commendation from its tourist at the £60000 in
which it exclude a meal at hotel. While hotel will charge form CHTC £ 150 per tourist for meal.
For this purpose a the Concept of CVP analysis and its importance in a financial management of
a travel and tourism business such as CHTC
CVP is known as cost volume profit analysis which is a tool of planning a profit which
company can earn. This is also help in understanding a what all changes arises in a profit because
of changes in variable cost, volume fixed cost and mix of product sold (Fowles, 2014). Further
through the help of CVP company can usenr5stand the relationship between a different products
selling price and and change in variable cost. The tour company can achieve sale volume and by
making a various products which company produce for selling purpose and for earning profit.
There are some basic elements of the CVP analysis which are described below
Cost: in CVP cost is the first elements of business which is certain cost that is incurs for
carrying out the business activity. CHTC used this cost for making a products and services for its
customer.
Volume; it is a second element of the CVP in which company analyses how much it
need to make a goods and sell to its customer (Vazquez and Federico, 2015). Fist CHTC
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company need to decide how much it need to sell for a producing a good. On the basis of sell
goods are produce.
Profit: it is the last elements in which tour company need to analyzed how much profit
they can earn by selling the products they made. For identifying the profit by deducting the cost
of manufacturing the product by a selling price.
Illustration 1: CVP analysis
(Source: Basic CVP analysis, 2016)
CVP has a scope in a decision making of the CHTC tour company. Through this
company can easily identify how much product they need to made for fulfilling the customer
need. Moreover, through a cost and volume company can easily know how much they can
generate the profit (Damodaran, 2016). This CVP also help in determine which products and
service increase the company profit. If company came to know which products are generating a
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profit then they will focus on making those products in more quantity. to help help CHTC
company in understanding the level fo fluctuation which it can increase the sell and afford the
selling price.
b.)
According to the given scenario CHTC meed to understand various pricing method and it
help in determining the price to charge a each tourist on a trip. Various pricing method are as
follow
Profit led pricing: it is a method which is categorized in a two method of pricing which
is a pricing based on customer and competition pricing. So in a pricing based on customer price
is set by CHTC company after determining the needs and demand of the customer related to a
products. While in competition pricing company set price according to the price of its
competitor so that it can make a profit.
Cost led pricing: it is a method in which company fixed the price of its prod cuts and
services on the basis of the cost and volume of the bossiness (Badev and et.al., 2014). In this
company can set the price on above the break even point for earning a profit. The break-even
profit can be determine by CHTC company after calculating a selling price. Company set the
price below a break even profit then it cannot earn profit. So it need to set a price on above the
break-even point.
Return on investment pricing; it is method in which CHTC company set the price on the
basis of interest rate and return on investment. Price is fixed in this method because company is
expecting some amount of profit.
Market led pricing; it is a method in which carob tour company can set a skimming price
or penetration price. In a penetration pricing method company lower the price of its products so
that is can grab a attention of customer, it also help in gaining a competitive advantage. On the
other hand in a skimming price CHTC company is set a high price. Further it can be only doen if
company have strong position in a market.
c.)
There are many factor which influence the profit of the CHTC will earn on the holiday
trip (Lambe and et.al., 2015). Company generate the profit by selling its tour package and cost of
manufacturing. It can be affects by some of the factor that are as follow
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Political environment: there is a political insatiability which can affects the profit of tour
company. Different company have a different rules and regulation which Tour company need to
follow strictly. Their is high tax rate which force tour company to charge a high price form its
customer. It may also enable customer to switch form its company to other company products.
Overall it can affect the price of company and also the needs and demand of customer.
Costs: it can also affects the profit of company because if there is high price of the hotel
and transport facility then it basic difficult for the Caribbean company because it need to increase
the price of its tour package. For example if price of food increase then it increase the cost of
transport which can lead to charge high price from its customer (Stewart, 2014).
Economic environment: the economic environment also affects the organization profit in
many ways that is at the time of global recession consumers not like to spend their money in
unwanted spending such as traveling for holiday purpose. It so because their purchasing power is
low and price of tourist products is very high and it cannot be afford by the company. For
coming out form this situation company need to provide some discount to its customer it may
reduce the company profit.
TASK 2
a)
In the business accounting information are recorded and performance is analyses on the
basis of that information. Various types of management accounting information are such as
financial statements, budget, forecast etc. which are given as below:
 Income Statement: Income statement is a type of management accounting information.
Income statement gives information to the management such as profit, loss, expenses etc.
The statement is provide information to the firm which helps to formulate proper
strategies.
 Statement of Financial Position: Another type of accounting information is statement of
financial position. From this statement the firm is able to get information related to the
position that the firm is how performing in the industry (Baeck, 2014). From this the
company get information such as assets, liabilities, shareholder's equity etc. On the basis
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of these information company able to know that up which extent it can meet with the
short term and long term obligations.
 Cash Flow Statement: The cash flow statement provide accounting information to the
business. It gives the information such as cash inflow and cash outflow. From the cash
inflow and cash outflow the firm is able to know the profit level. If cash inflow is high
then outflow means company performing well. On the other hand if cash inflows are less
than outflow then firm's performance is poor in industry.
 Budgeting: From the budgeting the business get the informations of the current years
(Faruk, 2010). Here the firm forecast about the future financial data with the help of past
performance and past data of the company.
 Cost Allocation Reports: Such type of report provides cost related informations to the
travel and tourism company such as CHTC. It is the most important report which helps to
the management in order to know cost of production which incurred in the firm while
making tourism services.
 Forecasting: As per the forecasting the management of CHTC able to determine and
predict future financial informations on the basis of past performance of the company. It
provides approximate financial and accounting informations to the firm which is helpful
up to greater extent.
 Variance Analysis: Another accounting data and information derived by the firm from
variance analysis using budgeted or foretasted data and actual results. It is the best
method where actual and budgeted data are to be compared. Further, CHTC able to know
its business performance that whether it is good or poor in order to generate sales and
revenue.
 Management Information System: In this the company record its financial and
accounting transactions which are most helpful for the travel and tourism company. It
provides all the information which are management oriented and helps to the
management in order to determine accounting informations up to greater extent.
b)
Investment appraisal tools are helps to management in order to take decision related to
choosing two or more mutually exclusive projects. In the financial tools or investment appraisal
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technique there are various tools or techniques. The various techniques of investment appraisal
are given as below:
NPV: Net present value is a technique where cash inflow and cash outflow are analyzed of the
project and then decision is to be made. In this the value is difference of cash inflow and outflow.
From the below mentioned table of net present value it can be interpreted that project A is giving
low net present value in comparison to project B. It can be suggested that the management have
to choose project B.
Year Project A PV @ 10%
Present
value Project B
PV @
12.5%
Present
value
Investment 150000 150000
1 27000 0.9091 24545.45 30000 0.9091 27272.73
2 42000 0.8264 34710.74 48000 0.8264 39669.42
3 37000 0.7513 27798.65 58000 0.7513 43576.26
4 49000 0.6830 33467.66 45000 0.6830 30735.61
5 56000 0.6209 34771.59 29000 0.6209 18006.72
Total 155294.10 159260.73
NPV 5294.10 9260.73
IRR: Internal rate of return is indicated that the project is giving return up to which extent
(Moran, Porter and Curth-Bibb, 2014). In present scenario the project A have low internal rate of
return and project B have high internal rate of return. It means the project B is better to
implement in business process.
Year Project A Project B
Investment -150000 -150000
1 27000 30000
2 42000 48000
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3 37000 58000
4 49000 45000
5 56000 29000
IRR 11.23% 12.37%
Payback period: Another technique of investment appraisal is payback period method. The
method shows that the initial investment of the project is covers within how many years. Lesser
the payback period is better for the business. It can be assessed from the below mentioned
calculation that, initial investment of project A is covers in 3.9 years while the project B's initial
investment covers within 3.3 years. It means the project B is better.
Year Project A
Cumulative cash
flow Project B
Cumulative cash
flow
Investment -150000 -150000
1 27000 27000 30000 30000
2 42000 69000 48000 78000
3 37000 106000 58000 136000
4 49000 155000 45000 181000
5 56000 211000 29000 210000
Payback period 3.9 3.3
ARR: Average rate of return is another tool of financial tools. It indicates about the average
return of the whole project and investment (Pantaleo, Candelise and Shah, 2014). Here the
average rate of return is higher in project A. hence, the firm have to undertake project A.
Year Project A Project B
Investment -150000 -150000
1 27000 30000
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2 42000 48000
3 37000 58000
4 49000 45000
5 56000 29000
Total 211000 210000
42200 42000
ARR 56.27% 56.00%
From the overall analysis of investment techniques the company have to undertake the
project B in business which gives high net present value, high internal rate of return as well as
initial investment of the project B is covers within less time compare to project A.
TASK 3
a)
Financial ratios are the information which shows that the company is how performing in
the industry where it operates. In the travel and tourism industry in UK there are many numbers
of companies which operates in travel and tourism industry. In the present case to interpret the
financial ratios TUI group is selected. TUI group is a UK based company which operates in
travel and tourism sector (Schönbohm, 2013.). The firm is provides its goods and services across
the world. In the financial ratios there are major three types of financial ratios are calculated such
as profitability ratios, investment ratios and liquidity ratios. The financial ratios of the chosen
travel and tourism sector's company are given as below:
Profitability ratios 2014 2015
Gross profit 2278 2395
Net sales 18715 20012
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Gross profit ratio 12.17% 11.97%
Operating profit 699 672
Net sales 18715 20012
Operating profit ratio 3.73% 3.36%
Net profit 105 340
Net sales 18715 20012
Net profit ratio 0.56% 1.70%
Profitability Ratios: In financial ratio's profitability ratios are important ratios. Profitability
ratios are those which helps to determine company's performance in terms of the profit level. It
indicates that the firm is how performing in its industry or market. The profitability ratios of TUI
group are as follows: Gross Profit Ratio: Gross profit is a ratio which indicates that the firm is how much
earning after deducting cost of goods sold. In the gross profit only cost of goods sold are
deducted from net sales. In present case gross profit is decreases from previous year that
means the firm is not able to cover more cost of goods sold from previous year. Operating Profit Ratio: Operating profit is another type of profitability ratios which
measures company's performance in terms of operating profit (Waldron, and et.al., 2013).
Operating profit is the profit where all operating cost of the products and services are
deducted from the total revenue of firm. In the financial year 2014 the ratio of business is
3.73% and in the year 2015 the operating profit ratio is 3.36%. It means the operating
cost of the services are increases from last year. The firm is not able to manage operating
cost from previous year. Net Profit Ratio: Net profit is shows the final income of the product and services. In net
profit all the costs and expenses as well as interest and taxation amounts are deducted
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from the total sales of the firm. In the accounting year 2015 the net profit ratio is
increases from the year 2014. It indicates that the company is performing well in the
industry. It can be assessed that the firm is not having high amount of debt in comparison
to the year 2014.
Liquidity ratios 2014 2015
Current assets 5379 4473
Current liabilities 7515 7699
Current ratio 0.72 0.58
Current assets 5379 4473
Closing stock 127 135
Prepaid expenses 777 843
Current liabilities 7515 7699
Quick ratio 0.60 0.45
Liquidity Ratios: Liquidity ratios are shows financial position of the company in the industry. It
indicated that the business entity is how much able to fulfill its obligations with helps of current
assets and current liabilities. The liquidity ratios are as follows: Current Ratio: In the accounting year 2015 the current ratio is decrease from the year
2014. It means the company is not able to cover short term obligations from previous
year. On the other hand, as per the standard ratio 2:1, the firm's performance is poor in
the industry.
 Quick Ratio: The quick ratio is not including closing stock and prepaid expenses in its
calculation because both are not easily convertible in to cash. The company is performing
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very poor because the ratio is declining. It shows that the firm have high amount of debt
less profit.
Investment ratio 2014 2015
Return on investment 5.34 11.69
Return on equity 3.68 15.76
Investment Ratios: The ratios are shows that the firm is how much able to generate return with
the investment which made by investors. The ratios are given as below: Return on Investment: It shows ability of the firm to generate return on the basis of
investment. In present case the ratio is increases from last year that means company is
able to give more return to its investors.
 Return on Equity: In the financial year 2015 the ratio is increases from the year 2014. It
means the company is able to get high return on the shares. The company had proper
strategies to increase the sales from the last years.
TASK 4
A.)
According to the given scenario CHTC company want to construct its own hotel in a
Caribbean instead of going to hire a hotel for its tourist. For this purpose there are various
sources of fund that is internal and external which tour company can obtain for making new
hotel various source of fund are as follow
Long term sources of finance:
equity shares: it is one of the most common sources of fund for the CHTC company. For
this purpose company need to fulfill some of the legal formalities for raising the capital (Baeck,
2014). CHTC company need to make all investor believe that it is will generate a profit so that
investor ready to invest in their new project.
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Loan: it is long tern fund which company can take form a bank or any other financial
institution. If CHTC company take loan form bank then it need to pay a fixed amount of interest
every year. There is a long term loan and short loan which bank can provide to tour company.
In addition to this tour company need to keep some security for taking a loan so that in case if
company unable to pay a loan bank can used that security for paying a loan.
Internal sources of fund:
Retained profit: Chtc company can use a internal sources of finance of Constitution a
hotel. It can used a retained profit which organization get after paying a dividend to its
shareholder. It very benefited of the organization because company no interest charged by the
tour company.
Sale of assets: CHTC company can sell its assets so that it generate cash for making a
new hotel (Faruk, 2010). For example Carib tour company need to sell the assets such as land
and building for constructing a hotel.
CONCLUSION
From the above report it can be concluded that cost volume profit analysis is the best
method for measuring the company profit. It help identifying how much product company need
to produce for generating a profit. It help in making various type of decision related to generate
the profit. Their are also a different type of cost pricing method which company can used such as
profit led pricing, cost led pricing etc. According to the financial performance on the basis of
financial ratios it can be concluded that travel and tourism firm such TUI is able to generate
higher net profit in the next accounting year. On the other side on the basis of liquidity and
investment ratios as well as GP and operating profit performance of the firm is poor in travel and
tourism industry.
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