CW1 Business Report: Financial Analysis and Investment Evaluation

This report provides a financial analysis of a company's income statement and balance sheet, along with an evaluation of potential investments using ARR, payback period, and IRR. It also suggests five factors to consider before making investments.

CW1 Business Report

TABLE OF CONTENT
INTRODUCTION ..........................................................................................................................3
MAIN BODY...................................................................................................................................3
Heading 1.....................................................................................................................................3
Heading 2.....................................................................................................................................3
Heading 3.....................................................................................................................................3
CONCLUSION ...............................................................................................................................3
REFERENCES................................................................................................................................4

SECTION A
Question 1
Income statement for the year ended 31st December, 2021
Particular Amount (in £000s)
Turnover 1100
Less: cost of goods sold
Opening inventory 100
Purchase 650
Closing inventory 90 660
Gas & electricity 27
Gross profit 413
Less: Expense
Selling and distribution expenses 46

Rent, rates and insurance 36
Staff salaries 100
Advertisement 20
Audit fees 11
Bad debt 4
Depreciation 40
Debenture interest 11
Director's remuneration 34
Bank loan Interest 7
Total expenses 309
Net profit before tax 104
Less: tax payable 25
Net profit after tax before dividend 79
Interim dividend 48
Net profit after dividend 31
Balance sheet as at 31 December, 2021
Particulars Amount (in £)
Assets
Non-current assets
Intangible assets
Premises 600
Equipment 80
Furniture & fitting 20
Total non-current assets 700
Current assets
Inventory 90

Debtors 87
Prepaid expenses 9
Cash in hand and at bank 13
Total current assets 199
Total assets 899
Equity and liability
Equity
Share capital 350
Reserves 120
Retained earning 101
Total equity 571
Liabilities
Non-current liability
Bank loans 100
Debentures 100
Total non-current liabilities 200
Current liabilities
Short term loans
Creditors 70
Proposed dividend 28
Debenture interest 1
Tax payable 25
Other current liabilities 4
Total current liability 128
Total equity and liability 899

According to financial statement of company it can be said that the performance of the company is good and it is earning a
good profit and providing dividend to its shareholders. It is advised to company to increase its retained earning which will help it in
investing in future and enable growth and development.
SECTION B
Question 3
A)
Particulars Formula
Profitability ratio analysis
2022(000s) 2021(000)
Gross Profit 50 45
Net profit 10 12
Sales revenue 120 105
GP ratio Gross profit / sales * 100 42% 43%
NP ratio Net profit / sales * 100 8% 11%
Liquidity ratio analysis 2022(000s) 2021(000)
Current assets 32 34
Current liabilities 27 29
Inventory 14 10
Current ratio Current assets / current liabilities 1.185185 1.172414
Quick ratio (Current assets-Inventory)/Current Liabilities 0.666667 0.827586
Efficiency ratio analysis

2022(000s) 2021(000)
Average Inventory 14 10
Turnover or sales revenue 120 105
Receivables or debtors 16 21
Creditors or payables 12 13
Cost of goods sold 70 70
Receivables or debtor’s turnover ratio (in days) (Debtors * 365) / Credit sales 48.66667 73
Creditors turnover ratio (in days) (Creditors * 365) / COGS 62.57143 67.78571
Inventory Holding Days Ratio Sales/Inventory*365 42.58333 34.7619
B)
As far as the performance of the company has been concerned it can be said that the gross profit and the net profit of this
organization has fallen in the year of 2022. This shows a down fall in the performance of the organization and also decreases the
income of the owners (Dance and Imade, 2019). The current ration that is also the efficiency ration of the organization is higher in
2022 in comparison to that of the previous year. This indicates that the business has been more efficient in the management of its
assets and liabilities. The quick ration of the organization has fallen in the year of 2022 which is a indicator that the business is not
going to have the ability to pay its short term debts. The receivable days turn over of the organization has fallen in the year of 2022
which is a positive indicator as the business would want it to decrease as it can gain funds quicker for reinvestment. The decrease in
the payable period is not good for the business but is would allow the company to develop its performance and generate the growth
that it requires.
QUESTION 4
Relevant annual profit and cash flow
Selling price per unit is 30 and variable cost per unit is 20

Year Sales Total cash inflow Total VC
Total
FC
net cash
flow
1 11000 330000 220000 75000 35000
2 13000 390000 260000 75000 55000
3 14000 420000 280000 75000 65000
4 15000 450000 300000 75000 75000
5 10000 300000 200000 75000 25000
ARR, NPV and payback period
Net present value
Computation of NPV Machine A
Year Cash inflows PV factor @ 10 %
Discounted cash
inflows
1 35000 0.909 31818.18
2 55000 0.826 45454.55
3 65000 0.751 48835.46
4 75000 0.683 51226.01
5 25000 0.621 15523.03
Total discounted cash inflow 192857
Initial investment 160000

NPV (Total discounted cash inflows - initial
investment) 32857
ARR
Computation of Average rate of return
Year Cash inflows
1 35000
2 55000
3 65000
4 75000
5 25000
Average profit or cash inflow 51000
Average initial investment 80000
average initial investment
[(initial investment + scrap value)
/ 2]
ARR 64%
Payback period

Computation of Payback period
Year Cash inflows Cumulative cash inflows
1 35000 35000
2 55000 90000
3 65000 155000
4 75000 230000
5 25000 255000
Initial investment 160000
Payback period 3
0.1
Payback period 3 year and 1 month
Advising company
According to ARR, it can be said that company can invest in the project as it is getting back 64% of rate of return which is a
favourable return that company gets on investing in the current project. But as per the limitation of ARR it does not consider
time value of money which can be an essential part for maintaining business. In this case if the time value of money is kept
aside, company will earn a good income or return from this project and this will also help company in growth and development.
In accordance to pay back period which refers to period in which company will earn back the invested amount, gives a reflection
that company will be able to earn back its invested amount in 3 years and 1 month which is a normal period and gives an idea
that company can invest in this project. As company will be able to earn profit after mitigating all expenses within 3 years and 1
month it will be beneficial for organization and its long term growth and development. But it cannot be neglected that this tool
have certain limitation too. The tool does not consider time value of money and other factors which may impact profit

estimation of company. It is advisable to company to overlook on these limitations of both tools and then take decision
regarding to invest in the project or not. If all other factors are neglected then it will be a favourable project for long term growth
of company and it will help company in earning higher profit and revenue and capture higher market shares.
Five other factors to be considered
The five factors that are to be considered by the company before making such investments are going to be the following,
 Analysation of the current and projected profitability is required from the investment.
 The effective utilization of the assets is also important to be evaluated before investments.
 Conservative capital structure is said to be required for the referring to the company funds and its business operations.
 Earnings and momentum is said to be the reason for the fixation of the many investments that are made.
 The intrinsic value is also a key part of the market value for the project and the analysation of the operations.
IRR and its advantages
IRR is the metric that has been considered to be used as the financial analysis for the estimation of the profitability of the potential
investments (Siziba and Hall, 2021). It is considered that the IRR is the discount rate that makes the net present value of the cash flow
equal to zero in the discounted cash flow analysis. The advantages of IRR include the following,
 It helps in finding the time value of money in the capital budgeting method.
 It is said to be the simplest form of capital budgeting tool.
 The hurdle rate is not required for the calculation of the IRR.

REFERENCES
Books and Journals
Siziba, S. and Hall, J. H., 2021. The evolution of the application of capital budgeting techniques in enterprises. Global Finance
Journal. 47. p.100504.
Dance, M. and Imade, S., 2019. Financial ratio analysis in predicting financial conditions distress in indonesia stock
exchange. Russian Journal of Agricultural and Socio-Economic Sciences. 86(2). pp.155-165.