Business Finance - Business Report

Business Finance - Business
Report

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
(A)....................................................................................................................................................3
(a) Computation of Pay Back period for all projects..................................................................3
(b) Computation of Net present Value for all projects................................................................4
(c) Ranking of project using both payback and net present value method.................................5
(d) Recommendation on best and profitable projects.................................................................6
(e) Strength and Weaknesses of payback and net present value method....................................6
(f) Five qualitative factors which directors need to be considered before making final decision
.....................................................................................................................................................7
(B)....................................................................................................................................................8
(a)................................................................................................................................................8
(b)................................................................................................................................................8
C.......................................................................................................................................................9
a. Variance analysis statement for the variable cost element......................................................9
b. Explanations of identified variance in the above statement..................................................10
D.....................................................................................................................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................15

INTRODUCTION
The present report is based on various tools and techniques associated with business
finance will be discussed that are useful in making decisions and establishing control. First of all,
investment appraisal techniques will be applied to a number of projects in order to provide
ranking and making decisions in case of mutually exclusive projects (Fandel Hofmann and
Schreck, 2020). Secondly, various funding methods will be critically evaluated along with
discussing the link between investment and financing decision made for the acquisition of a
company. Further, a variance analysis statement will be prepared with reference to the
production of chemical product along with explaining the causes of variances occurred. At last,
centralized and decentralized procurement will be differentiated on different bases along with
highlighting their respective benefits.
TASK
(A)
(a) Computation of Pay Back period for all projects
Formula of Pay back period (in case of even cash flows): Initial investment / Annual net cash
inflows.
Pay back period of Project A to F (even cash flow)
Projects
Initial
Investment
Annual cash net
inflow Pay-back period
A 1000000 300000
3.3 years
(£1000000 / £300000)
B 400000 100000
4 years
(£400000 / £100000)
C 700000 200000
3.5 years
(£700000 / £200000)
D 614500 100000
6.1 years
(£614500 / £100000)
E 500000 120000 4.1 years

(£500000 / £120000)
F 560000 100000
5.6 years
(£560000 / £100000)
Pay back period of Project G (uneven cash flow)
Year Annual cash flows (£) Cumulative annual cash flows
(£)
0 -200000 -200000
1 100000 -100000
2 100000 0
3 80000 80000
4 80000 160000
5 80000 240000
6 80000 320000
Formula of pay back period (in case of uneven cash flow): Year before full recovery + UN-
recovered cost at the start of the year / Cash flow during the year
= 1 + (100000 / 100000)
= 1 + 1 = 2 years.
(b) Computation of Net present Value for all projects
Net Present value formula = Present value of cash inflow — Present value of cash outflow or
Initial investment
Net present value of Project A to F
Projects Initial
investment
(a)
Annual cash net
inflow
(b)
Annuity factor
(c)
Present value
of cash inflow
(d) = (b) * (c)
Net Present
Value
(e) = (d) - (a)
A 1000000 300000 4.36 1306590 306590