Capital Budgeting and Financial Management

This assignment delves into the realm of capital budgeting and its significance within financial management. Students are tasked with understanding various capital budgeting techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), and Payback Period, to evaluate investment projects effectively. The assignment emphasizes the application of financial statement analysis and risk management concepts in making sound investment decisions. It encourages students to critically analyze real-world scenarios involving project appraisal and financial planning.

Running Head: Financial Management
Capital Budgeting & Financial Analysis

Financial Management 1
Executive summary:
In the first part of report the two projects investments are analysed on the basis of their net
present values, payback periods and the average annual rate of return. From the results of
those capital budgeting techniques project B is considered as the appropriate investment
proposal due to the fact that it is providing higher returns and keeps the ability to recover its
invested amounts in the shorter time than the project A. In the second part various elements
of financial statements have been calculated using certain financial formulas. Using those
calculated amounts the extract for the next year is drawn. In the third part, critical analysis of
financial performance of Jaguar Land Rover is made using ratio analysis approach which
proved that in company needs to improve its performance in certain areas and in some
financial areas it is currently performing well. In the last part of the report, the budgeting
process and its importance is discussed as budgets are necessary for financial planning and
therefore participation from all the levels of management is necessary to make the best use of
budgeting practices.

Financial Management 2
Solution 1:
It is assumed salvage value received in 5th year is not included in 5th year cash inflows, hence
treated separately.
Year
PVF @
16%
PROJECT
A
Cash-flows
Cumulative
value
PV of
cash flows
PROJECT
B
Cash-flows
Cumulative
Value
PV of cash
flows
0 1.000 -250,000 -250,000 -250,000 -260,000 -260,000 -260,000
1 0.862
90,0
00 -160,000
77,586.
21
120,0
00 -140,000 103,448.28
2 0.743
80,0
00 - 80,000
59,453
.03
90,0
00 -50,000
66,884.6
6
3 0.641
75,0
00 -5,000
48,049
.33
80,00
0 30,000
51,252.6
1
4 0.552
60,0
00 55,000
33,137
.47
50,0
00 80,000
27,614.5
5
5 0.476
55,0
00 110,000
26,186
.22
50,0
00
130
,000
23,805.6
5
5 0.476 10,000 120,000 4,761.13 25,000 155,000 11,902.83
NPV £ -826.62 £ 24,908.58
a)
PAYBACK PERIOD
a) =3 + 5,000 =3.08 Years
Project A 55,000 – (5,000)
b) =2 + 50,000 =2.63 Years
PROJECT B 30,000-(50,000)

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b)
ANNUAL AVERAGE RATE (Gotze, Northcott & Schuster, 2016).
ARR= Average Net Income after Taxes
Average Investments
PROJECT A
Average Net Income
= Net Income of year 1-5 = 370,000 =74,000
Number of years 5
= Average Investment of Project A
= 10,000+1/2 (250,000-10,000)
= £ 130,000
ARR = 74,000 x 100
130,000
= 56.92%
PROJECT B
Average Net Income
= Net Income of all the years = £ 415,000 = £ 83,000
Number of years 5
Average Investment of Project B
=25,000 + 1/2(260,000-25,000)
= 1, 42,500
ARR = 83,000 x 100
£ 142,500
= 58.45%

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c)
NET PRESENT VALUES
Present Value Cash Outflows – Present Value of Cash Inflows
PROJECT A = £ 250,000 - £ 249,173.38
= £ -826.62
PROJECT B = £ 260,000 -£ 284,908.48
= £ 24,908.58
d)
In the current case project A has the higher payback period than that of project B. Therefore,
project B must be selected as it is capable of recovering the invested funds more quickly than
the project A (Petty et al., 2015). Project B is delivering higher ARR and hence it is to be
accepted. Project B has also positive NPV hence it should be accepted and project A has
negative NPV hence to be rejected (David, 2011).
e)
The qualitative considerations in the capital investment appraisal is quite important
particularly for strategic investments. Some of the investments are characterised by their
qualitative nature and hence cannot be measured in the quantitative terms such as dollars,
times, months, percentages etc. If these factors are ignored at the time of making project
investment evaluation, there may be the chances that an opportunistic project is rejected on
the basis of some quantitative methods (Burns & Walker, 2015). The strategic investments
affects the company for longer terms with huge investment of funds and these are irrevocable
decisions, hence requires significant consideration of both quantitative and qualitative factors
(Cooremans, 2011). Some of the qualitative factors are explained below:
 Impact on environment: A project can be attractive from the point of view of cash
flows and profitability but is not suitable for the environment it is surrounded by. The

Financial Management 5
project may involve use of excessive natural resources affecting their sustainability or
its operations may impose harmful impact on the nature such as plants, animals,
human beings, water bodies etc. Such a project has the huge chances of public
opposition which would definitely hinders the investment’s ability to produce
desirable outputs (McNeil, Frey & Embrechts, 2015).
 Social trends: the taste and preferences of the ultimate consumers of the products
produces by the proposed investment plan is very important to be considered while
evaluating the capital budgeting decisions. As if the products are not demanded by the
public it would not allow the project managers to make profitability from the
business. Such projects will not help in generating any required returns.
 Technological factors: This includes consideration of required techniques to be
implemented to make the project successful. The managers must also consider
availability of such trained and skilled labour force before investing funds in these
projects.
Solution 2
a)
i) Gross Margin= Gross Margin = £ 10,500 x 100 =25%
Net Sales £ 42,000
ii) Average period of credit taken by customers (in months) is calculated using
Average Collection Period i.e.
= Number of months in the given period* Average Accounts Receivables
Net Credit Sales
= 12 * 4,200
42,000
= 1.2 Months

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iii) The average period of credit taken from suppliers (in months) is calculated using
Average Payment Period i.e.
= Number of months in the given period* Average Accounts Payables
Net Credit Purchases
= 12 * 2,363
31,500
= .90 Months
iv) Inventory Turnover Period
Inventory turnover ratio= Cost of Goods Sold
Average Inventory
Cost of Goods Sold= Opening inventory + Purchases- Closing Inventory
= £ 1,575 + £ 31,500- £ 1,575
= £ 31,500
Average Inventory = (Opening inventory + Closing Inventory)
2
= £ 1,575 + £ 1,575 = £ 1,575
2
Inventory turnover ratio= £31,500
£1,575
= 20 Times

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Inventory Period (In Months) = Number of Months in a Year
Inventory Turnover
= 12
20
= .6 months
b)
Extracts of Income statement for year ended 31 July 2018
Year 2018 2017
Amounts £000 Amount £000
Revenue (all from sales) 48,500 42,000
Cost of Sales
Opening Inventory 1,968.75 * 1,575
Purchases 31,500 31,500
Closing Inventory 1,968.75 31,500 1,575 31,500
Gross Profit 17,000 10,500
* (1575 x 125%)
Extracts of Statement of Financial Position as at 31 July 2018
Current assets £000 £000
Inventory 1968.75 1575
Trade receivables 8083.33 4200
Current liabilities
Trade payables 2625 2363
Working Notes:

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i) Calculation of accounts receivables amount as Average Collection Period is given
as 2 months.
Average Collection Period i.e.
= Number of months in the given period* Average Accounts Receivables
Net Credit Sales
2 = 12 * X
48,500
X = £ 8,083.33
ii) Calculation of accounts receivables amount as Average Payment Period is given
as 1 month.
Average Payment Period i.e.
= Number of months in the given period* Average Accounts Payables
Net Credit Purchases
1 = 12 * X
31,500
= £ 2,625
Assumption: All sales and purchases are assumed on credit.
Solution 3
Analysis of firm’s performance using various kinds of financial ratios:
Profitability:
Profitability of the firm’s efficiency to generate higher profits from its investments in
business. Higher the profits of the business higher is its efficiency. Net profit ratio, return on
equity and return on assets are some of the formulas commonly used in finance to evaluate
the as to how profitable is a business (Brooks, 2015).

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(All amounts in millions £)
RATIOS 2016 2015
Net Profit Ratio= Net profit after Tax 1,312 = 5.91% 2,038 = 9.32%
Net Sales 22,208 21,866
It indicates the amount of income a firm makes on every dollar of sales. Higher ratio is
preferred as it shows firm’s ability to translate more sales into profits at the year-end
(Higgins, 2012). The net profit ratio of the company in year 2016 has declined from the last
year 2015. It can be said business is incurring more expenses and generating lesser profits.
The company must strive to improve its net profit ratio so to make it profitable to operate.
Return on Equity = Net profit after Tax = 1,312 = 14.83% = 2,038 =28.87%
Shareholder’s Funds(WN 1) 8,850 7,312
It indicates the company’s efficiency in using the shareholder’s monies to earn profits. It also
indicates how effective the business of the firm is using equity financing for funding its
operations (Brigham & Ehrhardt, 2013). Higher ROE is preferred over lower ROE. In the
present case, it is seen that the ROE has drastically declined in year 2016 as compared to
2015. The current ROE is just almost the half of previous year’s ROE. Therefore, it can be
concluded that the company is being inefficient in making efficient and effective utilisation
of its shareholders funds in the business. Though it is generating returns for its shareholders
but as much as it used to generate in last years.
Return on Assets = Net Income (WN 3) 1,383.19= 7.07% 2,172.36 = 12.72 %
Average Annual Assets (WN 2) 19,565 17,076
It indicates how efficient a firm is in managing its total assets to produce profits in the given
year. Positive ratio shows efficiency of company to earn returns from the investments in

Financial Management 10
assets. The above calculation is showing that the company’s performance has been degraded
in the year 2016 as compared to 2015 as the return to asset ratio is declining.
Liquidity:
Current and quick ratios are the most commonly recognised liquidity ratios (Fridson &
Alvarez, 2011).
Current Ratio= Current Assets 8,972=1.14 8,410 =1.13
Current Liabilities 7,875 7,457
This ratio determines the corporation’s ability to meet out the debts that become due in
merely 12 months using the current assets and without requiring the disposal of other income
generating assets. The ideal current ratio is 2:1 (Bierman Jr & Smidt, 2012). The current ratio
of the company in 2016 is 1.14 which is depicting that the company has almost equal current
assets and current liabilities. The ratio indicates that the company is unable to meet its current
liabilities through the use of current assets. Its puts the company in the riskier position. There
is negligible change in the previous year’s current ratio and this year’s ratio which means that
company has been unable to improve its ability to repay its short term debts using only the
current assets (Moyer et al., 2011).
Quick Ratio= Quick Assets(WN 4) 5,729= 0.73 5,375=0.72
Current Liabilities 7,875 7,457
Quick ratio shows the company’s capability of meeting out its short term financial liabilities
using only those assets that are highly liquid i.e. which are capable of getting converted into
cash as soon as cash is required (Healy & Palepu, 2012). Higher ratio is preferred in case of
quick assets as it shows the company’s efficiency to pay out the current liabilities in short
time. In the current case the quick is quite low which tells that the company is being unable to

Financial Management 11
manage its short term liabilities with the only use of quick assets. The ratio was almost
similar in the last year that means that the company was unable to arrange and manage
required quick assets for its business (Brigham & Houston, 2012).
Capital Structure
Debt Equity
Ratio= Total Debt (WN 5) 12,953=8.63 times 12,523 =8.34 times
Equity 1,501 1,501
It indicates quantum of funds raised from creditors (banks and financial institutions) in
comparison with those raised from shareholders. Higher the debt equity ratio higher is the
proportion of external financing in the total debt of company (Arnold, G., 2013). In the
instant case the debt equity ratio is quite stable which means that the company has been
successful in arranging the finance from internal sources like equity share capital than the
external sources such as debt or loans (Cheng et al., 2010). Raising of funds from external
sources puts the company more close to insolvency risk which is not good for it. From the
previous year results it can be said that the company is not only maintaining a good debt
equity ratio rather it is able to improve it slightly (Brigham & Ehrhardt, 2013).
Working Notes:
1) Shareholder’s Equity= Share Capital + Reserves + Retained Earnings
Year 2016 2015
Share Capital
Capital Redemption Reserves
Retained Earnings
Total
1,501
167
7,182
8,850
1,501
167
5,644
7,312
2) Average Annual Assets= Opening Assets + Closing Assets

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2
Year 2016 2015
Opening Assets
Closing Assets
Total
Average Annual Assets
18,563
20,567
39,130
19,565
15,589
18,563
34,152
17,076
3) Net Income = Profit after Tax + [(Interest Expenses) *1-Tax Rate]
Year 2016 2015
Profit after Tax
Add: Net Finance Expenses (net of
tax)
Net Income
1,312
71.19
1,383.19
2,068
104.36
2,172.36
Note: Rate of tax in 2016 as per annual report is 20.9% ad for 2015 it was 22.7%
In 2016 tax expense is £ 90 and after tax net expense is £71.19
In 2015 tax expense is £ 135 and after tax net expense is £104.36
4) Quick Assets= cash + cash equivalents + short term investments + current receivables
Year 2016 2015
Cash & Cash Equivalents
Short term deposits
Trade and other receivables
Total
3,399
1,252
1,078
5,729
3,208
1,055
1,112
5,375
5) Total Debt = Current Liabilities + Non-Current Liabilities
Year 2016 2015

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Current Liabilities
Non-Current Liabilities
Total
7,875
5,078
12,953
7,457
5,066
12,523
Solution 4
Part a)
Reasons for which businesses uses budgets:
 To anticipate the potential expenses and incomes:
Budgeting process forms the most important part of planning for the near future of the
business. It helps in estimation of all the potential costs and revenues of the business
thereby defining the amount of funds that a firm requires to proceed further with the
business functions (Bogsnes, 2016). The business managers uses such practices to
determine whether it is profitable to take the business ahead or it needs to be shut
down.
 For decisions making:
In managing the critical functions of the business the managers requires proper base
on which they can draw their decisions that are necessary to run and grow the
business. When budgets are placed in front of business owners or the policy
formulators it helps them in allocating the important resources to various functions of
business. Moreover, it helps them in deciding how much funds are required to be
deployed in the business in order to achieve targeted goals.
 To monitor the performance of business:
Every business requires to evaluate its performance in order to know that where it is
exactly standing. Without performance evaluation the business would not know about
its inefficiencies which needs urgent actions to be corrected. Budgets assists the

Financial Management 14
business managers in assessing the performance of its functions by tallying the
budgeted desired results and the actual results and to an extent it also enables them in
identifying the root causes of the deviations.
Part b)
Incremental approach of budgeting follows that method of preparing budgets whereby the
transactions and events that are currently occurring are increased with certain percentages for
the budgets for the future periods. The only change in the proposed budget and previous
budget is of incremental amounts are incorporated in the new budget plan. The alternatives to
incremental approach of budgeting are as follows:
 Zero based budgeting
This is one of the most commonly used contemporary techniques of budgeting for the
projects. It involves preparation of budgets from the scratch i.e. from zero base. Under this
type of budgeting the expenses for the fresh budgeting period are calculated based on the
actual costs that are going to be incurred and not merely on the basis of incremental approach
of budgeting. Unlike traditional budgeting techniques which assumes that past expenses will
continue to occur in future, zero based budgeting works on the assumption that no balances
will be carried forward to the new budgeting period.
 Activity based budgeting
This is the modern technique of budgeting under which those activities are recorded which
incur costs in each and every functional area of the organisation. This technique do not
merely make adjustments to the previous period’s budgets to provide for inflationary effect or
possible business developments. Rather, it looks for the efficiencies in the operations of
business and develops budget plans on the basis of necessary activities (Assembly, 2010).
 Performance based budgeting

Financial Management 15
This is the different approach of budgeting than those conventional budgeting techniques.
This technique of budgeting exhibits input of the resources and output of the services for each
organisation’s unit. It basically awards the funds to various activities based on their
performances (Anessi‐Pessina, Sicilia & Steccolini, 2012). This type of budgeting is mostly
used by the governmental bodies to indicate the connection between the amounts of funds
provided to general public and outcomes of those services.
Part c)
An organisation prepares its budgets to determine how much money will it require to carry
out its functioning and what can be the possible sources of income in future. Basically,
budgeting involves estimation of an organisation’s potential expenses and incomes that are
going to occur in future in order to achieve its goals and targets.
Promotes motivation among subordinates:
Participative budgeting is the type of budgeting process in which people who are influenced
by the budgets are given the opportunity to participate in the budgeting process. Participation
of overall organisation particularly those who are required to deal with these budget plans is
necessary in order to enhance their motivation and to promote flexibility of their ideas.
Budgets are normally prepared by the managers or the other personnel from top level
management who do not actually carry out the day to day operations of business. However,
the persons who work on these budget plans and perform the regular and casual business
operations belongs to either low level management or sometimes the middle level
management. In reality they have the better knowledge of company’s basic operation than
their supervisors from the top level management. Therefore, the involvement of lower
management personnel improves the quality of budgets (Heinle, Ross & Saouma, 2013).
Introduction of innovative ideas:

Financial Management 16
All the employees working in an organisation have a different thinking process which may
result in evolution of unique ideas for the business. Participation of employees from different
level of management helps an organisation in introduction of innovative ideas to conduct the
business operations in the most effective and efficient manner which ultimately contributes to
the success and growth of business (Baiocchi & Ganuza, 2014).
Enhanced Employees productivity:
Participation in the budgeting process will also enhance the employee productivity as they
will be given the opportunity to express their ideas and this practice will make them feel
encouraged as it would amount to build confidence in them (Zhang & Liao, 2011). The
entertainment of ideas of employees from different department of organisation will encourage
them to work with more loyalty as their participation is being appreciated by the organisation
and their efforts are contributing to the business success.
Better decision making:
The involvement of employees from lower and middle level management will help in
improved business results in terms of profitability as the executors of the plans can better
control the expenditures than the top level management (Assembly, 2010).

Financial Management 17
List of references:
Anessi‐Pessina, E., Sicilia, M. and Steccolini, I., 2012. Budgeting and rebudgeting in local
governments: siamese twins?. Public Administration Review, 72(6), pp.875-884.
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Assembly, N.I., 2010. Methods of Budgeting. Available at: http://www. niassembly. gov.
uk/researchandlibrary/2010/0610. pdf.
Baiocchi, G. and Ganuza, E., 2014. Participatory budgeting as if emancipation
mattered. Politics & Society, 42(1), pp.29-50.
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Bogsnes, B., 2016. Implementing beyond budgeting: unlocking the performance potential.
John Wiley & Sons.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage
Learning.
Brigham, E.F., 2014. Financial management theory and practice. Atlantic Publishers &
Distri.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.

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Cheng, M.Y., Lin, J.Y., Hsiao, T.Y. and Lin, T.W., 2010. Invested resource, competitive
intellectual capital, and corporate performance. Journal of Intellectual Capital, 11(4), pp.433-
450.
Cooremans, C., 2011. Make it strategic! Financial investment logic is not enough. Energy
Efficiency, 4(4), pp.473-492.
David, F.R., 2011. Strategic management: Concepts and cases. Peaeson/Prentice Hall.
Fridson, M.S. and Alvarez, F., 2011. Financial statement analysis: a practitioner's
guide (Vol. 597). John Wiley & Sons.
Gotze, U., Northcott, D. and Schuster, P., 2016. INVESTMENT APPRAISAL. SPRINGER-
VERLAG BERLIN AN.
Healy, P.M. and Palepu, K.G., 2012. Business analysis valuation: Using financial statements.
Cengage Learning.
Heinle, M.S., Ross, N. and Saouma, R.E., 2013. A theory of participative budgeting. The
Accounting Review, 89(3), pp.1025-1050.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
McNeil, A.J., Frey, R. and Embrechts, P., 2015. Quantitative risk management: Concepts,
techniques and tools. Princeton university press.
Moyer, R.C., McGuigan, J., Rao, R. and Kretlow, W., 2011. Contemporary financial
management. Nelson Education.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M.,
2015. Financial management: Principles and applications. Pearson Higher Education AU.

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Zhang, Y. and Liao, Y., 2011. Participatory budgeting in local government: Evidence from
New Jersey Municipalities. Public Performance & Management Review, 35(2), pp.281-302.