Managerial Finance: Performance Analysis and Recommendations
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This document provides an analysis of the performance, financial position, and investment potential of Tesco and Sainsbury in managerial finance. It includes calculations of financial ratios for both companies, such as current ratio, quick ratio, net profit margin, gross profit margin, gearing ratio, P/E ratio, EPS, ROCE, average stock turnover period, and dividend pay-out ratio. The analysis reveals that Sainsbury has a stronger liquidity position, while Tesco has higher profitability and dividend pay-outs. Recommendations are provided for both companies to improve their financial performance. The document also discusses the limitations of relying solely on financial ratios for analysis.
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Managerial Finance
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Contents
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
a. Calculate 10 financial ratios as given below for two years (2018 and 2019):....................3
b. Analyse performance, financial position and investment potential of both companies:....5
c. Provide recommendations:...............................................................................................11
d. Limitations of relying on financial ratios.........................................................................12
TASK 2..........................................................................................................................................13
a. Investment appraisal techniques:......................................................................................13
b. Limitations of using investment appraisal techniques in long term decision making:.....15
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
a. Calculate 10 financial ratios as given below for two years (2018 and 2019):....................3
b. Analyse performance, financial position and investment potential of both companies:....5
c. Provide recommendations:...............................................................................................11
d. Limitations of relying on financial ratios.........................................................................12
TASK 2..........................................................................................................................................13
a. Investment appraisal techniques:......................................................................................13
b. Limitations of using investment appraisal techniques in long term decision making:.....15
CONCLUSION..............................................................................................................................18
REFERENCES..............................................................................................................................19
INTRODUCTION
Management finance is primarily associated with the evaluation of financial procedures
than with financial strategies themselves. This varies from the practical approach, which is
basically concerned only about evaluation and whether funding has been applied to the
appropriate areas. The goal of the management approach is to evaluate the importance of results,
estimates and statistics (Jabbouri, 2016). Management finance is looking at how financial
strategies can be strengthened – where improvements can be introduced to better avoid risks and
increase bottom lining. The study consists of two major parts, in first part ratio analysis of UK’s
leading corporations: Tesco and Sainsbury have been done to evaluate their performance in
perspective of investors. While second part comprises practical sum of multiple investment
appraisal techniques as well as their limitations.
TASK 1
a. Calculation of 10 financial ratios as given below for two years (2018 and 2019):
(Amounts are in GBP thousand except ratios) Tesco PLC Sainsbury PLC
Year 2018 Year 2019 Year 2018 Year 2019
Current Ratio
Current Assets 13726000 12668000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Current Ratio = Current Assets / Current
Liabilities
0.713484 0.612573 0.762667443 0.637185
Quick Ratio
Quick Asset 11463000 10051000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Quick Ratio = Quick Assets / Current
Liabilities
0.595852 0.486025 0.762667443 0.637185
Net Profit Margin
Net Profit 1206000 1322000 291000 168000
Sales 57491000 63911000 28456000 29007000
Management finance is primarily associated with the evaluation of financial procedures
than with financial strategies themselves. This varies from the practical approach, which is
basically concerned only about evaluation and whether funding has been applied to the
appropriate areas. The goal of the management approach is to evaluate the importance of results,
estimates and statistics (Jabbouri, 2016). Management finance is looking at how financial
strategies can be strengthened – where improvements can be introduced to better avoid risks and
increase bottom lining. The study consists of two major parts, in first part ratio analysis of UK’s
leading corporations: Tesco and Sainsbury have been done to evaluate their performance in
perspective of investors. While second part comprises practical sum of multiple investment
appraisal techniques as well as their limitations.
TASK 1
a. Calculation of 10 financial ratios as given below for two years (2018 and 2019):
(Amounts are in GBP thousand except ratios) Tesco PLC Sainsbury PLC
Year 2018 Year 2019 Year 2018 Year 2019
Current Ratio
Current Assets 13726000 12668000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Current Ratio = Current Assets / Current
Liabilities
0.713484 0.612573 0.762667443 0.637185
Quick Ratio
Quick Asset 11463000 10051000 7857000 7550000
Current Liabilities 19238000 20680000 10302000 11849000
Quick Ratio = Quick Assets / Current
Liabilities
0.595852 0.486025 0.762667443 0.637185
Net Profit Margin
Net Profit 1206000 1322000 291000 168000
Sales 57491000 63911000 28456000 29007000
Net Profit Margin = Net Profit / Sales *100 2.09772 2.068502 1.022631431 0.579171
Gross Profit Margin
Gross Profit 3350000 4144000 544000 620000
Sales 57491000 63911000 28456000 29007000
Gross Profit Margin = Gross Profit / Sales
*100
5.826999 6.484017 1.911723362 2.137415
Gearing ratios
Long term Liabilities 15144000 13509000 2552000 7607000
Capital Employed 10480000 14858000 7411000 7782000
Gearing Ratio = Long term Liabilities / CE *
100
144.5038 90.92072 34.44 97.75
P/E ratio
Price 197.4 255.1 260 229.2
Earning per Share 0.44 0.39 12.54 6.79
PE Ratio = Price / EPS 448.6364 654.1026 20.73365231 33.75552
Earnings per share
Total net profit 1206000 1322000 291000 168000
Total no. of outstanding shares 2731000 3253000 243700 245700
EPS = Net Profit / Total no. outstanding
shares
0.441596 0.406394 1.194091096 0.683761
Return on capital employed
EBIT 1564000 2077000 544000 620000
CE 10480000 14858000 7411000 7782000
ROCE = EBIT / CE 14.92366 13.979 7.340439887 7.967104
Gross Profit Margin
Gross Profit 3350000 4144000 544000 620000
Sales 57491000 63911000 28456000 29007000
Gross Profit Margin = Gross Profit / Sales
*100
5.826999 6.484017 1.911723362 2.137415
Gearing ratios
Long term Liabilities 15144000 13509000 2552000 7607000
Capital Employed 10480000 14858000 7411000 7782000
Gearing Ratio = Long term Liabilities / CE *
100
144.5038 90.92072 34.44 97.75
P/E ratio
Price 197.4 255.1 260 229.2
Earning per Share 0.44 0.39 12.54 6.79
PE Ratio = Price / EPS 448.6364 654.1026 20.73365231 33.75552
Earnings per share
Total net profit 1206000 1322000 291000 168000
Total no. of outstanding shares 2731000 3253000 243700 245700
EPS = Net Profit / Total no. outstanding
shares
0.441596 0.406394 1.194091096 0.683761
Return on capital employed
EBIT 1564000 2077000 544000 620000
CE 10480000 14858000 7411000 7782000
ROCE = EBIT / CE 14.92366 13.979 7.340439887 7.967104
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Average inventories turnover period
Net Sales 57491000 63911000 28456000 29007000
Average inventories 2282000 2440000 1792500 1869500
Average inventories turnover period = Net
Sales / Average Inventory
25.19325 26.19303 15.87503487 15.51591
Dividend pay-out ratio
DPS 0.03 0.11 9.7 10.2
EPS 0.44 0.39 12.54 6.79
Dividend pay-out ratio = DPS / EPS 0.068182 0.282051 0.773524721 1.502209
b. Analyse performance, financial position and investment potential of both companies:
Current Ratio: As shown in the above presented graph current ratios of Tesco Company are 0.61
and 0.71 during the 2019 and 2018 periods, displaying increases over the both years,
whereas current ratio of Company Sainsbury are 0.64 and 0.76, accordingly, throughout that
same time-frame. Both businesses reported an improved performance in the ratio, although
Sainsbury's shorter-term liquidity efficiency with greater current ratio is good relative to Tesco
(Davis, 2016).
Net Sales 57491000 63911000 28456000 29007000
Average inventories 2282000 2440000 1792500 1869500
Average inventories turnover period = Net
Sales / Average Inventory
25.19325 26.19303 15.87503487 15.51591
Dividend pay-out ratio
DPS 0.03 0.11 9.7 10.2
EPS 0.44 0.39 12.54 6.79
Dividend pay-out ratio = DPS / EPS 0.068182 0.282051 0.773524721 1.502209
b. Analyse performance, financial position and investment potential of both companies:
Current Ratio: As shown in the above presented graph current ratios of Tesco Company are 0.61
and 0.71 during the 2019 and 2018 periods, displaying increases over the both years,
whereas current ratio of Company Sainsbury are 0.64 and 0.76, accordingly, throughout that
same time-frame. Both businesses reported an improved performance in the ratio, although
Sainsbury's shorter-term liquidity efficiency with greater current ratio is good relative to Tesco
(Davis, 2016).
Quick Ratio: As shown in the above-mentioned graph, the Quick Ratios are 0.60 and.49
throughout year-2018 and year-2019 respectively, whereas the Sainsbury company's Quick Ratio
are around 0.59 and 0.47 during the same time-frame respectively. There's also a increasing shift
in quick ratios, that represents an increase in cash liquidity scenario of both firms.
Comparatively, the Tesco's quick ratios are slightly higher than company Sainsbury
(Champagne, Karoui, and Patel, 2018).
throughout year-2018 and year-2019 respectively, whereas the Sainsbury company's Quick Ratio
are around 0.59 and 0.47 during the same time-frame respectively. There's also a increasing shift
in quick ratios, that represents an increase in cash liquidity scenario of both firms.
Comparatively, the Tesco's quick ratios are slightly higher than company Sainsbury
(Champagne, Karoui, and Patel, 2018).
Net Profit Margin: The performance of all corporations can be efficiently determined through net
profit ratio and gross profit ratio. The net profit percentages depicted in the Sainsbury chart
mentioned are 1.02 per cent and 0.58 per cent in year-2018 and year-2019, with an increasing
trend, whilst the net profit percentages of Tesco Plc are 2.10 per cent and 2.07 per cent in year-
2018 and 2019. Thus, both such corporations have reported improved net profitability levels, but
Tesco Plc has achieved greater profit margins relative to Sainsbury, which means that the
profitability level is much greater than company Sainsbury.
Gross Profit Ratio: The gross profitability margins of Tesco Plc are 5.82 per cent in year-2018
and 6.48 per cent in 2019, whereas the Sainsbury GP ratios are 1.9 per cent and 2.14 per cent in
period 2018-2019. Research reveals that Tesco Plc, with a greater gross margin percentage, is
more efficacious than Sainsbury to earn profits from its main business activities.
profit ratio and gross profit ratio. The net profit percentages depicted in the Sainsbury chart
mentioned are 1.02 per cent and 0.58 per cent in year-2018 and year-2019, with an increasing
trend, whilst the net profit percentages of Tesco Plc are 2.10 per cent and 2.07 per cent in year-
2018 and 2019. Thus, both such corporations have reported improved net profitability levels, but
Tesco Plc has achieved greater profit margins relative to Sainsbury, which means that the
profitability level is much greater than company Sainsbury.
Gross Profit Ratio: The gross profitability margins of Tesco Plc are 5.82 per cent in year-2018
and 6.48 per cent in 2019, whereas the Sainsbury GP ratios are 1.9 per cent and 2.14 per cent in
period 2018-2019. Research reveals that Tesco Plc, with a greater gross margin percentage, is
more efficacious than Sainsbury to earn profits from its main business activities.
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Gearing ratio: Gearing Ratios shown in the above-graph reflects the corporations' real liquidity
level. The company Tesco Plc reported gearing ratio of 90.92 in year-2019 and 144.50 in year-
2018, whereas Sainsbury corporation's gearing proportions are 34.44 per cent and 97.75 per cent
in year-2018 and year-2019 respectively. Tesco reported a higher ratio than Sainsbury, that
means that the debt level in company is greater. As a result, Sainsbury company's liquidity status
is stronger than Tesco Plc (Kumar and Pathak, 2016).
level. The company Tesco Plc reported gearing ratio of 90.92 in year-2019 and 144.50 in year-
2018, whereas Sainsbury corporation's gearing proportions are 34.44 per cent and 97.75 per cent
in year-2018 and year-2019 respectively. Tesco reported a higher ratio than Sainsbury, that
means that the debt level in company is greater. As a result, Sainsbury company's liquidity status
is stronger than Tesco Plc (Kumar and Pathak, 2016).
PE ratio: The Tesco PE ratio are 448.63 and 654.10 for year-2018 and year-2019 respectively,
with a downward trend, while Sainsbury corporation's PE ratio for same periods are 20.73 and
33.75 as result of the downward pattern in PE ratio. This implies that Sainsbury corporation is
more efficacious in providing returns to its shareholders on every share they owns, and value of
company Sainsbury's securities are greater.
EPS: As seen in the diagram EPS of corporation Tesco Plc in year 2019 is around 0.41 and
around 0.44 in year-2018, whereas Sainsbury company's EPS is around 1.19 and 0.68 in
period 2018 and 2019. Analysis shows that EPS value in both businesses is decremental. The
Sainsbury's EPS is higher than company Tesco, which demonstrates that company Sainsbury is
better at providing profits on each of their share (Baker, Kumar, Colombage and Singh, 2017).
with a downward trend, while Sainsbury corporation's PE ratio for same periods are 20.73 and
33.75 as result of the downward pattern in PE ratio. This implies that Sainsbury corporation is
more efficacious in providing returns to its shareholders on every share they owns, and value of
company Sainsbury's securities are greater.
EPS: As seen in the diagram EPS of corporation Tesco Plc in year 2019 is around 0.41 and
around 0.44 in year-2018, whereas Sainsbury company's EPS is around 1.19 and 0.68 in
period 2018 and 2019. Analysis shows that EPS value in both businesses is decremental. The
Sainsbury's EPS is higher than company Tesco, which demonstrates that company Sainsbury is
better at providing profits on each of their share (Baker, Kumar, Colombage and Singh, 2017).
ROCE: As demonstrated in the chart, are around 14.92 and 13.98 of Tesco and Sainsbury's
ROCE reported are 7.34 and 7.97 in 2018 and year-2019. There is an enhancement in
ratio in case of Tesco and a reduction in ROCE of Sainsbury. Tesco plc with larger ROCE is
much more likely to produce yields on its total capital-funds employed.
Average stock turnover period: This period of corporation of Tesco Plc are around 25.19 and
26.19 while of Sainsbury are around 15.87 and 15.52 during year-2018 and 2019. Which
indicates that corporation Sainsbury, with a lesser ratio, is easier than ever to turn its stocks into
ROCE reported are 7.34 and 7.97 in 2018 and year-2019. There is an enhancement in
ratio in case of Tesco and a reduction in ROCE of Sainsbury. Tesco plc with larger ROCE is
much more likely to produce yields on its total capital-funds employed.
Average stock turnover period: This period of corporation of Tesco Plc are around 25.19 and
26.19 while of Sainsbury are around 15.87 and 15.52 during year-2018 and 2019. Which
indicates that corporation Sainsbury, with a lesser ratio, is easier than ever to turn its stocks into
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revenue. Whereas average days of Tesco have been improved over the timeframe, it implies that
the productivity of the corporation in turning its inventory to revenue has decreased.
Dividend-pay-out: Sainsbury's Dividend pay-out are 0.77 and 1.5, whereas Tesco's dividend pay-
outs are 0.68 and -0.282 in during 2018-2019. This demonstrates that corporation Sainsbury is
more beneficial to the investor, because corporation pays greater rates of dividends on its shares
to its shareholders as compared to Tesco Plc.
Sainsbury's cumulative performance review reveals that Sainsbury's shorter-term
liquidity status is slightly greater than Paddy plc. Although the total net as well as gross
profitability status of Tesco Plc is even better than that of Sainsbury. Borrowings in Tesco are in
a higher proportion than Sainsbury's. From the investor's perspective Recent trends in shares
prices, Sainsbury corporation's EPS as well as Pay-outs are both more favourable and lucrative
for investors/shareholders, as the corporation has much more satisfactory ratios than Tesco plc.
Sainsbury's optimal average inventories days as opposed to Tesco point out that that Sainsbury
has done well in relation to turning its stocks/inventories into revenue.
c. Provide recommendations:
Tesco Plc: It is highly advised that company should concentrate on reducing its total debts and
strengthening its shorter-term liquidity status. This business should adjust its lending policy as
well as reduce its reliance on debt financing. Further, share value of company is lower than that
the productivity of the corporation in turning its inventory to revenue has decreased.
Dividend-pay-out: Sainsbury's Dividend pay-out are 0.77 and 1.5, whereas Tesco's dividend pay-
outs are 0.68 and -0.282 in during 2018-2019. This demonstrates that corporation Sainsbury is
more beneficial to the investor, because corporation pays greater rates of dividends on its shares
to its shareholders as compared to Tesco Plc.
Sainsbury's cumulative performance review reveals that Sainsbury's shorter-term
liquidity status is slightly greater than Paddy plc. Although the total net as well as gross
profitability status of Tesco Plc is even better than that of Sainsbury. Borrowings in Tesco are in
a higher proportion than Sainsbury's. From the investor's perspective Recent trends in shares
prices, Sainsbury corporation's EPS as well as Pay-outs are both more favourable and lucrative
for investors/shareholders, as the corporation has much more satisfactory ratios than Tesco plc.
Sainsbury's optimal average inventories days as opposed to Tesco point out that that Sainsbury
has done well in relation to turning its stocks/inventories into revenue.
c. Provide recommendations:
Tesco Plc: It is highly advised that company should concentrate on reducing its total debts and
strengthening its shorter-term liquidity status. This business should adjust its lending policy as
well as reduce its reliance on debt financing. Further, share value of company is lower than that
of Sainsbury, thus company should concentrate over making expansion in business and increase
their market share in industry to increase their share value.
Sainsbury: Based on above analysis it is mainly advisable for the corporation to concentrate
on its net profitability status and also on gross profitability status. The corporation
should optimize its total business expenditures and concentrate on increasing revenue through
effective advertisement and marketing strategy.
d. Limitations of relying on financial ratios
Limited use of the specific ratio: No sense can be conveyed at any particular ratio. As a
reason, any more proportions are assessed in order to understand something via a
particular ratio. Perhaps because the calculation of several ratios leads to complexity
instead of helping the analyst to arrive to the rational conclusion (Camilleri, Grima and
Grima, 2019).
Absolute lack of acceptable standards: There's also
no specific benchmarks or specification for different ratios. Only situational or logical
criteria is basis for all ratios are acknowledged and enacted. The comprehension
of ratios is also diverse.
Tampering in the financial statements-Regarding the review of the ratio, specifics/details
in financial statements are disclosed by the organization. Company managers can use this
expertise to produce a greater outcome than its actual performance. Ratio analysis would
also not accurately reflect the true essence of the industry, since the simplicity of the
evaluation does not detect the incorrect representation of the information. At these time
as decisions are taken, it's indeed crucial for the analysts to be aware of such possible
manipulation techniques and therefore to conform with due diligences (Lee, 2016).
Measurement and communications time lag: The balance sheets and revenue-
statements shall be approved by the independent auditor only at the completion
of accounting cycle. Such financial accounts shall be published at the close of the annual
discussion. This takes approximately six weeks and about nine months. Thus the
assessment and communications regarding ratios within the organisation could not be
employed.
their market share in industry to increase their share value.
Sainsbury: Based on above analysis it is mainly advisable for the corporation to concentrate
on its net profitability status and also on gross profitability status. The corporation
should optimize its total business expenditures and concentrate on increasing revenue through
effective advertisement and marketing strategy.
d. Limitations of relying on financial ratios
Limited use of the specific ratio: No sense can be conveyed at any particular ratio. As a
reason, any more proportions are assessed in order to understand something via a
particular ratio. Perhaps because the calculation of several ratios leads to complexity
instead of helping the analyst to arrive to the rational conclusion (Camilleri, Grima and
Grima, 2019).
Absolute lack of acceptable standards: There's also
no specific benchmarks or specification for different ratios. Only situational or logical
criteria is basis for all ratios are acknowledged and enacted. The comprehension
of ratios is also diverse.
Tampering in the financial statements-Regarding the review of the ratio, specifics/details
in financial statements are disclosed by the organization. Company managers can use this
expertise to produce a greater outcome than its actual performance. Ratio analysis would
also not accurately reflect the true essence of the industry, since the simplicity of the
evaluation does not detect the incorrect representation of the information. At these time
as decisions are taken, it's indeed crucial for the analysts to be aware of such possible
manipulation techniques and therefore to conform with due diligences (Lee, 2016).
Measurement and communications time lag: The balance sheets and revenue-
statements shall be approved by the independent auditor only at the completion
of accounting cycle. Such financial accounts shall be published at the close of the annual
discussion. This takes approximately six weeks and about nine months. Thus the
assessment and communications regarding ratios within the organisation could not be
employed.
No contrast among corporations: where the size and complexity of the corporate concerns
are not similar, there's no likelihood of any inter-company analysis by means
of ratios analysis.
Complicated and factually inaccurate: Ratios may render a closely related comparison
more problematic and contradictory in the face of price discrepancies.
Universal Accounting Limits: For the determination of ratios, the historic context of
relevant information collected is perceived. The justification is that company's financial
statements are produced on the framework of past data. This is an fundamental limitation
in the reporting procedure. Nor are the ratios fundamentally acceptable measures of
potential (Baker and Jabbouri, 2017).
TASK 2
a. Investment appraisal techniques:
NPV:
Net Profits
Project
A
Plant 1 PV @ 1.16
PV of Cash
flows
2020 45000 0.8621 38793.1
2021 45000 0.7432 33442.33
2022 45000 0.6407 28829.6
2023 35000 0.5523 19330.19
2024 35000 0.4761 16663.96
2025 25000 0.4104 10261.06
Residual
Value 0 0.4104 0
147320.2
Initial Net-
investment 110000
NPV 37320.23
Net Profits Project B
Plant 2 PV @ 1.16 PV of Cash flows
2020 10000 0.8621 8620.69
2021 15000 0.7432 11147.44
2022 25000 0.6407 16016.44
2023 55000 0.5523 30376.01
2024 65000 0.4761 30947.35
are not similar, there's no likelihood of any inter-company analysis by means
of ratios analysis.
Complicated and factually inaccurate: Ratios may render a closely related comparison
more problematic and contradictory in the face of price discrepancies.
Universal Accounting Limits: For the determination of ratios, the historic context of
relevant information collected is perceived. The justification is that company's financial
statements are produced on the framework of past data. This is an fundamental limitation
in the reporting procedure. Nor are the ratios fundamentally acceptable measures of
potential (Baker and Jabbouri, 2017).
TASK 2
a. Investment appraisal techniques:
NPV:
Net Profits
Project
A
Plant 1 PV @ 1.16
PV of Cash
flows
2020 45000 0.8621 38793.1
2021 45000 0.7432 33442.33
2022 45000 0.6407 28829.6
2023 35000 0.5523 19330.19
2024 35000 0.4761 16663.96
2025 25000 0.4104 10261.06
Residual
Value 0 0.4104 0
147320.2
Initial Net-
investment 110000
NPV 37320.23
Net Profits Project B
Plant 2 PV @ 1.16 PV of Cash flows
2020 10000 0.8621 8620.69
2021 15000 0.7432 11147.44
2022 25000 0.6407 16016.44
2023 55000 0.5523 30376.01
2024 65000 0.4761 30947.35
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2025 50000 0.4104 20522.11
Residual Value 8000 0.4104 3283.538
120913.6
Initial Net-investment 110000
NPV 10913.58
The NPV review of both proposals reveals that the Project A with greater NPV is more feasible
than the Project B.
Payback Period:
Plant 1
Cumulative cash
flows
Investment
-
110000 -110000
2020 45000 -65000
2021 45000 -20000
2022 45000
2023 35000
2024 35000
2025 25000
Residual
Value 0
Payback
Period = 2 year + (20000/45000*12)
2 year and 5.33 months
Net Profits Project B
Plant 2
Investment -110000 -110000
2020 10000 -100000
2021 15000 -85000
2022 25000 -60000
2023 55000 -5000
2024 65000
2025 50000
Residual Value 8000
Payback Period = 4 year + (5000/65000*12)
4 year and 1 month
Evaluation of payback periods reveals that the Project A provides lower
payback period than the Project B, this reveals that the Project A will
Residual Value 8000 0.4104 3283.538
120913.6
Initial Net-investment 110000
NPV 10913.58
The NPV review of both proposals reveals that the Project A with greater NPV is more feasible
than the Project B.
Payback Period:
Plant 1
Cumulative cash
flows
Investment
-
110000 -110000
2020 45000 -65000
2021 45000 -20000
2022 45000
2023 35000
2024 35000
2025 25000
Residual
Value 0
Payback
Period = 2 year + (20000/45000*12)
2 year and 5.33 months
Net Profits Project B
Plant 2
Investment -110000 -110000
2020 10000 -100000
2021 15000 -85000
2022 25000 -60000
2023 55000 -5000
2024 65000
2025 50000
Residual Value 8000
Payback Period = 4 year + (5000/65000*12)
4 year and 1 month
Evaluation of payback periods reveals that the Project A provides lower
payback period than the Project B, this reveals that the Project A will
rapidly recover net total investments.
ARR:
Plant 1
2020 45000
2021 45000
2022 45000
2023 35000
2024 35000
2025 25000
Average Profit 38333.33
Investment = (110000 + 0)/2 55000
ARR = 38333.33 / 55000 *100
69.70%
Plant 2
2020 10000
2021 15000
2022 25000
2023 55000
2024 65000
2025 50000
Average Profit 36666.67
Average Investment (110000+8000)/2 59000
ARR = 36666.67 / 59000 *100
62.15%
ARR computed above of the Project A and Project B suggests that Project A would produce
better yields than Project B.
The aggregate review of all such investment assessment techniques reveals that the Project
A is much more feasible for business than Project B.
b. Limitations of using investment appraisal techniques in long term decision making:
NPV: A net present-value of a project/venture represents the corporation's estimation of the
potential profits (or loss) through an investment in project. Corporations should evaluate the
rewards of introducing projects against the advantages of another alternative. Since value of
funds varies over timespan, the net current value should account for time values of monies –
including both present values and its future benefits (Chesney, Stromberg and Wagner, 2019).
ARR:
Plant 1
2020 45000
2021 45000
2022 45000
2023 35000
2024 35000
2025 25000
Average Profit 38333.33
Investment = (110000 + 0)/2 55000
ARR = 38333.33 / 55000 *100
69.70%
Plant 2
2020 10000
2021 15000
2022 25000
2023 55000
2024 65000
2025 50000
Average Profit 36666.67
Average Investment (110000+8000)/2 59000
ARR = 36666.67 / 59000 *100
62.15%
ARR computed above of the Project A and Project B suggests that Project A would produce
better yields than Project B.
The aggregate review of all such investment assessment techniques reveals that the Project
A is much more feasible for business than Project B.
b. Limitations of using investment appraisal techniques in long term decision making:
NPV: A net present-value of a project/venture represents the corporation's estimation of the
potential profits (or loss) through an investment in project. Corporations should evaluate the
rewards of introducing projects against the advantages of another alternative. Since value of
funds varies over timespan, the net current value should account for time values of monies –
including both present values and its future benefits (Chesney, Stromberg and Wagner, 2019).
The gains and costs of each timeframe under review must be included in NPV. Here are certain
limitations of NPV, as follows:
No sperate package or series of rules for the calculation of a fair
percentage/rate return: The total NPV measurement is centered on discounting projected
cash-flows to their prevalent prices employing the appropriate costs of capital. And there
are no criteria for the estimation of this percentage-rate. This aspect statistic is presented
at the choice of companies, and there may well be occasions when NPV was inaccurate,
contributing to some inaccurate discounting rate.
Not appropriate for contrasting various size and context of projects: Another limitation of
the NPV would have been that projects of different scales couldn't have been contrasted.
The present values is a relevant figure, not a percentage/proportion. The current benefit
of larger initiatives would therefore inevitably be considerably higher than that of simpler
ones. While returns on a bigger venture could well be higher, the total performance of
the NPV could be lower.
Forbidden Costs: The NPV actually takes into account present values cash inflows or
cash-outflows from a particular venture. It does not define any hidden losses, monetary
penalties or even other anticipated costs sustained in support of a specific project.
Moreover, the sustainability of the enterprise may not be fully trustworthy.
Payback Period: Reviewing payback periods enables corporations identify various investment
incentives to assess which commodity or service is most expected to return in the quickest time
practicable. Quick returning might not have been a goal for every company in every situation,
but it is also a critical concern. For this process, payback duration is determined by
dividing annualised cash inflows that project or commodity is projected to produce by initial
investment. When money flows are expected to be stable, the average approach will give a
reliable concept of payback time. However, if company is expected to undergo substantial
success in the immediate ahead, payback period can be quite broad. Here are some key
limitations of this approach as described here:
Disregards/not-consider time value of potential cash-flows: massive drawback
of repayment method will be that time-values of the monies are still not taken into
consideration. In the early phases of the enterprise, cash flows received are more relevant
limitations of NPV, as follows:
No sperate package or series of rules for the calculation of a fair
percentage/rate return: The total NPV measurement is centered on discounting projected
cash-flows to their prevalent prices employing the appropriate costs of capital. And there
are no criteria for the estimation of this percentage-rate. This aspect statistic is presented
at the choice of companies, and there may well be occasions when NPV was inaccurate,
contributing to some inaccurate discounting rate.
Not appropriate for contrasting various size and context of projects: Another limitation of
the NPV would have been that projects of different scales couldn't have been contrasted.
The present values is a relevant figure, not a percentage/proportion. The current benefit
of larger initiatives would therefore inevitably be considerably higher than that of simpler
ones. While returns on a bigger venture could well be higher, the total performance of
the NPV could be lower.
Forbidden Costs: The NPV actually takes into account present values cash inflows or
cash-outflows from a particular venture. It does not define any hidden losses, monetary
penalties or even other anticipated costs sustained in support of a specific project.
Moreover, the sustainability of the enterprise may not be fully trustworthy.
Payback Period: Reviewing payback periods enables corporations identify various investment
incentives to assess which commodity or service is most expected to return in the quickest time
practicable. Quick returning might not have been a goal for every company in every situation,
but it is also a critical concern. For this process, payback duration is determined by
dividing annualised cash inflows that project or commodity is projected to produce by initial
investment. When money flows are expected to be stable, the average approach will give a
reliable concept of payback time. However, if company is expected to undergo substantial
success in the immediate ahead, payback period can be quite broad. Here are some key
limitations of this approach as described here:
Disregards/not-consider time value of potential cash-flows: massive drawback
of repayment method will be that time-values of the monies are still not taken into
consideration. In the early phases of the enterprise, cash flows received are more relevant
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than cash/monies flows generated later (MacDiarmid, Tholana and Musingwini, 2018).
There might be two projects with the similar payback duration, though one project
provides greater cash-funds flow in shorter-period, while other project has increased
financial results in the ensuing periods. Throughout this case, the payment mechanism
does not specify the venture to be selected.
Cash flows produced during payback duration are disregarded: some of the projects that
see the largest cash reserve only after payback period is already over. These projects
would see greater returns on investment than will be superior to shorter repayment
contexts.
Ignoring the sustainability of the proposal, which would not mean that it is profitable
merely because project has a shorter payback period. When cash flows stop or decrease
dramatically over the payback period, the investment will not produce income.
Does not accept return on investment of project/proposal: certain organisations anticipate
investments in capital-project to resolve certain return hurdle; else project is declined.
The method of compensation does not consider expenses of returning project.
ARR: This method is one of non-discounted cash flows methods used in assessing of capital
financial planning. ARR is average net-income of project (anticipated) measured by average
costs of capital. In common, it is described as annual ratio. ARR should not take into
account time value of capital or cash-flows that are a crucial aspect of the management of a
corporation (Foster and Kalev, 2016). Some major limitations of ARR method are as follows:
ARR lacks the value of capital and time. The key drawback of average returns approach
for choosing alternate uses of funding would be that time values of the funds are
overlooked.
Unlike most other investment evaluation techniques, ARR is focused on income instead
of cash flows. ARR technique lacks the cash balance of the investment. Unless the
investment creates cash inflows rapidly, the organisation will invest in more profitable
ventures. However accounting rate return approach relies on the accounting of operating
revenue instead of just cash balance. It is influenced by arbitrary, non-cash products,
including rate of depreciation used to measure earnings.
There might be two projects with the similar payback duration, though one project
provides greater cash-funds flow in shorter-period, while other project has increased
financial results in the ensuing periods. Throughout this case, the payment mechanism
does not specify the venture to be selected.
Cash flows produced during payback duration are disregarded: some of the projects that
see the largest cash reserve only after payback period is already over. These projects
would see greater returns on investment than will be superior to shorter repayment
contexts.
Ignoring the sustainability of the proposal, which would not mean that it is profitable
merely because project has a shorter payback period. When cash flows stop or decrease
dramatically over the payback period, the investment will not produce income.
Does not accept return on investment of project/proposal: certain organisations anticipate
investments in capital-project to resolve certain return hurdle; else project is declined.
The method of compensation does not consider expenses of returning project.
ARR: This method is one of non-discounted cash flows methods used in assessing of capital
financial planning. ARR is average net-income of project (anticipated) measured by average
costs of capital. In common, it is described as annual ratio. ARR should not take into
account time value of capital or cash-flows that are a crucial aspect of the management of a
corporation (Foster and Kalev, 2016). Some major limitations of ARR method are as follows:
ARR lacks the value of capital and time. The key drawback of average returns approach
for choosing alternate uses of funding would be that time values of the funds are
overlooked.
Unlike most other investment evaluation techniques, ARR is focused on income instead
of cash flows. ARR technique lacks the cash balance of the investment. Unless the
investment creates cash inflows rapidly, the organisation will invest in more profitable
ventures. However accounting rate return approach relies on the accounting of operating
revenue instead of just cash balance. It is influenced by arbitrary, non-cash products,
including rate of depreciation used to measure earnings.
There are also variety of various methods that could be utilized to measure the ARR.
This approach does not take account consideration terminal values of a project.
While using ARR to contrast various investments, entity need to make sure that they
calculate ARR on a constant schedule (Ernayani and Sari, 2017).
CONCLUSION
From above study-discussion this has been articulated that Managerial finance area is a class
of mixture of business finance as well as managerial accounting. This is interdisciplinary
approach. Which helps to execute market plans and track their success in achieving the goals of
an organisation. When budgets are properly handled, value is generated and the finite resources
of the organisation are properly distributed.
This approach does not take account consideration terminal values of a project.
While using ARR to contrast various investments, entity need to make sure that they
calculate ARR on a constant schedule (Ernayani and Sari, 2017).
CONCLUSION
From above study-discussion this has been articulated that Managerial finance area is a class
of mixture of business finance as well as managerial accounting. This is interdisciplinary
approach. Which helps to execute market plans and track their success in achieving the goals of
an organisation. When budgets are properly handled, value is generated and the finite resources
of the organisation are properly distributed.
REFERENCES
Books and Journals
Jabbouri, H.K.B.I., 2016. How Moroccan managers view dividend policy. Managerial
Finance, 42(3), pp.270-288.
Davis, K., 2016. Credit Union and Demutualization. Managerial Finance, 31(11), pp.6-25.
Champagne, C., Karoui, A. and Patel, S., 2018. Portfolio turnover activity and mutual fund
performance. Managerial Finance.
Kumar, S. and Pathak, R., 2016. Do the calendar anomalies still exist? Evidence from Indian
currency market. Managerial Finance.
Baker, H.K., Kumar, S., Colombage, S. and Singh, H.P., 2017. Working capital management
practices in India: survey evidence. Managerial Finance.
Camilleri, S.J., Grima, L. and Grima, S., 2019. The effect of dividend policy on share price
volatility: An analysis of Mediterranean banks’ stocks. Managerial Finance.
Lee, M.T., 2016. Corporate social responsibility and stock price crash risk. Managerial Finance.
Baker, H.K. and Jabbouri, I., 2017. How Moroccan institutional investors view dividend
policy. Managerial Finance.
Chesney, M., Stromberg, J. and Wagner, A.F., 2019. Managerial incentives to take asset
risk. Swiss finance institute research paper, (10-18).
Foster, F.D. and Kalev, P.S., 2016. Editorial to the special issue of the International Journal of
Managerial Finance–Behavioral Finance. International Journal of Managerial Finance.
MacDiarmid, J., Tholana, T. and Musingwini, C., 2018. Analysis of key value drivers for major
mining companies for the period 2006–2015. Resources Policy,56. pp.16-30.
Ernayani, R. and Sari, O., 2017. The effect of return on investment, cash ratio, and debt to total
assets towards dividend payout ratio (a study towards manufacturing companies listed
in Indonesia stock exchange). Advanced Science Letters, 23(8). pp.7196-7199.
Books and Journals
Jabbouri, H.K.B.I., 2016. How Moroccan managers view dividend policy. Managerial
Finance, 42(3), pp.270-288.
Davis, K., 2016. Credit Union and Demutualization. Managerial Finance, 31(11), pp.6-25.
Champagne, C., Karoui, A. and Patel, S., 2018. Portfolio turnover activity and mutual fund
performance. Managerial Finance.
Kumar, S. and Pathak, R., 2016. Do the calendar anomalies still exist? Evidence from Indian
currency market. Managerial Finance.
Baker, H.K., Kumar, S., Colombage, S. and Singh, H.P., 2017. Working capital management
practices in India: survey evidence. Managerial Finance.
Camilleri, S.J., Grima, L. and Grima, S., 2019. The effect of dividend policy on share price
volatility: An analysis of Mediterranean banks’ stocks. Managerial Finance.
Lee, M.T., 2016. Corporate social responsibility and stock price crash risk. Managerial Finance.
Baker, H.K. and Jabbouri, I., 2017. How Moroccan institutional investors view dividend
policy. Managerial Finance.
Chesney, M., Stromberg, J. and Wagner, A.F., 2019. Managerial incentives to take asset
risk. Swiss finance institute research paper, (10-18).
Foster, F.D. and Kalev, P.S., 2016. Editorial to the special issue of the International Journal of
Managerial Finance–Behavioral Finance. International Journal of Managerial Finance.
MacDiarmid, J., Tholana, T. and Musingwini, C., 2018. Analysis of key value drivers for major
mining companies for the period 2006–2015. Resources Policy,56. pp.16-30.
Ernayani, R. and Sari, O., 2017. The effect of return on investment, cash ratio, and debt to total
assets towards dividend payout ratio (a study towards manufacturing companies listed
in Indonesia stock exchange). Advanced Science Letters, 23(8). pp.7196-7199.
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