UK Economy Analysis and Investment Appraisal

The provided assignment details a comprehensive analysis of the UK economy, utilizing macro-economic indicators such as inflation rate and balance of payment. Investment appraisal techniques are applied to evaluate a hypothetical project A versus project B, with project A demonstrating a higher net present value (NPV). The report concludes that project A should be accepted based on its higher NPV.

Financial and Economics Literacy for
Managers

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK ..............................................................................................................................................1
1 ..................................................................................................................................................1
2...................................................................................................................................................3
3. .................................................................................................................................................4
4. .................................................................................................................................................5
5...................................................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Economy is the macroeconomic term which is assessed by economists in order to know
the actual conditions in an effective manner. Any country's economy totally depends upon the
performance of organisations which carry out their business operations effectively. However,
this can be said that the organisation needs to carry out their operations in an effective manner.
Today's world full of competition which totally relied upon the performance of an organisation.
Here, capital investment appraisal techniques are used under this report.
TASK
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Market structure is the one which refers to the entire market the where the company is
engaged their operation. Basically, this can be said that in general, the market consists of the
characteristics of the market either firm or competitive, which elaborates the nature of
competition and pricing policies which are followed in the market (Smit and Watkins, 2012).
Henceforth, market structure is said to be the one which producing an identical goods and
services in the market and whose structure which is identified on relying the competition
prevailing in that market.
Market means to the place where sellers and buyers which satiate the selling and buying
of goods and services. Various kinds of market structures are defined hereunder:
Monopolistic Competition: As per Monopolistic Competition, there are large number of
organisations which render differentiated products with close substitutes for each other. On the
other hand, higher sellers the products which are same, but not identical and compete along with
each other on other factors besides price.
Basic characteristics of Monopolistic market:
Product Differentiation: It is the key feature of organisation which operates under
monopolistic competition which is manufacturing goods that are not identical but on the other
hand.
Large Number of Firms: Higher number of organisations operate as per the monopolistic
competition and there is an intense market competition between the existing operations.
Free entry and exit: With the strong competition among the firms, the organisation is
incurring loss which could move out of the industry during any time it wants. Same, the new
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firms could enter into the industry freely, provided this emerge with the unique feature and
diverse kinds of products to out-stand in the unique feature and diverse variety of goods to out-
stand in the market and meet the competition already existing in the industry. Conversely, by
enhancement in the product price, this would lose its customers to others.
Perfect Competition: This is the market structure where vast buyers and sellers are
existing and entire market is committed in purchasing and selling of the similar products at a
single price prevailing in the market. In other words, perfect competition have as a higher
competition, which exists during the time where there is no direct competition between the
rivals. Under this market, quantity of the buyers are more as compare to other market situation.
Oligopoly Market: This is characterised by the few sellers, selling similar or
differentiated products. On the other hand, Oligopoly market structure lies in between the
monopoly and the monopolistic competition where few of the sellers reflect the market and have
a strong control over the price of the goods.
Monopoly Market: This is the market structure which is reflected by the single seller,
selling a unique good with the restriction for a new organisation to enter the market. Commonly,
monopoly is a kind of market where the seller is only one which offers the particular commodity
for which there are no close substitutes.
Small and medium enterprises: Small and medium enterprises are the one which
ultimately help the economy in boosting their GDP. SMEs' are the important components for
enahncing the contribution for the market. as on average, they contains over 95% of the
organisation and this also employed 65%-70% of the total labour force. Further, SMEs are
drivers of the economic development and innovation. In addition to this, SMEs are the driver of
economic growth and innovation which ultimately help the organisation in order to grow the
business in an effective manner (Current Account, 2018). In the UK economy, SMEs play a vast
role for contributing the annual return in an effective manner. In the UK local market, there are
various small shops which sell their products at a cheaper price than the branded goods just
because of the locality of the product.
Multinational companies: These are various organisations which have their operations
all around the globe which simply means that they have strong positions for operating business
in an effective manner. However, this can be said that multinational organisations made their
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operations in an effective manner. Multinational companies contribute handsome percentage of
amount for growing of the business. However, this can be said that the organisation needs to
make certain tools which can be used by the organisation in order enhance the economy. In UK,
various stores are opened by the multinational companies which main aim is to grow the
business adequately.
Growth Strategy: A company substantially higher the scope of one or more of its
business in terms of their respective customer group, customer functions and alternative tools in
order to enhance its entire performance.
Kinds of Growth Strategies:
 Internal Growth Strategies: These are the strategies which are related to Designing and
Developing new products/ services, incorporating on the current products for the new
opportunities, enhancing sales of the product or services via an efficient market reach,
enhancing current product lines and service offerings, coming out for a new markets, and
enhancing into foreign markets.
 External Growth Strategies: There are certain growth strategies which can be used by
the organisation for gaining the sustainability (Gustman, Steinmeier and Tabatabai,
2012). Joint venture, strategic alliances, merger and acquisitions and others. Their main
aim is to optimise the profits for the UK High street store.
2.
Concept of demand and supply
One of the important concept of economics on which whole market is depends. In the
present report this concept is used to understand about the role of demand and supply in UK
housing market.
Demand is important phenomena which provides information about desire of buyers to
buy the house and homes in UK market. There is huge relation between price and quantity
demanded which understood as demand relationship. On the other hand, supply refers to capacity
of market to offer households and land to potential buyers. There is huge relation between the
both concepts of demand and supply.
Law of demand
The provisions of this law said, if all the factors are remain same and equal, then how the
prices are rise, less people are interested to buy goods. It means if the prices are high then less
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amount of quantity is demanded by buyer in return. For ex., UK market is well established and
the prices of houses and land are increasing continuously which impacts upon the demand raised
by the potential buyers in UK market. This will also has impact upon the area demanded by
buyers.
Law of supply
This law of supply has adverse provision as compared to the law of demand that the
reason supply relationship shows an upward slope. This includes the provision about higher the
prices motivates the seller to sell the quantities in more number. It provides the opportunity to
earn large n umber of profits. For ex., at present the prices are on boom in UK market which
motivates the seller to sell high number of households.
Monetary policy of the Bank of England for UK housing Market
It is the tool which is used by bank to change interest rates and takes other measures
which helps to bring positive changes in market.
Interest rates: Change in interest rates have huge impact on other factors also like loan
and saving interest rates. Changes in such interest rates has direct influence upon demand and
prices. In present scenario of UK, interest rates are higher which increases the cost of mortgages
and has adverse impact upon the demand of houses.
3.
Current asset management:
Analysis of current assets includes debtors, stock etc. is of large significance and is
directly interrelated with liquidity position of a business concern. Current asset management
includes administration of cash, accounts receivable, cash equivalents and prepaid expenses. It is
a process of increasing assets of firm to administer best returns to shareholders. There are wide
range of assets that business have which includes liquid and fixed assets. Managers apply this
concept in taking various decisions. It allows them to keep track of their assets which assists
management in ensuring better returns (Smit and Watkins, 2012). They can easily create
inventory report by managing assets from several locations in effective manner which helps them
in taking decisions regarding lease financiers and insurers. By application of asset management
theory, money on management can be save. It allows manager to understand abilities of its assets
and the way in which these can be operated in more effective manner so as to bring efficiency in
operations. Proper management of assets can assists in optimizing operations of company
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including resource use, planning and execution of management programme. Application of asset
management system helps the managers in monitoring assets as well as its recovery process. It
assists them in taking decisions regarding attainment of better returns from investments.
Leverage:
Leverage refers to borrowing of funds or debt to finance the purchase of equipment,
inventory & other assets of company. Using leverage or debt increase the risk of bankruptcy of
firm. It also increases returns specifically on equity. It includes 3 types of leverages:
Operating leverage: It defined as the percentage of fixed costs that firm has. In other
words, it is the ratio of fixed to variable costs. For instance, in auto mobile manufacturing firms,
they have many equipment that is needed to manufacture a product. When economy slows down
& very less people are buying cars, these firms still have to pay some fixed costs like
depreciation on equipment, overhead on plants & other fixed costs that are associated with a
capital intensive company (Lusardi, 2012).
Financial leverage: It is defined as the amount of debt that have in capital structure of
firm. This leverage refers to right side of balance sheet. It refers the way in which operations of
company will be financed. Application of this concept assists managers in taking decisions
regarding financing. It can helps in enhancing return on earnings and equity per share.
Combined or total leverage: It is total amount of risk that is facing by a business firm. It
is the amount of leverage that can be used by firm to magnify their returns from business.
Leverage concept is used by managers in development of capital structure and in break-even
analysis of the company.
4.
Macroeconomics is a breach of economics that would concentrate on the diverse aspects
of the organisation and how they are connected to each other for production of wealth
(Fernandes, Lynch Jr and Netemeyer, 2014). This aspect covers the performance of the nation,
its behaviour and judgement which are considered to the economy of the nation. The main
indicator of the macro-economics are the inflations, balance of payment, interest rate and
economic growth.
Economic growth: This enhance in the percentage in country output per year is called as
the rate of economic growth. This likewise means to enhance in the growth of the nation's
productive potential over the period of time in relations to the GDP per capita. To reflect the
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value of GDP, whole goods and services are manufactured in the year which are calculated
together. This emergence is compared to those last year to overview the current year positions of
the nations.
(Source: Outstanding current account, 2016)
Gross domestic product (GDP): UK economy has grown with 1.4% on year to year
basis. In January 2015 GDP rate is 2.7 and in 2016 it is 2.1 or in 2017 it is 2. So that, it is shows
continuously decline from last few years (Fonseca Mullen and et. al., 2012). The main reason
behind this is a high level of immigrants as well as low employment opportunities.
Employment indicators: It is an employment rate which shows level of opportunities
that are available for all candidates at market place. In UK Employment has been increase year
by year. In 2002 it is 62.90%, in 2006 its 63.00%, 2010 its 61.60%, in 2014 68.40 or in the end
66.10 in year of 2015. So that, it is concluded that employment growth is very as compare to
other county that create negative impact on whole economy.
Through macroeconomic indicators company are able manage their work with economic
growth and uncertainty. Market economy of UK is uncertain, which are directly affect firm
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performance as well as market position. Some important indicators of economy are gross
domestic product, consumer's price index, employment indicators, balance of payment,
government monetary and fiscal policies or many more (Lusardi and Mitchell, 2014). Some of
them which affect overall UK economy are explain as follows:
Balance of payment: It is a record of international payment which are fulfil by
government. Balance mean outstanding mount that are remain to pay back by national bank of
the country. It consist two types of account current as well as capital or finance. UK have current
account deficit of £ 32.6 billion that was 6.9% of total GDP in the year of 2016. It is rise from
last year 2015 which are £ 96.2 billion. So it is concluded that balance of payment are
continuously rise with time.
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a)
JSM Learn financial ratios
Ratios 2015 2016
Liquidity Ratio 220345/124834=1.76 235250/118520=1.98
Market value ratio 458520/358521=1.27 478502/362520=1.32
Asset management ratio 785850/125852=6.24 798525/158520=5.03
Debt management ratio 125452/88525=1.47 90025/72520=1.24
Profitability ratio (125850/1250000)*100=10% (154200/1285252)*100=12%
From the above mentioned report, this can be said that profitability of the of the JSM
learn is increasing as compare to the last year data which reflect the most effective tool for the
firm viability. Overall, JSM Learn is going good if we compare data to the last year data.
b)
To calculate the present value, this can be measured as:
Present value= Future Value/ (1+r) ^n
Here,
r means= Interest Rate
n means= Number of years
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Here,
Present value= 650(1.0450^3=569.59
c)
Year Project A Project B PV@11.25% Present value of project A PV OF project B
0 -50000 -50000 1 -50000 -50000
1 26000 0 0.898876404 23370.78652 0
2 17625 0 0.807978791 14240.62618 0
3 15000 0 0.72627307 10894.09605 0
4 10000 0 0.652829726 6528.29726 0
5 32000 99500 0.586813237 18778.02358 58387.91707
PV 73811.82959 58387.91707
NPV 23811.82959 8387.917066
Here, project A must be accepted as this have higher NPV than the project.
CONCLUSION
From the above mentioned report, this can be observed that the UK economy is analysed
in an effective manner. By using various tools, firm can use various investment appraisal
techniques. Here, various macro-economic indicators are used which affect the economy in an
effective manner. Inflation rate and balance of payment are used in this report. In this report,
certain tools investment appraisal techniques are used under this report.
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REFERENCES
Books and Journals
Lusardi, A. and Mitchell, O.S., 2014. The economic importance of financial literacy: Theory and
evidence. Journal of economic literature, 52(1), pp.5-44.
Fonseca, R., Mullen, K.J., Zamarro, G. and Zissimopoulos, J., 2012. What explains the gender
gap in financial literacy? The role of household decision making. Journal of Consumer
Affairs, 46(1), pp.90-106.
Fernandes, D., Lynch Jr, J.G. and Netemeyer, R.G., 2014. Financial literacy, financial education,
and downstream financial behaviors. Management Science, 60(8), pp.1861-1883.
Lusardi, A., 2012. Numeracy, financial literacy, and financial decision-making (No. w17821).
National Bureau of Economic Research.
Smit, Y. and Watkins, J.A., 2012. A literature review of small and medium enterprises (SME)
risk management practices in South Africa. African Journal of Business Management,
6(21), p.6324.
Gustman, A.L., Steinmeier, T.L. and Tabatabai, N., 2012. Financial knowledge and financial
literacy at the household level. American Economic Review, 102(3), pp.309-13.
García, N., Grifoni, A., López, J.C. and Mejía, D., 2013. Financial education in Latin America
and the Caribbean: Rationale, overview and way forward. OECD Working Papers on
Finance, Insurance and Private Pensions, (33), p.1.
Stylidis, D. and Terzidou, M., 2014. Tourism and the economic crisis in Kavala, Greece. Annals
of Tourism Research, 44, pp.210-226.
Online
Current Account 2018 [Online]. Available through:<Stylidis, D. and Terzidou, M., 2014.
Tourism and the economic crisis in Kavala, Greece. Annals of Tourism Research, 44,
pp.210-226>.
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