UGB223 Business Finance: Evaluating Projects and Company Finance

This assignment solution delves into various aspects of business finance, including net present value (NPV) and internal rate of return (IRR) calculations for project viability assessment. It analyzes different methods for accounting for risk in project analysis and compares their effectiveness. The solution also covers the calculation and interpretation of financial ratios such as the operating cycle, current ratio, and acid-test ratio, providing insights into a company's liquidity and efficiency. Furthermore, it evaluates risks and costs associated with inventory levels and examines options available to investors and businesses regarding rights issues, equity funding, and debt financing. Finally, the assignment includes a detailed ratio analysis of Crusher PLC, assessing its financial position and performance.

BUSINESS FINANCE

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................1
a) Computation of net cash inflows and net present value..........................................................1
b) Determination of internal rate of return...................................................................................2
c) Analysis of financial viability of investing in the project........................................................2
d) Determining and comparing the different methods that can be account for risk while
analyzing the viability of project. ...............................................................................................2
QUESTION 2...................................................................................................................................4
a) Calculation of average operating cycle in days and how this measure is put to use ..............4
b) Calculation and interpretation of current and acid test ratio...................................................5
c) Evaluating the different types of risk & cost that can be reduced inventory level..................6
QUESTION 3...................................................................................................................................6
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC.................6
New share price = 54*65% = 35.1...............................................................................................7
b) Calculate the value of the rights associated with holding shares in Mainsbury PLC..............7
c) Evaluating each of the option available to investor.................................................................7
d) comparing and contrasting the various options available to business.....................................8
QUESTION 4...................................................................................................................................8
a) Calculating the ratios for Crusher PLC ...................................................................................8
b) Analysing the financial position of the Crusher PLC ...........................................................13
REFERENCES..............................................................................................................................15

QUESTION 1
a) a) Computation of net cash
inflows and net present value
Particulars Year 2011 Year 2012 Year 2013 Year 2014 Year 2015
Sales (no. of units * rate) (In£) 3600000 4275000 5625000 4050000 2700000
Less: expenses (in£)
Variable labor cost 375 375 375 375 375
Variable material cost 250 250 250 250 250
Lease 550000 550000 550000 550000 550000
Administrative cost 600000 600000 600000 600000 600000
Total expenses 1150625 1150625 1150625 1150625 1150625
Less: Depreciation 500000 500000 500000 500000 500000
Earning before interest and tax 1949375 2624375 3974375 2399375 1049375
Less: Interest 0 0 0 0 0
Earning before tax 1949375 2624375 3974375 2399375 1049375
Less: Tax 0 0 0 0 0
Earning after tax 1949375 2624375 3974375 2399375 1049375
Add: Depreciation 500000 500000 500000 500000 500000
Net cash inflows 2449375 3124375 4474375 2899375 1549375
Year Net cash
inflows
Present
value
factor
Discounted
cash inflows
2011 2449375 0.926 2267939.815
2012 3124375 0.857 2678647.977
2013 4474375 0.794 3551903.133
2014 2899375 0.735 2131127.179
2015 1549375 0.681 1054478.591

Total of present value factor & discounted
cash inflows
14496875 11684096.7
Computation of Net present value
Total discounted cash
inflows 11684096.7
Less: Initial investment 2500000

Net present value 9184096.695
b) Determination of internal rate of return.
Computation of IRR:
IRR
Year Cash inflows
0 -2500000
2011 2449375
2012 3124375
2013 4474375
2014 2899375
2015 1549375
Total of IRR 112%
c) Analysis of financial viability of investing in the project.
The outcome derived by the net present value and internal rate of return are viable as the
NPV derive is 9184096.695 and IRR comes out to be 112%. So, the company should invest in
this project.
d) Determining and comparing the different methods that can be account for risk while analysing
the viability of project.
Internal rate of return: This aid investors in calculating and knowing the profitability of their
investments made. However, IRR function can be determined by using excel tool or
financial calculator. The ideal internal rate of return for a project ought to greater than cost
of capital required in the project. The source person who are thinking to maximize the
potential of capital invested need to vantage the IRR (Alles and et.al., 2021). However, this
rate is formed to make NPV of all cash inflows and outflows in a project equal to Zero.
Subsequently, companies should not rely wholly on internal rate of return while calculating
the viability of project and should use another budgeting method. Hence, it is proved that
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none method in capital budgeting can work solely, they have to involve one or the other
option with them.
Net present value: This method is used primarily for financial analysis in determining the
feasibility of investment in a business. Further, they are calculated by deducting net inflow
of money from project with capital invested. Hence, the value of NPV can be computed in
both positive and negative earnings generated by using investment that will transcend the
expected cost of a plan. Consequently, unlike other capital budgeting methods net present
value chronicle for the time value of money so inflation and opportunity cost are not
ignored (Nukala and Rao, 2021). To achieve rate of return expected for investment option,
NPV formula identifies a discounted rate based on the cost of financing. Further, this
method factors in the risk of long term investment and also the formula is well-established
and effective. Accounting for unexpected expenses becomes quiet difficult when making
budget for capital investment, so it turned necessary to consider pay back period prosody
and IRR as alternative.
Accounting rate of return: ARR is also popularly known as the average rate of return which
measures the foreseen gain from any capital invested. This method is calculated by dividing
net income generated through investment by the total amount already infused in the project.
Moreover, accounting rate of return is a useful metric for speedily computing the
lucrativeness of a company, and widely used to examine the occurrence rate of investment
that features multiple projects (Idehen, 2021). However, this method also faces various
drawbacks like it doesn't account for the time value money and along-with lack of
acknowledging cash flows. In disparity to these disadvantages ARR is also useful for
providing a clear picture and idea of expected return on investments. This method
acknowledges depreciation, and earnings after tax, making it effective for making it as a
standard to business current performance.
Pay back period: It is a unique method of capital budgeting. This is a financial investing tool
that defines the period required to earn back the money invested in a project. The price to
earning payback period widely utilized to realize how risky an investment opportunity can
be. Therefore, stated method helps in limiting the peril related with costly projects (Payback
Period, 2021). Pay back period is integral component that is proved to be useful for firms
that are focusing on smaller investments, as they usually don't involve convoluted figures.
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Although, with many merits it also suffers with some demerits like, this method don't
account for the time value money, financing concerns, opportunity cost, etc. in investment.
So any particular method always needs an aid of different other options for the cash flows
and capital assets to ensure their profitability in long run. This, way firm can take full
advantage of capital budgeting.
QUESTION 2
(a) Calculation of average operating cycle in days and how this measure is put to use
Particulars Formula Amount
Operating cycle:
COGS 5106
Average inventory 2648
Sales 8649
Average account
receivable
1428
Inventory turnover Inventory
turnover=
(COGS /Average
inventory)
1.93
Accounts
receivable turnover
Accounts
receivable
turnover=(Net sales
/ Average account
receivable)
6.06
Inventory period Inventory period=
(365/ Inventory
turnover)
189.29
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Accounts
receivable period
Accounts
receivable period=
(365/ Accounts
receivable
turnover)
60.26
Operating cycle Operating cycle=
(Inventory period +
Accounts
receivable period)
249.55
Operating cycle aid in determining the no. of days required for a business by receiving and
selling inventory with collection of cash from such trading. A shorter cycle indicates that
company is able to retrieve its investment quickly and have enough cash to meet obligations.
b) Calculation and interpretation of current and acid test ratio.
Particulars Formulas Amount
Liquidity ratio
Current assets 4076
Current liabilities 2933
Inventories 2648
Quick asset 1428
Current ratio (Current ratio= Current Asset / 1.39
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Current Liabilities)
Liquid ratio (Liquid ratio= Quick Asset /
Current Liabilities)
0.49
Interpretation:
Current ratio:
By comparing the derived outcome, accountant has come to a solution that company is
having £1.39 of current assets for each £1 current liabilities. It suggests that firm is having
enough cash to pay the debts but not too much finance is employed which could be reinvested or
distributed to shareholders. The entity can improve the ratio by paying off its current liabilities,
unproductive assets, etc.
Liquid ratio:
After evaluation of quick ratio it has been articulated that entity is having £0.49 quick
assets for £1 current liabilities which reflects that company is not having enough cash to pay off
its debts. Good acid test ratio always attracts and maintains credibility power. So, firm can
improve this by increasing sales, inventory turnover, pay off liabilities as early as possible, etc.
c) Evaluating the different types of risk & cost that can be reduced inventory level
There are variety of risk that required to be emphasized in order to decline inventory.
These comprises inaccurate forecasting, unreliable suppliers, shelf, theft, loss, damage, life
cycle, etc. that can result in reduced level of inventory. There are various expenses that results in
declined extent of stock which required to be emphasized by organization in turn better ability to
meet market forces can be established (Gasparyan and et.al., 2021). In addition to this, the
manager of company should focus on each and every segment related with stock level so that
better productivity by company can be established in turn higher sustainability can be obtained.
Inventory service cost, storage space, risk cost, etc are comprised as result of organizational
declined & inclined inventory level. In addition to this, concentrating on mentioned course of
expenses can lead to such activities that become cause of reduced inventory level. Purchasing,
taxes, labour, obsolescence, insurance, security, transportation, etc are some other types of
expenses that are comprised as the processing of declining inventories. The manager of company
should focus on these risk & cost for accomplishing the objective of particular proposed plan.
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These mentioned action can be taken into consideration by organization for the purpose of
having proposed action level.
QUESTION 3
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC.
Theoretical ex right price = (new share price * issue price+ old shares * market price)/ (New
shares+ old shares)
= (600* 54+3600*35.1)/ (600+3600)
= 158760/4200
= 37.8
Working note:
share market price= 972/18 = 54
Number of shares (Old) = 720/0.20 = 360
New share price = 54*65% = 35.1
New number of shares = 360/6 = 600
b) Calculate the value of the rights associated with holding shares in Mainsbury PLC
Market value of each share= 54
Price to be paid for getting one share in company= 35.1
Value of rights associated with holdings = (Number of right issue / Total holdings )* (Market
value – issue price)
= (600/4200) * (54-35.1)
= 0.142*18.9
= 2.68
c) Evaluating each of the option available to investor
 Right issue for investor
Investor portfolio value = 10,000* 54 = 540000
Number of right shares to be received= (10000/6) = 1667
Price paid to buy right shares= 1667* 35.1 = 58511.7
Total number of shares after practicing the right share = 10000+1667= 11667
Revised value of shares after exercising right issue = 540000+ 58511.7 = 598511.7
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Price of shares post right issue= 598511.7/ 11667 = 51.29
According to this, the obtained share price if goes up then investor will be benefit & in
case of decline he will face loss.
 Selling rights of shares
= (new share price * issue price+ old shares * market price)/ (New shares+ old shares)
= (35.1* 51.29 +10000 *54)/ (10000+1667)
=541800.279/ 11667
=46.43
 Right to lapse calculations
The right to entitlement price= Share current price- price after right issue
= 54- 35.1
= 18.9
From the evaluation it can be interpreted to that investor will be benefited if it will go
with option of right issue for the shares so that its objective of obtaining higher profitability can
be attained. The reason behind particular suggestion is that value of shares is comparatively less
as as compared to right issue option.
d) comparing and contrasting the various options available to business
There are several options for accomplishing the objective of company rather than debt
obtain which can enable organization to have various advantages. It compromises raising
internally and externally for meeting the business objectives rather than using debt option. It
includes equity funding, retained earnings, venture capital, using angle investors, crowdfunding,
government grants, etc.
Debt option for obtaining the funds can provide certain disadvantages to organization
rather than mentioned course such as equity raising funds (Hein and et.al., 2019). In equity firm
can opportunity to pay dividend after accomplishing all other obligations. In addition to this,
venture capitalist & using angel investors can be beneficial for the firm by providing certain like
managing risk, large capitals, experienced leadership, etc allow the organization to have better
sustainability & processing. Retained earning can be more beneficial for the company to avoid
interference of other parties as compared to debt raising.
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QUESTION 4
a) Calculating the ratios for Crusher PLC
I. Return on capital employed Ratio
Particulars Formula 2019 2020
Operating profit 3751 3453
Total Assets-total
liabilities
14393-
4,331
=10062
23115-11621=
11494
Return on capital
employed Ratio
Operating
profit/(Tot
al Assets-
total
liabilities )
*100
37.28
%
30.04%
ii. Return on ordinary shareholder funds ratio
Particulars Formula 2019 2020
Profit for the year 2809 2332
Shareholders equity 10062 11494
Return on ordinary
shareholder funds
ratio
Profit for
the
year
/Sharehol
ders
equity
0.279169
1513
0.2028884635
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