Accounting and Finance for Decision Making: Investment Appraisal and Risk Analysis in Tesco

This report analyzes the investment appraisal and risk analysis of Tesco, a leading multinational retailer. It includes a SWOT and PESTEL analysis, payback analysis, net present value, and internal rate of return. The report also discusses the impact of risk and return on financial performance and provides recommendations for investment decisions.

Accounting and
Finance for Decision
Making

Contents
1.EXECUTIVE SUMMARY..........................................................................................................3
2.Motivation of the investment being proposed..........................................................................3
3. Investment appraisal:...............................................................................................................4
Payback analysis..........................................................................................................................5
Net present value and Internal rate of return...............................................................................6
Carry out SWOT and PESTEL analysis for the investment........................................................7
4. Risk, Return and its impact on financial performance:............................................................8
Sensitivity analysis for risk and return.........................................................................................9
Concentrate on variables such as Cost, Benefits and Cost of capital..........................................9
Concentrate on return on NPV.....................................................................................................9
Discuss risk and return and provide comments on Discounted payback period........................10
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11

1.EXECUTIVE SUMMARY
The report prepared below takes in account the running, functioning and operation related
work in Tesco company. The purpose and motive of below prepared report is to carry out
analysis as well as evaluation of the company. It further provides suggestions that in what certain
ways it can decide investment related action and plans as well. It also helps to provide related
suggestions and recommendations that would be helpful in assessment of performance carried
out by the business. There are many motivation plans implemented and adapted by a company in
the long run for maintaining sustainability and stability in competitive environment.
2.Motivation of the investment being proposed.
There are many issues faced by Tesco company in unpredictable situation such as Covid
– 19 and the real problem was in generating funds from related areas for carrying out operations
well in time. It also had to look after real problems such as issue of budgets being prepared. It is
very important to solve the issues well in time which won't further affect the growth and
expansion of company. The problem being caused by such conditions is mainly management of
Supply chain in a chosen organisation. The problem being caused is due to inefficient
transportation facilities being available with the business. There are many casual drivers which
would be responsible for change in issues and problems. The difficulty can be solved by hiring
of better staff persons and managing in what ways the goods can be imported or exported.
A leading company TESCO
TESCO is a leading retailer multinational company which have headquarter in London,
United Kingdom. The company is found by Jack Cohen in 1929. company opened their first
store in Edgware North London in year 1929.
Tesco have 360000 associate and millions of trusted customers. Tesco make surplus from selling
groceries through online and offline market. It has almost 7000 stores worldwide. Tesco group
also includes Tesco mobile, Tesco Bank and Dunnhumby. Tesco mobile is largest mobile
network operator in United Kingdom. The main motive of Tesco is to serve always improved
and Better to their customers. Tesco is Britain's biggest online supermarket company. Tesco
aims to perform everyday better for customers (Briggs, 2022).

Investment is an asset which purchased to generate future profits. When manager find out
an asset is profitable in future then he sends proposal in-front of board member and they decision
to purchase such assets, this is called proposed investment (Chen and et.al., 2018).
Tesco's vision of investment:
Tesco has vision to made investment which gives maximum profits and help to improve its
growth. It explains related opportunities available with the company which would attract more
investments from market. It would help investors to manage their funds accordingly and
contribute the amount which is worth and will give maximum and expected returns as well.
Tesco focus on investing in such opportunities which acquire lesser risk and threats and would
help in company’s growth and expansion over a period of time. It further explains the importance
of funds generated through such activities (Omamo, Rodriguez and Muliaro, 2018).
3. Investment appraisal:
Investment appraisal is the calculation of profitability of an investment over a period of
time. Investment appraisal plays a very important role in investment decisions. There are times
when the company is having enough adequate funds available and generated by taking and
making effective as well as efficient decisions in case of company. There are many decisions
which have proved to be fruitful for the company keeping future in mind.
Investment made by Tesco
 Tesco made an investment in a free technology company trigo vision. It is a very big
investment made by Tesco. Tesco raised $60 million from this investment and bring
Israeli business investment to $94million. Trigo is a leading tech company which has
grocery multi-store with digitalized operations. After investing in trigo the demand of
Tesco's technology is rapidly increased. Trigo AI-powered vision and mounted cameras
that allow customer to move around store and pick up what they want to purchase
without payment checkout. Payment is settled digitally (Ross and Caldwell, 2020).
 In October Tesco announced investment in equity of amazon go-rivalling business. The
technology is tested in a supermarkets situated in Welwyn garden city headquarter.
Amazon is a big company multinational company with huge trusted customer base.
Amazon is the first company to use the such technology to supply new customer
demands. Amazon launched their first go store in Seattle headquarters. Now amazon

manages many branches across Chicago, New York and san Francisco (Jiskani and
et.al., 2020).
Long-term investments of Tesco from 2010 – 2021
Long-term investment is the investment which are kept for more than a year. Long term
investment can be a fix asset, share etc. Long term investments are helpful for assessing the need
of funds and managing funds for a period of time in long run for carrying out operations over a
large scale as well. It helps to understand the importance of such activities in a company or
organisation. Such investments are helpful in the hour of need such can be investment in stock
and exchange which might increase over a period of time.
 Tesco long-term investments rapidly declined over period of time. In the end of august
31, 2021, investments of Tesco declined by 10.75%, they were $3.091B
 From 2020, long term investments of Tesco increase by 5.79%, they were $3.091B,
 From 2019, long term investments of Tesco decline by 23.69%, they were $2.0917 B,
 From 2018, long term investments of Tesco increase by 23.69%, they were $3.823B
As per above data Tesco's long term investments are decline continuously. It states that company
facing problems regarding their efficiency and production. In 2021, Tesco site is hacked by
hackers due to which many customers not able to book orders and the result is many frustrated
customers leave company.
Payback analysis.

Payback Period
Year Annual Cash
Inflow
Annual Cash
Outflow
Annual Net Cash
flows
Cumulative
Cash Inflows
0 -588.5 -588.5 0
1 233.7 33.2 200.5 200.5
2 233.7 33.2 200.5 401
3 233.7 33.2 200.5 601.5
4 233.7 33.2 200.5 802
5 233.7 33.2 200.5 1002.5
6 233.7 33.2 200.5 1203
7 233.7 33.2 200.5 1403.5
7 SV 76.505 - 76.505 1480.005
Total 1635.9 -356.1 891.505 1480.005
Payback Period = Number of complete years + (Cash outflow – total inflow till date) /
Cumulative cash inflow
= 2 + (588.5-401) /601.5
= 2 + 0.312
= 2.312 Years
Net present value and Internal rate of return.
Net Present value: -
Years Net Cash
Inflows Discounting @ 9% PV of Cash Inflows
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
PV of Cash Inflow (A) 1175.9784
PV of Cash Outflow (B) 588.5
Net Present Value (A-B) 587.4784
Internal Rate of Return:

Years
Cash
inflows
Discounting Factor
9%
PV value of cash
inflow
1 233.7 0.917 214.3029
2 233.7 0.842 196.7754
3 233.7 0.772 180.4164
4 233.7 0.708 165.4596
5 233.7 0.65 151.905
6 233.7 0.596 139.2852
7 233.7 0.547 127.8339
Total Cash inflow 1175.9784
Total Cash outflow 588.5
NPV (A-B) 587.4784
Years
Cash
inflows
Discounting Factor
20%
PV value of cash
inflow
1 233.7 0.833 194.6721
2 233.7 0.694 162.1878
3 233.7 0.579 135.3123
4 233.7 0.482 112.6434
5 233.7 0.402 93.9474
6 233.7 0.335 78.2895
7 233.7 0.279 65.2023
Total Cash inflow 842.2548
Total Cash outflow 588.5
NPV (A-B) 253.7548
IRR = Lower rate + Lower Rate NPV/ (Lower Rate NPV – Higher Rate NPV) * Diff. in Rates
= 9% + (587.48 / 587.48 - 253.75) * (20 – 9)
= 9% + (587.48 / 333.73) * 11
= 9% + (1.76) * 11
= 9% + 19.36
= 28.36%
Carry out SWOT and PESTEL analysis for the investment.
SWOT: There are many Strength, weakness, opportunities and threats surrounding the business
which must be assessed and examined before making any related investment. It is necessary to
find out which strengths can turn into better chances and manage the operational activities as
well. It is done on both scales external as well as internal environment.

PESTEL: Such analysis is helpful in examination of factors such as political, economic, social,
technological and legal as well. It is mandatory that every company assess such elements which
would help to have a better understanding of working and functioning of a business. It helps to
find out whether business would be able to run its operations over a longer period of time or not.
4. Risk, Return and its impact on financial performance:
Risk, return is explained as threat that every company has while putting its money in
economy as understanding what could be the related fund generated over a period of time which
could be used for future course of actions in a related company chosen. It helps to understand
how performance can be improved over a period of time. If the investment is increase, then the
risk of return is also increase they are correlated to each other. Diversification can decrease the
risk but it limits the return of an investment. Return generally based upon market condition if
market performing well then company get higher return but market suffers then the return is
decreased. Return bring up either loss or gain in any investment. There are many type of risk
faced by an investor (Logan 2022)
Risk faced by Tesco
Reputational risk: Tesco is a huge brand which covers electrical goods, CatLog sales, and
financial services. Due to serving in many sectors company can suffer reputational risk. If a
brand of Tesco face losses or downfall, then it can spoil the image of whole group and also lead
to a loss of trust and confidence of its customers.
Tesco take some steps to reduce risks are:
 Tesco define a set of “Tesco value” for practice at any levels.
 Tesco regularly take the view of their shareholder which help in preparing future strategy
Economic risks: Economic factor always put impact on a company's performance and
also on consumers’ pockets. If there is a situation of inflation and deflation in the market it
effects consumer to purchase their needs. Due to these situation consumers didn't feel risky to
purchase anything (Lutalo 2020).
 Economic factor plays a vital role to impact on financial statements of Tesco.
 Market inflation has an impact on people's purchasing power which directly effect a
company's sale.
Political risks: Political risk are big issue for Tesco. Change in political party and change
in government policies may give loss to the company and it directly impact on future plans and

forecasts of Tesco. Company can effect in each county where it operates due to change in legal
and tax policies of a country.
 Every country has their different tax and government policies; it is also a big problem for
Tesco.
 Due to continuously change in policies company suffer losses and it is cost consuming to
implement such policies.
Returns and their impact on financial statement:
A company aims to generate maximum return on their investments which improve the
financial performance of a company. If a company is not able to generate profits from its
investment or suffer losses may reduce their customer trust. Returns directly impact on a
company's financial performance. Company can generate profit form investment like mutual
funds, bonds, purchase of fixed assets and shares (Oliveira Costa 2020).
 Tesco suffer continuous loss of return on their investment.
 Before investing in any assets a company has to prepare a proper plans and strategy.
Company can generate profit from investment like mutual funds, bonds, purchase of fixed assets
and shares. It helps to take in account risk and threats which are surrounding the company and
how they can be minimized accordingly by taking preventive measures by the firm.
Sensitivity analysis for risk and return.
 It is useful in measuring uncertainty in the outcomes and results, and understand where
the risk can be minimized to a extent which won't cause any losses.
 It helps to analyse the effect involved in activities such as comparing sale related
outcomes and advertising as well.
Concentrate on variables such as Cost, Benefits and Cost of capital.
Such elements are useful in examining all investment related opportunities and cost
benefit can be explained as a process which would be helpful in comparing the expected and
budgeted cost in relation with planned projects. It reflects the idea of return a organisation would
be demanding for achieving in relation towards justification of cost of a capitalised project.
Concentrate on return on NPV.
Npv focuses on identifying most feasible investment related chances and opportunities by
facilitating and carrying out present value recorded during future cash flow of a project plan. The

principle behind the method chosen is that it focuses on increasing wealth percentage of
shareholders, stakeholders and owners of business as well.
Discuss risk and return and provide comments on Discounted payback period.
It is clear that if the discounted payback method is taken into account it would help to
compute time which would be taken for covering the investment made at initial level. It thus
conclude that the shorter the discounted payback period is it would reflect that the earlier a
project plan would be able to produce and generate cash flow for covering initial expenses. It
also gives an idea whether a company should invest in the planned project or not and whether it
would result to be profitable as well as fruitful or not.
CONCLUSION
The report prepared above takes in account the motivation of proposed investment,
conducting of investment appraisal with the help of both quantitative as well as qualitative
information. It also discusses about the risk and return and its related influence of its working on
financial performance. There are many suggestions and recommendations given as how the
organisation must carry out its working, data is being assessed on the basis of stock exchange,
rates and many other variables as well. There are many reasons explained which would explain
its related impact over company for a set duration of time being. There are many risk and returns
taken in account for explanation of such terminologies. It also takes in account how the profit
can be generated and managed by the company and how it can be used. It can be noted that there
are many ways a company can overcome hurdles and managed threats and risks which would
surround and affect the working of company over the globe. There are many effective ways
which would help the company to grow and improve its related efficiency in marketplaces. It
helps to judge which stocks or shares would be profitable for the investors to invest their money
into and how they would be having maximum returns possible as compared to other products. It
helps the company to have an overview about their related projects and plans they would carry
out in near future.

REFERENCES
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