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Report on Planning for Investment in the Project : Redstone Plc

   

Added on  2020-06-06

14 Pages3944 Words79 Views
FinanceLeadership Management
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Introduction to Finance
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TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1TASK...............................................................................................................................................1Question 1........................................................................................................................................1a) Calculate the undiscounted payback period.......................................................................1b) Calculate the Weighted Average Cost of Capital (WACC)...............................................1c) Calculate the Net Present Value (NPV) of the project, using the WACC computed above...2d) Calculate the Accounting Rate of Return (ARR)...............................................................2e) Critical appraisal of the project..........................................................................................3Question 2........................................................................................................................................3a) Outline two types of business structures owner may consider, and discuss the advantagesand disadvantages of both of it...............................................................................................3b) Significance of working capital management in the business...........................................5Question 3........................................................................................................................................6(i) Calculate the twelve ratios for the company......................................................................6(ii) Analysis of the financial health of the company..............................................................7Question 4........................................................................................................................................8a) Critically evaluate statement regarding budget..................................................................8b) Explain various accounting concepts.................................................................................9CONCLUSION..............................................................................................................................10REFERENCES .............................................................................................................................11
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INTRODUCTIONFinance is the blood of the organisation as through this, it is able to channelise funds tomost productive resources which yield better profits and more market share in the best possibleway. The enclosed report deals with Redstone plc which is planning for investment in the projectand as such, capital investment appraisal techniques are required to be carry out. Media Tech plcaccounting ratios are calculated for two years for analysing performance. For X store, variousbusiness structures are carried so that more profits may be made by owner. Moreover, budget'simportance is also outlined and accounting concepts as well. Accounting concepts play essentialrole to management and helps them to make correct and meaningful information by carrying outthe financial statements in the best possible way.TASKQuestion 1a) Calculate the undiscounted payback periodYear InflowOutflownet cash flowCumulative cashflow11000002500075000750002100000250007500015000031000002500075000225000410000025000750003000005100000250007500037500061000002500075000450000Initial investment = 340000Payback period = 4 + 35000 / 75000= 4.47 yearsb) Calculate the Weighted Average Cost of Capital (WACC)The formula for calculation of WACC is ad follows :[(Equity/Equity + Debt) x Equity return] + [(Debt/Debt + Equity) x Debt return]The equity as well as debt financing is 170000 each. The cost of equity is 7 % and debt is 6 %interest. Therefore, WACC is calculated as :1
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= 170000 / 170000 + 170000 * 7 % + 170000 / 170000 + 170000 * 6 %= 3.50 + 3= 6.50 %c) Calculate the Net Present Value (NPV) of the project, using the WACC computed above.NPV is calculated by taking risk premium rate as well. Therefore, Cost of capital = 6.5 %+ 1.5 % = 8 % which is the discount factor to be used for calculating NPV of the investmentproposal. NPV = Total discounted cash inflows – initial investmentYear InflowOutflownet cashflowPV factor@ 8%Discountedcashinflow 110000025000750000.92669444.4475000210000025000750000.85764300.41150000310000025000750000.79459537.42225000410000025000750000.73555127.24300000510000025000750000.68151043.74375000610000025000750000.63047262.72450000Totaldiscountedcash inflow 346715.97Initial investment340000NPV6715.97NPV is positive.d) Calculate the Accounting Rate of Return (ARR)Year InflowOutflownet cashflowPV factor@ 8%Discountedcash inflow 110000025000750000.92669444.4475000210000025000750000.85764300.41150000310000025000750000.79459537.422250002
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