Comparative Analysis of Project 1 and Project 2

The given assignment asks to evaluate the feasibility of Project 1 and Project 2 by comparing their Net Present Values (NPVs). It provides the NPV values for both projects and asks to determine which project is more feasible. The assignment also references various academic papers on financial literacy, macroeconomics, and project evaluation.

Running head: FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Financial and Economic Literacy for Managers
University Name
Student Name
Authors’ Note

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Table of Contents
Solution to Question 1:...............................................................................................................2
Solution to Question 2:...............................................................................................................6
Solution to Question 3:...............................................................................................................9
Solution to Question 4:.............................................................................................................12
Solution to Question 5:.............................................................................................................14
References................................................................................................................................18

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Solution to Question 1:
Business economics concepts of market structure
As rightly indicated by Lusardi and Mitchell (2014), market structure can be defined as
organizational as well as other features of a market that in turn elucidates the nature of
competition along with pricing policy pursued in the market. Market Structure refers to a
categorisation system for the important market traits, counting the total number of firms,
overall similarity of products marketed and the ease of entry as well as exit from the specific
market.
The categories of market structure include the following:
Perfect Competition: This market is characterised by large number of business firms,
homogeneous products, and firm’s freedom of entry and exit from the market (Fernandes et
al. 2014).
Monopoly: Monopoly market structure refers to one where there is only one business firm
prevailing in a specific segment. Essentially, a specific firm dominates the entire market and
there are barriers for entrance of new firms along with supernormal profit.
Oligopoly: An industry that is dominated by a few number of business concerns. Essentially,
it can be said that oligopoly is a specific market structure in which few firms dominate and
the time when a particular market is shared between corporations, it is said to be highly
concentrated (Mitchell and Lusardi 2015).
Monopolistic Competition: Monopolistic competition refers to a specific market structure
that combines diverse components of monopoly as well as competitive markets. In itself,

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSmonopolistic competitive market can be characterised by freedom of entry as well as exit, but
corporations can differentiate between products of the firm (Allgood and Walstad 2016).
Basic Concepts of small and medium enterprise (SME)
As correctly indicated by (), small as well as medium enterprises can be considered to be any
business having less than 250 employees. As such, there are around 5.7 million SMEs
operating in the UK during the year 2017, which was over and above 99% of diverse
businesses. SMEs can be considered as one of the primary drivers of nation’s economic
growth as well as innovation. It can be hereby mentioned that enhancement in the total
number of SMEs in the nation can increase the job creation as well as income per capita
(Klapper et al. 2015). As individuals become wealthier, they intend to increase their level of
consumption that consequently can open up numerous opportunities in the market that can
persuade creation of higher number of SMEs.
Basic Concepts of multinational corporations (MNC)

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSA multinational corporation can be considered to be an enterprise that undertakes business
functions in more than one nation. This necessarily extends both manufacturing and
manufacturing operation by means of a network of diverse branches as well as subsidiaries
that are referred to as foreign affiliates (Singh 2014). The characteristics of MNC comprise of
large sized firms, universal functions, centralized system of control, and higher level of brand
equity, advanced technology and international market.
Basic Concepts of growth strategy
Growth strategy aims at winning higher share of market, sometimes even at costs of firm’s
short term income. Growth strategy of a business refers to diverse methods a particular can
utilize to expand their business and it is largely dependent upon financial circumstances,
competition and even government regulation. In essence, growth stratagems for retail
business basically concentrates on the subsisting business comprises spectrum of
intensification of the present business scope, reasonable extension and strategic
diversification (Farnham 2014). Also, management of the retail firms can develop growth
strategy of the firm by taking into consideration the Ansoff’s Strategy that entails product
development, diversification, market development and market penetration.
Empirical Evidence: As per the report presented by Hirschey (2016), growth is normally
one of the most important agenda for the chief executive officers of firms operating in UK.
Corporations target aggressive strategies of growth in response to particular structural shifts
brought about by advanced technologies (Mankiw 2014). In the latest retail growth strategies,
around half (that is 42%) of retailers of UK said that they planned to merge with otherwise
acquire another business for entering into a new market space. For instance, Green King Plc
of particularly UK acquired the company Spirit Pub Plc operating in the UK, Carphone

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSWarehouse Group PLC operating in the UK entered into a merger with Dixons Retail Plc of
the UK.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Solution to Question 2:
Business economics concept of demand and supply and monetary policy of the Bank of
England to particularly the UK Housing Market
Basic Concepts of demand and supply:
As rightly indicated by Agénor and Montiel (2015), supply and demand can be considered to
be fundamental notions of economics and is necessarily the backbone of the market economy.
Bernanke et al. (2015) mentions that demand indicates total amount of a specific product or
service that is desired by purchasers. Essentially, the quantity demanded can be regarded as
the total amount of a product individuals are willing to purchase at a specific price, the
association between price and quantity demand is referred to as the demand association.
Again, supply reflects the total amount a market can offer. Particularly, the quantity supplied
indicates towards total amount of specific product producers are keen to supply at the time of
receiving a specific price. The law of demand mentions that in case if all other facets remain
equal, the higher the price of a specific product, lower number of individuals will demand
that particular good.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSFigure: Demand and Supply
(Source: Ascari and Sbordone 2014)
Monetary Policy:
The monetary policy primarily includes utilization of rates of interest as well as other
monetary tools that can be used to influence the levels of consumer spending as well as
aggregate demand (AD). Particularly, monetary policy intends to stabilise the economic cycle
and maintain lower level of inflation and avert recessions. The aim of monetary policy is
lessening inflation. Low inflation can be regarded as a significant aim that can enable higher
investment during the long term period. In addition to this, aim of monetary policy is to
maintain stable growth rate of economy and low rate of unemployment. The monetary policy
of Bank of England maintains rate of interest and quantitative easing policy for attainment of
target of inflation and avoiding recession (Borio 2014). The rates of interest are increased for
the purpose of reducing demand and lowering inflation. Also, money supply is decreased for
decreasing demand and consequently inflation. On the other hand, in a bid to avert recession
in the economy, increase in money supply also augments both demand and firm’s investment.
Furthermore, rate of interest is lowered that in turn enhances consumer spending together
with investment. The monetary policy of UK is established by the Monetary Policy
Committee of the Bank of England. Essentially, they are self-governing in establishing rates
of interest but have to try and satisfy the inflation target of the government (Agénor and
Montiel 2015).
The monetary policy of UK is instituted by the Monetary Policy of the Bank of England. The
Bank of England can be considered to be independent of the government since the period of
1997 and monetary policy committee (MPC) has nine different members appointed by
government are responsible for formulation of the monetary policy. MPC take into account

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERScertain factors before arriving at rate decisions. The bank lending and figures on customer
credit includes equity levels withdrawal from the housing market and data on credit card
lending that supports demand of the customers. Furthermore, equity markets (prices of share)
and prices of houses are taken into consideration for the purpose of ascertainment of
household wealth that then feeds through to borrowing and retail spending (Bernanke et al.
2015). The monetary policy committee (MPC) necessarily has no official target for the yearly
house price inflation rate but the same has been criticised for not acting appropriately for
prevention of housing bubble till the period 2008. The alterations in the policy of the central
bank rates of interest also affect the housing market. Essentially, higher rates of interest
enhance the overall cost of mortgages and lessen overall demand for particularly housing.
Again, this can affect the overall wealth of the household and put a pressure on withdrawal of
equity.
Empirical evidence: As per reports published in Financial Times, Mark Carney, the central
banker tried to avert threats to economic recovery by imposition of limits on particularly
mortgage borrowing. The limitations on huge loans forced by the bank’s Financial policy
Committee sought to put off an increase in process of lending, even though they would not
have affected the current loans. As per the central banker, these measures would prevent
process of lending going too far ahead of earnings, growth as well as prevent a decline into
riskier proposition of lending and higher indebtedness that could undermine overall economic
expansion (Ascari and Sbordone 2014).

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Solution to Question 3:
Key macroeconomics indicators and trend in these indicators in the UK over last 5
years
Key macroeconomic indicators are necessarily utilized for the purpose of calculating gross
national income (GNI) is particularly gross domestic product, employment, money supply
and inflation rate among many others.
Gross domestic product (GDP): This refers to the total market value of different goods as
well as services that is necessarily produced by a nation in a particular period of time (Borio
2014). The UK economy developed by around 0.4% on quarter in a period of three months
and is below the preliminary approximation of 0.5% and an upward revision of 0.5%
expansion can be witnessed in the earlier period. A slowdown can be observed in the overall
rate of growth of spending of households when viewed from expenditure side. The growth
rate of GDP in the UK averaged approximately 0.60% during the period 1955 to 2017,
thereafter reaching an all time high of approximately 5% during the first quarter of the year
1973 as well as a record low of -2.70% during the first quarter of 1974 (Agénor and Montiel
2015).

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Figure: Growth Rate in UK
(Source: Titman et al. 2017)
Employment Rate: Employed can be referred to as full as well as part time workers, along
with part time together with temporary workers who necessarily accepted pay for specified
period (Block et al. 2015). The employment rate in the nation UK declined to approximately
75.20% during the period November to the registered figure of 75.20% in the period October
in the year 2017, thereby reaching the high of 75.30% in the month of June of the year 2017
and a recorded low of around 65.60% in the month of March of the year 1983.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSFigure: Employment Rate in UK
(Source: Titman et al. 2017)
Money Supply: Money supply is necessarily a representation of the entire amount of money
that is in circulation in the economy (Andreou et al. 2014). Essentially, this comprises of
physical currency, savings of demand deposit and checking accounts, diverse traveller
checks, particular assets present in retail money market, money market mutual funds,
individuals time deposits as well as savings deposit. Money supply particularly in the United
Kingdom enhanced to 2833498 million GBP in January from the registered figure of
2814773 million GBP during December 2017 (Sharan 2015). Essentially, money supply
necessarily in the United Kingdom has an average of 1312724 million GBP from the period
1987 – 2018, reaching an all time high of 2833498 million GBP in the year 2018 and a record
low of approximately 263025 million GBP in the month of January of the year 1987.
Figure: Money Supply
(Source: Sharan 2015)

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSInflation Rate: Rate of inflation indicates towards an overall enhancement in the Consumer
Price Index (CPI) that is essentially the weighted mean of prices of diverse goods. In essence,
the set of different goods that constitute the index relies on what are regarded representative
of general basket of consumption (Cavusgil et al. 2014). Thus, depending upon the nation
along with habits of consumption of most of the population, the index takes in diverse goods.
The inflation rate throughout the UK was registered to be 3% during January 2018, unaltered
from the prior month and over and above expectations of market of roughly 2.9%.
Essentially, recreation prices along with culture increased further whilst cost incurred for
food along with transportation enhanced at a softer rate. Rate of inflation in the UK had a
mean of 2.58% from the period 1989-2018, thereby attaining an all time high of 8.50% in the
year 1991 and the record low figure of -0.10% in the year 2015.
Figure: Inflation Rate
(Source: Foster and Gupta 2014)
Solution to Question 4:
Way managers apply the notions of leverage and current account management in
decision making

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSLeverage as a business term indicates towards debt or otherwise borrowing of funds for
financing inventory purchase, diverse assets of the corporation and different equipments.
Therefore, owners of business can utilize either debt or equity for funding or else purchasing
assets of a firm. Utilization of debts of the corporation else wise leverage can lead to
enhancement in the overall risk of bankruptcy of the corporation. This also enhances returns
of the firm, particularly, the returns on equity (Mitchell and Lusardi 2015). Essentially, this
holds true when debt financing is utilized in place of equity financing, then equity of the
owner is not necessarily diluted by issuing more number of shares.
In case of debt financing, disbursements for interest are necessarily tax deductible
irrespective of whether interest charges are acquired from a loan or else a specific line of
credit. Again, by undertaking timely disbursements a corporation will institute a positive
history of payments along with credit rating of business. Essentially, a financier in a business
has the inclination to make use of debt financing although only up to a certain extent.
However, beyond a certain point, financiers tend to get nervous regarding excessive debt
financing since it drives overall default risk of the company (Singh 2014). Essentially, there
are three different leverages namely, operating leverage, financial leverage and combined
leverage.
Farnham (2014) suggests that in case of operating leverage, break even analysis reflects that
there are necessarily two categories of costs in a specific cost structure of a business concern
namely fixed as well as variable cost. Essentially, operating leverage indicates towards
percentage of fixed costs that a firm has.
Operating leverage can be considered as the ratio of fixed costs to variable costs. In case if a
corporation has higher amount of fixed costs in comparison to variable costs, then the
corporation is said to have higher level of operating leverage. In essence, these corporations

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSutilize huge amount of fixed costs in their operations and can be considered as the capital
intensive corporations (Ascari and Sbordone 2014). An appropriate instance of capital
intensive business concerns are the automobile manufacturing firms and they have a huge
amount of equipment that is required to manufacture their product. Financial leverage
indicates towards the specific amount of debt in the structure of capital of the corporation.
The notion of combined leverage helps in understanding the total risk encountering a
corporation. As such, this can be observed as the total amount of leverage that can be used for
magnifying overall returns from business. Particularly, operating leverage helps in
magnifying returns from the plants as well as equipments otherwise fixed assets of the
business. Again, financial leverage assists in magnifying overall returns from the debt
financing. Combined leverage refers to the aggregate of above mentioned two leverages or
else the magnification of the returns (Allgood and Walstad 2016).
The current account management delivers enterprise services for generating and bringing
about alterations to different current accounts. The enterprise services in particularly current
account management can help serve both corporate customers along with consumers (Singh
2014). In essence, business concerns often possess a group of accounts known as facility and
the limits of credit for all these accounts can be pooled and this can be no greater than the
entire amount instituted for that specific facility. As such, current accounts that are a fraction
of the facility can be altered and diverse new accounts can be generated for a facility utilizing
this current accounts management.
Solution to Question 5:
The table below presents the enumeration of financial ratios of Tesco plc for the period
(2015 and 2016):
Tesco Plc: Financial Statement Analysis

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS2016 2015
Liquidity Ratio
Current Ratio
Current Asset 14828 11958
Current Liability 4886 7852
Ratio 3.034793 1.522924
Market Value Ratio
Price Earning Ratio
Price 205.75 148.7
Earnings 1260 -6875
Ratio 0.163294 -0.02163
Asset Management Ratio
Receivable Turnover Ratio
Credit Sales 54433 56925
Average Accounts Receivables 1607 2121
Ratio 33.87243 26.83876
Debt Management Ratio
Debt Ratio
Total Debt 5110 8481
Total Assets 8616 7071
Ratio 0.593083 1.199406
Profitability Ratio
Return on Assets
Net Income 1260 -6875
Average Total Assets 8616 7071
Ratio 0.14624 -0.97228
Analysis of financial statement:
Current ratio reflects the ability of the firm to repay all the liabilities of the corporation with
the available assets of the firm (Titman et al. 2017). The current ratio of the firm has
increased during 2016 as compared to year ago period. Higher ratio reflects can be regarded
to be more favourable in comparison to the lower ones since this replicates that the company
can seamlessly make payments for current debt.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSPrice-earnings ratio is necessarily the price that a financier is willing to pay for company’s
earnings or else profit. Essentially, a lower ratio indicates poor performance of the firm
during current as well as future period (Titman et al. 2017). Therefore, based on the recorded
figures it can be said that market value ratio of the firm has enhanced replicating a favourable
financial condition of the firm.
Accounts receivable turnover indicates towards an efficiency ratio that measures the total
number of times a particular corporation can convert receivables of a corporation into cash
during a specific time period. In this regard, a higher ratio refers to the fact that business
concerns are effectively collecting their receivables in a more frequent manner throughout the
year (Sharan 2015). Tesco Plc’s accounts receivable turnover has increased during the period
2016 as compared to the year ago period indicating a favourable financial condition of the
corporation.
Debt ratio refers to a financial ratio that enumerates the degree and extent of leverage of a
company (Mitchell and Lusardi 2015). A lower debt ratio mainly indicates a stable financial
condition of the business with regards to potential of longevity as a corporation having lower
ratio has lower overall debt. The debt ratio for the firm Tesco plc is registered to 1.19 in 2015
and 0.59 in 2016. Therefore, this ratio is said to reflect a favourable financial ratio.
Return on assets enumerates the net income that is produced by a corporation during a
specific period of time by means of comparing net income to assets (Titman et al. 2017). In
this case, higher ratio can be considered to be more desirable to financiers as it reflects that
the company is more effectually handling assets for producing higher income. Based on the
calculation of the return on assets, it can be hereby said that the return on assets have
increased in 2016 as compared to 2016, replicating a favourable financial condition.
5. B.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERSPV of annuity
Amount of payment 650
Interest Rate (%) 4.5
PVIFA (4.5%,3) 2.74
Number of Years 3
Payment Interval Annually
1781
5.C
Project A
Year PV at 11.25% Cash Flow PV of cash flow
1 0.898876404 26000 23370.78652
2 0.81300813 17625 14329.26829
3 0.729927007 15000 10948.90511
4 0.653167864 10000 6531.678641
5 0.529100529 32000 16931.21693
Total 72111.85549
50000
NPV 22111.85549
Project B
Year PV at 11.25% Cash Flow PV of cash flow
1 0.898876404 0 0
2 0.81300813 0 0
3 0.729927007 0 0
4 0.653167864 0 0

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
5 0.529100529 99500 52645.50265
Total 52645.50265
50000
NPV 2645.502645
As NPV of project 2 is higher than that of project 1, selection of project 1 can be said to be
feasible.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
References
Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University
Press.
Agénor, P.R. and Montiel, P.J., 2015. Development macroeconomics. Princeton University
Press.
Allgood, S. and Walstad, W.B., 2016. The effects of perceived and actual financial literacy
on financial behaviors. Economic inquiry, 54(1), pp.675-697.
Andreou, P.C., Louca, C. and Panayides, P.M., 2014. Corporate governance, financial
management decisions and firm performance: Evidence from the maritime
industry. Transportation Research Part E: Logistics and Transportation Review, 63, pp.59-
78.
Ascari, G. and Sbordone, A.M., 2014. The macroeconomics of trend inflation. Journal of
Economic Literature, 52(3), pp.679-739.
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-
Hill Higher Education.
Block, S.B., Hirt, G.A., Short, J.D., Danielsen, B.R. and Perretta, M., 2015. Foundations of
financial management. McGraw-Hill Ryerson.
Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of
Banking & Finance, 45, pp.182-198.
Cavusgil, S.T., Knight, G., Riesenberger, J.R., Rammal, H.G. and Rose, E.L.,
2014. International business. Pearson Australia.