Business Finance Report: Investment Analysis, Funding, and Variances

This business report provides a comprehensive analysis of various financial aspects for K plc, a listed firm. Part A focuses on evaluating investment proposals using payback period and net present value (NPV) methods, ranking projects, and discussing qualitative factors for decision-making. Part B explores alternative funding methods for acquiring an unlisted company, including bank loans, government grants, and angel investors, emphasizing the link between financing and investment decisions. Part C involves a full variance analysis of variable cost elements, explaining potential reasons for identified variances. Finally, Part D compares centralized and decentralized procurement approaches, highlighting their respective benefits. The report concludes with recommendations based on the analysis, aiming to guide K plc in making informed financial decisions. Desklib provides students with access to similar solved assignments and resources.

Business Finance
Business Report

Table of Contents
INTRODUCTION ..........................................................................................................................3
PART A...........................................................................................................................................3
Analyse the investment proposals...............................................................................................3
c) Rank the projects on the basis of Pay back as well as Net present value.............................10
d) Select the project when all the offers are mutually exclusive...............................................10
e) Explain the strength and weaknesses of payback period and net present value method.....10
f) Discuss about the qualitative factors which will help the directors in making a final
payment.....................................................................................................................................11
PART B..........................................................................................................................................11
a) Suggest 3 alternative methods of funding...........................................................................11
b) Create a link between the financing and investment decision in relation to acquisition of
unlisted company......................................................................................................................12
PART C..........................................................................................................................................12
a) Prepare a full variance analysis statement of variable cost elements....................................12
b) Suggest the possible explanations for variances identified..................................................14
PART D.........................................................................................................................................14
Compare the centralised and decentralised procurement along with discussing about their
benefits......................................................................................................................................14
CONCLUSION .............................................................................................................................15
REFERENCES..............................................................................................................................16

INTRODUCTION
Business report can be defined as a set of knowledge related to the operations of the firm.
This report is prepared with a motive of making future plans for the firm. It comprises of
comparative analysis of various project and budgets along with their examination with actual
results (Anifowose and et. al., 2018). The firm chosen in this report is K plc. It is listed firm. The
report is divided into four parts. Its first section analysis the various projects offers along with
the recommendation on the project to be chosen. Second part suggests the firm about the various
sources of funds available to it and best one to adopt for the purpose of acquisition. The third one
evaluates the performance of firm on the basis of its budgeted values with the actual ones. The
forth section presents the contrast among the decentralised and centralised purchasing along with
their advantages.
PART A
Analyse the investment proposals.
a) Calculation of Pay Back Period.
Project A
Year £000
Annual cash inflow Cumulative cash flow
0 -1000000
1 300000 -700000
2 300000 -400000
3 300000 -100000
4 300000 200000
5 300000 500000
6 300000 800000
Pay back period of Project A = 3 + 100000 / 300000
= 3 + 0.33
= 3.33 years

Project B
Year £000
Annual cash inflow Cumulative cash flow
0 -400000
1 100000 -300000
2 100000 -200000
3 100000 -100000
4 100000 0
Pay back period of Project B = 4 years
Project C
Year £000
Annual cash inflow Cumulative cash flow
0 -700000
1 200000 -500000
2 200000 -300000
3 200000 -100000
4 200000 100000
5 200000 300000
Pay back period of Project C = 3 + 100000 / 200000
= 3 + 0.5
= 3.5 years
Project D
Year £000
Annual cash inflow Cumulative cash flow

0 -614500
1 100000 -514500
2 100000 -414500
3 100000 -314500
4 100000 -214500
5 100000 -114500
6 100000 -14500
7 100000 85500
8 100000 185500
9 100000 285500
10 100000 385500
Pay back period of Project D = 6 + 14500 / 100000
= 6 + 0.145
= 6.145 years
Project E
Year £000
Annual cash inflow Cumulative cash flow
0 -500000
1 120000 -380000
2 120000 -260000
3 120000 -140000
4 120000 -20000
5 120000 100000

6 120000 220000
7 120000 340000
Pay back period of Project E = 4 + 20000 / 120000
= 4 + 0.17
= 4.17 years
Project F
Year £000
Annual cash inflow Cumulative cash flow
0 -560000
1 100000 -460000
2 100000 -360000
3 100000 -260000
4 100000 -160000
5 100000 -60000
6 100000 40000
7 100000 140000
8 100000 240000
9 100000 340000
10 100000 440000
Pay back period of Project F = 5 + 60000 / 100000
= 5 + 0.6
= 5.6 years
Project G
Year £000
Annual cash inflow Cumulative cash flow

0 -200000
1 100000 -100000
2 100000 0
3 80000 80000
4 80000 160000
5 80000 240000
6 80000 320000
Pay back period of Project G = 2 years
b) Calculation of Net Present Value of Projects.
Project A
Year £000
Annual cash inflow PV value Discounted cash flow
0
1 300000 0.909 272700
2 300000 0.826 247800
3 300000 0.751 225300
4 300000 0.683 204900
5 300000 0.621 186300
6 300000 0.564 169200
Total 1306200
Net present value of Project A = Total inflow – Total Outflow
= 1306200 – 1000000
= £ 306200

Project B
Year £000
Annual cash inflow PV value Discounted cash flow
0
1 100000 0.909 90900
2 100000 0.826 82600
3 100000 0.751 75100
4 100000 0.683 68300
Total 316900
Net present value of Project B = 316900 – 400,000
= - £ 83100
Project C
Year £000
Annual cash inflow PV value Discounted cash flow
0
1 200000 0.909 181800
2 200000 0.826 165200
3 200000 0.751 150200
4 200000 0.683 136600
5 200000 0.621 124200
Total 758000
Net present value of Project C = 758000 – 700,000
= £ 58000
Project D

Year £000
Annual cash inflow PV value Discounted cash flow
0
1 100000 0.909 90900
2 100000 0.826 82600
3 100000 0.751 75100
4 100000 0.683 68300
5 100000 0.621 62100
6 100000 0.564 56400
7 100000 0.513 51300
8 100000 0.467 46700
9 100000 0.424 42400
10 100000 0.386 38600
Total 614400
Net present value of Project D = 614400 – 614,500
= £ -100
Project E
Year £000
Annual cash inflow PV value Discounted cash flow
0
1 120000 0.909 109080
2 120000 0.826 99120
3 120000 0.751 90120
4 120000 0.683 81960

5 120000 0.621 74520
6 120000 0.564 67680
7 120000 0.51 61200
Total 583680
Net present value of Project E = 583680 – 500,000
= £ 83680
Project F
Year £000
Annual cash inflow PV value Discounted cash flow
0
1 100000 0.909 90900
2 100000 0.826 82600
3 100000 0.751 75100
4 100000 0.683 68300
5 100000 0.621 62100
6 100000 0.564 56400
7 100000 0.513 51300
8 100000 0.467 46700
9 100000 0.424 42400
10 100000 0.386 38600
Total 614400
Net present value of Project F = 614400 – 560,000
= £ 54400
Project G

Year £000
Annual cash inflow PV value Discounted cash flow
0
1 100000 0.909 90900
2 100000 0.826 82600
3 80000 0.751 60080
4 80000 0.683 54640
5 80000 0.621 49680
6 80000 0.564 45120
Total 383020
Net present value of Project G = 383020 – 200,000
= £ 183020
c) Rank the projects on the basis of Pay back as well as Net present value.
Rank Pay back period Net present value
1 G ( 2 Years) A (£ 306200)
2 A ( 3.33 Years) G (£ 183020)
3 C ( 3.5 Years) E (£ 83680 )
4 B ( 4 Years) C (£ 58000)
5 E ( 4.17 Years) F (£ 54400)
6 F ( 5.6 Years) D (£ - 100)
7 D ( 6.145 Years) B (£ - 83100)
d) Select the project when all the offers are mutually exclusive.
From the above prepared ranking table, it is very much clear that the K plc cannot go for
Project E, F, D because all these deals requires the time period of more than 4 years for their

completion. According to the target of K plc, the company need the amount to be received back
in maximum 4 years. Also, these projects are not giving much returns even F and D are
producing negative returns on its completion. Out of the remaining four deals- A, B, C, G, it is
recommended to go on with project G. it seems to be more beneficial for the business. These
both offers will take 6 years for their completion. In Project A there is much more investment
than project G. Though the income received from this deal is more. Also, A will give return in 3
years and few months while the return on G will be received in 2 Years only.
e) Explain the strength and weaknesses of payback period and net present value method.
Strength of Pay back Weakness of Pay back
This is the simplest technique of investment
appraisal (Das, 2017).
It ignores the effect of time value of money for
while calculating the time period.
It makes the task of comparison easy on the
basis of reimbursement of amount.
It does not counters the amount received after
pay back
Strength of NPV Weakness of NPV
It considers the impact of time value of money
on the cash.
The accuracy of results depends on the
forecasted figures taken for it.
It takes into account the net cash flows and not
net earnings.
It does not help in comparing projects of
various sizes (Domínguez-Gómez and
González-Gómez, 2017).
f) Discuss about the qualitative factors which will help the directors in making a final payment.
There are various factors which are required to be taken in consideration by K plc before
selecting any project.
 Quality of management - K plc must check out the level of management that would be
needed for handling the project. In addition to this, it should also check its own
capabilities in managing it.