Financial Analysis and Investment Decisions

The assignment delves into the realm of financial analysis and investment decisions, exploring a range of capital budgeting techniques. It examines their applications in evaluating projects and making informed choices regarding resource allocation. The analysis encompasses different methods such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR). The goal is to understand the strengths and limitations of each technique and provide insights into their practical use in financial planning.

Managing Financial
Resources and Decisions
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TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
a.) Identifying different sources of finance for the Radisson Plc company ................................1
b.) Evaluating a different source of finance for Radisson company............................................2
Task 2...............................................................................................................................................2
A.) Analyzing cost of funding ....................................................................................................2
b.) Explaining the importance of financial planning...................................................................3
c.) Explaining the impact of suggested financing option on the financial statement..................4
Task 3...............................................................................................................................................4
a.) Analyzing the importance of budgets for variation and decision for Radisson Plc................4
B.) unit cost and pricing decision making ..................................................................................5
c.) Assess the viability of the expansion project using different appraisal techniques................5
Task 4...............................................................................................................................................7
A.) Discussing the above mentioned financial statement of Radisson........................................7
b. Comparison between format of financial statements...............................................................8
C. Interpreting the financial statements through suitable ratios .................................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................12
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INTRODUCTION
Management of financial resources is considered as an significant aspects at workplace in
order to integrate all of the other related resources. Finance helps the business to satisfy the
needs and requirement of various parties and make sure the business to be in the upward
direction in the market (Caglayan and Demir, 2014). Present report is based on Radisson Plc
which is medium size manufacturing company engaged in providing computer software. This
report covers the the different sources of finance which are available for the business and the
implications of that sources. Further , it also includes the analysis of proper cost of funding of the
project. It also covers the importance of financial planning and assessment of the information
which is required in the decision making. Moreover, it also covers the importance of budget with
variations and make appropriate decisions for the company. In addition to this, different financial
statements are compared as per the different companies (Dalal-Clayton and Sadler, 2014).
TASK 1
a.) Identifying different sources of finance for the Radisson Plc company
According to the given scenario, Radisson Plc is a medium size software manufacturing
company operating in London. The company has recently taken a long term contract for
providing bespoke software for various companies around UK. Operation manager of company
believe that there is lot of opportunities to expand their business and to increase a market shares
in the industry. Now company is launching a new project for the purpose there are different
sources of finance which are available for Radison Plc company are discussed below
 Equity share: Equity capital is a source from the promoter of company or through a
public by issuing a new equity share. Company can raise fund from a equity share capital.
 Bank loan: Bank loan is another source of finance for a Radisson company (Leung,
Springborn and Brockerhoff, 2014). Firm can take a loan from a bank and pay specific
rate of interest to them every month. Further. company can take loan from a bank for
longer period and for shorter period of times.
 Retained profit: Retained profit is suitable source of finance for an Radisson company.
This retained profit is an amount which company kept for further investment. There is no
additional cost company need to pay on investing a retained profit. Leasing; It is an effective source of finance for a Radisson in which it can acquire a
highly equipped tools and technologies for the production activities. Further, if company
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buy a new technology for production purpose then it need to pay a amount for buying its.
While this equipment on lease can be consider as a most suitable source of finance.
Implication of this different source of finance are as follows:
The implication of different source of finance can be understood in simple manner
because it has some positive and negative factors (Zimmermann and Jørgensen, 2015). Issue of
share is the best source of method available for business but it need to pay return to shareholders
in form of dividend in every board of meting. Therefore, company need to earn high profit, so
that it can easy pay to its shareholders. Along with this Bank loan is also sources of finance
which have some negative and positive aspects. If Radisson company take loan from bank then it
need to pay specific rate of interest which may decrease the profit of company. Further it also
needs to repay amount of loan within a given period of time whether it earn profit or not.
Retained profit is an internal source of finance which have some positive impact that is there is
no cost of opportunity charged on retained profit. While leasing an asset is also good sources of
finance for company because company nee to pay high amount on purchasing equipment simply
it can take on lease for a particular period. Along with this if company buy anew equipment it
need to pay a repairing charges and cost of depreciation etc which may affects company
profitability.
b.) Evaluating a different source of finance for Radisson company
There are different sources of funding which are appropriate for Radisson company is as
follows:
Retained profit is best source of finance which help company in launching a new project.
Further in this company not required to fulfill nay type of legal formalities for using retained
profit along with this there is no opportunity cost charged on retained profit. So company can use
retained profit for expanding it business (Hiesl, Crandall and Wagner, 2016). Further, Radisson
company can take loan from bank for this it need to fulfill some legal formalities and also need
to keep security in bank before taking a loan. If company take loan form bank then there is low
dilution of control because their is interface of shareholder.
TASK 2
A.) Analyzing cost of funding
The cost which is related to the sources of finance that are mentioned below:
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Interest- At the time, Radisson Plc make proper utilization of financial resources which is gain
by the facility of overdraft and bank loan. In this case, the payment of interest is bade by the
organisation. This can be considered as an expenditure for the stated business and also add to the
cost.
Dividend- This cost is related to the issue of shares and regarded as profit for the company which
is offered to the different shareholders. In order to gain the trust of public the company have to
pay the dividend on appropriate time frame (Fraser, Bhaumik and Wright, 2015).
Cost of Opportunity- The cost of opportunity is developed by the using the amount of retained
earnings and the cost of this is connected to the financial sources. This cost is related to the cost
of next best alternative. It helps in the financing the different activities which is sacrificed by the
Radisson Plc.
b.) Explaining the importance of financial planning
Financial planning is the process of meeting a goal and objective of an organization but properly
managing the finance and other resources.
There is some importance of financial planning that is as follows:
 Financial planning help Radisson company in determining a amount of finance needed
for carrying out business activities smoothly.
 It also help in identifying a suitable policies so that all resources of company can be
effectively utilized.
 Financial palling help Radisson company in making a decision how it can raise fund of
for launching a new project (Jacobs and Chase, 2013.). Although identifying which
source of finance charge low cost and high cost.
 Further, any company have taken 2 to 3 project in consideration then it need to decide
which among them is best and most affordable and have the highest chance to success.
For this purpose it is necessary for company to plan financially for choosing a right
project
 Financial planning help in making sure a reasonable balance between a inflow and
outflow of funds so that stability can be maintained of Radisson company financial
resources (Capital Investment Appraisal Techniques. 2015).
 Through this Radisson company can make a growth and expansion plan which help
company in surviving for long time in a market.
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In order to take decisions so that the person who takes decisions are required to have an
appropriate information. The people who take decisions along with their requirement for the
informatics which is described below:
Government- The government requires data which is related to the profit which is created by the
company. This helps the organisation so that they are keep on track for the amount of tax that is
paid by the company. In this context, the company is required to take some of the decisions
which helps in the welfare of the public (Götze, Northcott and Schuster, 2015).
Financial Manager- The financial manager of the company have to get all of the information in
context of profitability and the growth of the company. It helps the manager for taking decisions
that is related to the different types of investments opportunities which are exists for the
company.
c.) Explaining the impact of suggested financing option on the financial statement
The impact of financing option on the financial statements which is described below:
Bank Loan - This kind of finance have an impact on the income statements and on the cash flow
statements. It increases the liabilities of business that can influence the balance sheet. The
expenses which are done on the loan amount so that affects the income statements (Hubbard, and
et.al., 2014).
Issues of shares- The amount of issue of shares affect the cash flow statements and enhances the
liability of the company and it has to be pay from the profit the shareholder of the company.
Further, the amount of dividend which is to be paid to the shareholders which can reduce the
amount of profitability in the business.
TASK 3
a.) Analyzing the importance of budgets for variation and decision for Radisson Plc
Budgeting is a quantitative plan used for deciding which activities will be chosen for
future time period. There are some importance of budgeting that is it help in preparing a estimate
of future cash collection. Effective budgeting system is a great way for successfully attaining the
business objective and goal. By making budget it helps in identifying a wasteful expenditure.
Decembe
r January February March April May
Opening balance 0 438500 472500 507050 542100 577100
Sales 450000 50000 55000 60000 65000 70000
Total 450000 488500 527500 567050 607100 647100
Expense
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Purchase 9000 13000 17000 21000 26000 32000
Creditors 900 1300 1500 1900 1500 1400
Logistic expenses 350 500 700 850 900 900
Employee cost 1250 1200 1250 1200 1600 1600
Total 11500 16000 20450 24950 30000 35900
Closing balance 438500 472500 507050 542100 577100 611200
As per according to the above mentioned budget it is clear that focus can be laid on credit
policy. Radisson company need to modified for maintaining a higher rate of return on business.
Through this company overall productivity can be improved by increasing a working capital.
Further, company need to reduce its logistic expenses so that profitability company can be
improved. Company can also used retained profit because currently company gaining a profit.
B.) unit cost and pricing decision making
From the above information is show that cost is per unit cost is 50 pound where total cost is
15000. and salary given to staff is 5000. By selling product at aforementioned price Radisson
can earn profit. There is rate of returnis 16.67%. so company can easily select the profit by
setting the price that will be add in 50
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c.) Assess the viability of the expansion project using different appraisal techniques
Investment appraisal technique play a great role in development of business. This techniques
help company in selecting a most suitable project on the basis of profitability and cost.
Pay back period method: It is a most important method which can be used by a Radisson
company for choosing a project. Company can select a project which is take short time period in
a recover the investment amount. As per following table it Project B can be selected because
company initial amount is recovered in 3 year with a high recovering amount.
Project Project B
Initial
investment -150000 -150000
1 40000 -110000 40000 -110000
2 55000 -55000 60000 -50000
3 60000 5000 65000 15000
4 65000 70000 45000 60000
5 70000 140000 30000 90000
6 140000 90000
Average rate of return: Accounting rate of return is also a different method for selecting a
project under which average investment and cash flow are taken into consideration. In below
mentioned method in Project 1 average rate of return is 38.67% while in project B it is 26.67%.
it is clear that 1 investment is better because it helps in raising an overall profitability of
Radisson company.
Average rate of return
Project Project B
Initial
investment 150000 150000
1 40000 40000
2 55000 60000
3 60000 65000
4 65000 45000
5 70000 30000
0 0
Total 290000 240000
Average 58000 40000
ARR 38.67% 26.67%
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Net present value method:
In net present value method is an appraisal technique which help Radisson company in selecting
a project on basis of return generated from each proejct. Form the below table of proejct A and B
is 43.17% and 22.77 %. which show that project high net present value is selected and it will be
more benfical for company.
Project A Pv @ 10% Present value Project B PV @ 10% Present value
Initial
investment 150000 150000
1 40000 0.909 36364 40000 0.909 36364
2 55000 0.826 45455 60000 0.826 49587
3 60000 0.751 45079 65000 0.751 48835
4 65000 0.683 44396 45000 0.683 30736
5 70000 0.621 43464 30000 0.621 18628
Total 214757 184149
NPV 64757 34149
43.17% 22.77%
Internal rate of return: Internal rate of return is an appraisal technique which help company in
finding which project generate high rate of interest. According to the below table Project A have
24.25% rate of return interest while in Project B it is 14.56% which show that less interest rate of
return. Radisson company will select project A for earning high interest rate.
Project Project B
Initial
investment -150000 -150000
1 40000 40000
2 55000 60000
3 60000 65000
4 65000 45000
5 70000 30000
IRR 24.25% 14.56%
TASK 4
A.) Discussing the above mentioned financial statement of Radisson
According to the given scenario at the end of company financial year, there are different
procedure which need to perform for making a business finance in orders. There are three Major
financial statement that are Income statement, statement of cash flow and the statement of
financial position of Radisson company which are discusesd below
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 Income statement: Incomer statement is a financial statement which reflects company
financial performance over a specific accounting period. It is a major financial statement
which is used by accountant and business owner (Jacobs and Chase, 2013.). It is
important for Radisson company because it show the profitability of company of a
particular years. Thorough this Radisson company came to how much profit it earned
and loss is occur in a particular year. This format of Profit and loss statement show
revenue and gain, expense and losses of Radisson company. It can be expressed that it is
a form of financial statement which is developed by businesses such as Radisson Plc
every year. In addition to this, the statement clearly highlights the revenue generated by
the selected business enterprise along with the key expenses carried out in a particular
financial year. In the expenses part, element such as depreciation, rent, salaries provided,
taxes paid etc. are taken into consideration. One of the main benefits associated with
using income statement is that it helps in identification of the fact that whether the
company has made profit or loss in particular financial years. The information can be
extracted from checking out the difference between revenue generated and income
received.
 Cash flow statement: cash flow statement is different from an Income statement and
balance sheet it is show because in this statement future incoming and outgoing cash not
include. It is a financial statement which show changes in balance sheet accountants and
cash equivalent and income affect cash. Further it reports the cash generated and used at a
given time interval.
 Balance sheet: Balance sheet is a financial statement which prepared at every end of
financial year. It helps in determining a Radisson company cash position (Peetz and
Buehler,2013). Information included in balance sheet is related to profit and loss and
assets and liabilities used in a year. It is used by a investor for making a decision whether
they want to invest in their company or not. Further Radisson company owner used this
statement to see overall expenses for a particular period.
b. Comparison between format of financial statements
The comparison between various formats of financial statement is carried out below as:
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 Public limited company - Radisson Plc can be termed as a public limited company and
therefore statements such as cash flow, balance sheet and profit loss etc. are developed by
the business. All the rules and procedures related to accounting are followed in the best
possible manner (Kirkos, Spathis and Manolopoulos, 2007).
 Sole trader- These are the individuals who carry out businesses by their own and are solely
liable for all profits and losses. Furthermore, the investment carried out by these businesses
is also very low and therefore it is not necessary to prepare all of the accounts.
C. Interpreting the financial statements through suitable ratios
Interpretation
It can be interpret from the above analysis of the ratio in which profitability ratio of
Marriot is lower than the Hilton. This shows that the financial position of Hilton is much better
than the Marriot. Further, the liquidity ratio of Hilton is more than the Marriot which shows that
the current assets are high as compared to the current liabilities of the company. Thus, from the
overall analysis it can be stated that the financial position of Hilton is better than the Marriot.
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CONCLUSION
From the above report it can be concluded that, there are different sources of finance
which company can used for raising a fund for new project. Different sources of finance have
some implications that is on bank loan company need to pay rate of interest every month. Further
it can be concluded that there are different appraisal technique which can be used for selecting a
appropriate project from various project. There are different type of financial statement which
company make at the end of financial year that is Balance sheet. Income statement and cash flow
statements.
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