Performance evaluation and investment decision making for M plc

This article discusses the performance evaluation of M plc based on ratios such as gross profit ratio, net profit ratio, liquidity ratio, efficiency ratio, and more. It also covers investment decision making using payback period and NPV. The recommended project is suggested based on the ranking table. Other factors to be considered while taking the investment decision are also discussed.

SECTION A
Question 1
Income statement
Particulars Details Amount
Sales 977
Less
Cost of Sales
Opening inventory 40
Purchases 510
Closing inventory 60 490
Gross profit 487
Expenses
Business Rates and insurance (60- 7) 53
General expenses 22
Audit fees (13+ 2) 15
bad debt 1
directors remuneration 52
debenture interest 15
heating and lighting (25+1) 26
salaries and wages 150
depreciation on machinery 25
depreciation on fitting 12 371
Profit before tax 116
provision for tax 20
Profit after tax 96
interim dividend paid (21) 21
final proposed (350 * 0.8) 28 49
retained profit from last year 50
retained profit for this year 97
Notes
depreciation
Machinery
cost - accumulated 150- 50 100
depreciation 100 * 25% 25

Fitting
cost - accumulated 100- 40 60
depreciation 60 * 20% 12
Statement of financial position
Particular Details amount
Non- current asset
Land and building 500
Machinery 150
Fitting 100
Accumulated depreciation 127 623
current asset
receivable 80
cash 3
bank 12
Closing inventory 60
prepayments 7 162
Total assets 785
Non- current liabilities
10 % debenture 200
200
current liabilities
payable 67
accrued 3
proposed dividend 28
interim dividend paid 21 119
Share capital
£1 Ordinary share capital 350
profits 96 466
Share premium 20
Total shareholder fund 785

SECTION B
Calculating the ratios for RT plc
Particular Formula RT plc (2020) 2019
Gross profit ratio Gross profit/ sales * 100 33.33 33.28
Gross profit 600
Sales 1800
Particular Formula RT plc (2020) 2019
Net profit ratio Net profit/ sales * 100 11.11 9.5
Net profit 200
Sales 1800
Particular Formula RT plc (2020) 2019
Current ratio Current asset/ current liabilities 2.75 2.1:1
Current asset 550
Current liabilities 200
Particular Formula
RT plc
(2020)
2019
Quick ratio
(current asset - inventory) / current
liabilities 1.50
1.25: 1
Current asset 550
Inventory 250
Current
liabilities 200
Particular Formula
RT plc
(2020)
2019
Account
receivable
Average account receivable/ total sales *
365 57
45
Account
receivable 280

Sales 1800
Particular Formula RT plc (2020) 2019
Account
payable Average account payable/ COGS * 365 61
65
Account
payable 200
COGS 1200
Particular Formula RT plc (2020) 2019
Inventory
holding 76
65
Inventory Inventory/ cost of sales *365 250
Cost of sales 1200
Critically discussing the performance of M plc
By the evaluation of the ratios being calculated it is clear that the performance of the
company has improved as compared to the last year. With regards to the gross profit ratio the
performance of the company has increased very slightly. Earlier the gross profit ratio was
33.28% where as in the current year it is 33.33%. There is a very slight increase within the
performance of the company based on the gross profit ratio. Further with regards to the net profit
ratio it is clear that it has increased a little bit. Earlier in the last year it was 9.5% where is in the
current year it is 11.11%. This implies that there is hike within the net profit of the company.
This implies that the indirect expenses of the company have been reduced as compared to the last
year and because of this the net profit ratio has increased.
Further with help of the liquidity ratio that is current ratio it is clear that it has increased
as compared to last year. Earlier it was 2.1 where is currently is 2.75. This simply implies that
currently the companies having 2.75 times current assets for paying of single current liabilities.
Furthermore with help of the quick ratio it is clear that it has also been increased as compared to
the last year. In 2019 it was 1.25 where is in the current year it is 1.50. With this it can be stated
that the liquidity of the company has improved which is good for the company.
Moreover, with help of the efficiency ratios like receivable ratio it is clear that earlier it
was 45 where as in the current year it is 57. This mean that the days within the divisible will be

received has increased which is not good for the company. This is particularly because of the
reason that now company will take more time in receiving the amount of receivable. Further with
help of the inventory holding it is clear that earlier it was 65 days and current latest 76 days. This
simply means that now the company takes more time and converting their inventory into the
sales. This implies that the money will be blocked for more time within the inventories.
Furthermore with help of the account payable it is clear that earlier it was 65 days but in current
year it is 61 days. Now the company has to clear all its payable within the time duration of 61
days which is good for the company as the payable will be paid of the liabilities will be reduced.
QUESTION 3
Payback period and NPV
Payback period
Payback period for Project A
Year Cash inflows Cumulative cash inflows
1 240 240
2 240 480
3 240 720
4 240 960
5 240 1200
6 240 1440
7 240 1680
Initial investment 700
Payback period 2
0.1
Payback period 2 year and 1 month
Payback period for Project B
Year Cash inflows Cumulative cash inflows
1 400 400
2 500 900
3 600 1500
4 400 1900
5 300 2200
6 100 2300

Initial investment 1000
Payback period 2
0.8
Payback period 2 year and 8 month
Net present value
NPV Project A
Year Cash inflows PV factor @ 10 %
Discounted
cash inflows
1 240 0.909 218.18
2 240 0.826 198.35
3 240 0.751 180.32
4 240 0.683 163.92
5 240 0.621 149.02
6 240 0.564 135.47
7 240 0.513 123.16
Total discounted cash inflow 1168
Initial investment 700
NPV (Total discounted cash
inflows - initial investment) 468
NPV Project B
Year Cash inflows
PV factor
@ 10 %
Discounted cash
inflows
1 400 0.909 363.64
2 500 0.826 413.22
3 600 0.751 450.79
4 400 0.683 273.21
5 300 0.621 186.28
6 100 0.564 56.45
Total discounted cash inflow 1744
Initial investment 1000
NPV (Total discounted cash inflows -
initial investment) 744

Ranking table
Basis Project A Project B
Payback period 2.1 years 2.8 years
NPV 468 744
Recommended project
By the evaluation of the calculations relating to net present value and payback periods it
is clear that both the projects are good in one aspect. With regards to the payback period the
project A is better as compared to the project B. This is particularly because of the reason that
project A has 2.1 years payback period with employees that the invested amount will be
recovered within the time frame of 2.1 years. On the other hand the project B has 2.8 year as the
payback period which signifies that the invested amount will be recovered in 2.8 years. On the
other hand net present value of project A is 468 which is less as compared to project B that is
744. This net present value indicates that the present value of the future profit being earned by
the company with help of the investment. Thus on the basis of the ranking it is recommended to
the company that they must invest in project B. This is particularly because of the reason that net
present value outlines the current value of the profit which is earned in the future period. This is
more in case of project B and because of this it is advisable to the company to investing project
people stop
Other factors to be considered
Other than the financial aspects there are different factors to be considered while taking
the decision. These different factors are as follows-
 The factor to be considered while taking the decision relating to investment is the
resource available. This is the major factor to be considered because and case resources
will not be available then the investment will not be successful.
 Along with this another factor to be considered while taking the investment decision is to
analyse the risk taking capability of every project. In case the risk taking capacity of the
project is not being evaluated then the investment will not be worth. This is pertaining to
the fact that every project has their own individual risk taking capability and this need to
be assessed before taking decision relating to any of project selection.