Advance Financial Accounting: BLC Limited Case Study Analysis

This assignment presents a comprehensive case study analysis in advance financial accounting, focusing on capital budgeting and financial decision-making. The first part of the assignment examines BLC Limited, a UK-based medium-sized company, and applies capital budgeting techniques, including Net Present Value (NPV), Internal Rate of Return (IRR), and payback period, to evaluate a proposed office establishment project. The analysis includes detailed calculations and comparisons of the financial metrics to determine the most viable investment. Qualitative factors influencing investment decisions, such as social trends, political factors, and company culture, are also evaluated. The second part of the case study assesses a proposed scheme involving a 2% discount for customers paying within 30 days. It computes the approximate equivalent annual percentage cost, evaluates the value of trade receivables under different scenarios, and analyzes the scheme's costs and benefits. The assignment concludes with recommendations on whether to implement the new scheme, based on a cost-benefit analysis, emphasizing that the existing scheme is more beneficial. The document provides a detailed breakdown of the analysis, including tables, calculations, and references to relevant literature.

Running Head: ADVANCE FINANCIAL ACCOUNTING
Advance financial accounting
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction:..............................................................................................................................3
Case study assignment Part A:..................................................................................................3
Computing the net present value, internal rate of return and payback period:......................3
Evaluation of qualitative factors influencing the decisions:..................................................5
Case Study Assignment Part B:.................................................................................................5
Computation of approximate equivalent annual percentage cost:.........................................5
Computation of value of trade receivables:...........................................................................6
Evaluation of schemes of cost and benefits:..........................................................................6
Conclusions and Recommendation:......................................................................................7
References and Bibliography list:..............................................................................................8

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Introduction:
In this particular assignment, there are two case study analyses. First part involves case
about BLC limited that is a medium sized company based in United Kingdom. Company seeks
to employ the technique of capital budgeting for evaluating its project of establishing office. Nest
case is about discussion of discount cost and its influence of business. Detailed analysis of both
the case study is done by explanations and calculations.
Case study assignment Part A:
Computing the net present value, internal rate of return and payback period:
For the calculations of above these metrics, company has made the assumption of cost of
capital at the rate of 10%. As per the rule, project generating higher net present value should be
accepted compared to project generating lower net present value (Chittenden and Derregia
2015). Project evaluation based on IRR depicts that project generating IRR higher than cost of
capital will be accepted and vice versa. Project that has higher payback period should be rejected
as against lower payback (Andor et al. 2015).
Property 1:
Period
Particulars 0 1 2 3 4 5
(£000) (£000) (£000) (£000) (£000) (£000)
Cash Inflow/(Outflow) -2500 1000 500 600 1000 900
Cost of Capital 10% 10% 10% 10% 10% 10%
Cumulative Cash Flow -2500 -1500 -1000 -400 600 1500
Discounted Cash Flow
-
2500.00 909.09 413.22 450.79 683.01 558.83
Net Present Value 514.9

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Internal Rate of Return 17.67%
Payback Period (years) 3.4
Property 2:
Period
Particulars 0 1 2 3 4 5
(£000) (£000) (£000) (£000) (£000) (£000)
Cash Inflow/(Outflow) -2750 900 700 800 600 700
Cost of Capital 10% 10% 10% 10% 10% 10%
Cumulative Cash Flow -2750 -1850 -1150 -350 250 950
Discounted Cash Flow
-
2750.00 818.18 578.51 601.05 409.81 434.64
Net Present Value 92.2
Internal Rate of Return 11.37%
Payback Period (years) 3.58
The above table depicts the computation of net present value of property 1 and property 2
that the company is seeking. Net present value of property 1 is recorded at 514.9 while the
internal rate of return is computed at 17.67%. When looking at figures of NPV for property 2, the
computed figure is 92.2. On other hand, the value of IRR is computed at 11.37%. Comparing the
figures for both the properties, it can be seen that NPV for property 1 is higher as against
property 2. When looking at the figures of IRR, figures computed for property 2 is more than
property 1. Therefore, from the IRR perspective, property 2 should be accepted and property 2
should be rejected. As per NPV, property 1 should be accepted and property 2 should be
rejected.
Now, looking at the figures for payback period, time taken for recovering the initial
amount of property 1 is recorded at 3.4. On other hand, payback period for property 2 is 3.58.

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Therefore, comparing the figures of payback period for both the properties, property 1
has lower pay back period compared to property 2. From the analysis of all the budgetary
techniques, property 1 should be accepted as against property 2. This is so because property 1
has higher NPV and lower payback period compared to property 2.
Evaluation of qualitative factors influencing the decisions:
One of the important roles that are played in investment decisions is social trends and has
considerable impact of decision making of organization. It is of utmost important for BLC to
analyze the social trends for making profitable investment decisions. Political factor is another
qualitative factor that impacts investment decision of firms as role of government and political
party determine the success of project to a considerable extent. Culture of company has also
considerable impact of investment decisions and for generating better return, company should
take into consider this particular factor (Batra and Verma 2014). Organization should select best
alternative by conducting proper analysis. However, equal importance should be given to
qualitative factors as the best investment decisions come in light of both the factors.
Case Study Assignment Part B:
Computation of approximate equivalent annual percentage cost:
Particulars Details
Current Credit Period (in days) 70
Proposed Credit Period (in days) 30
Reduction in Credit Period (in
day) 40
Credit Cycle in a Year 9.125

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Discount Rate 0.02
Discounted Receipts 0.98
Receipt after Deposit Fund @ 2%
1.02040816
3
Approximate Equivalent Annual
Percentage Cost 19.30%
Computation of value of trade receivables:
Particulars Existing Scheme Proposed Scheme
Total 30 Days 70 Days Total 30 Days 70 Days
(£m) (£m) (£m) (£m) (£m) (£m)
Revenue 500 150 350 500 400 100
Discount @ 2% -8 -8
Bad Debt -10 -3 -7 -5 -4 -9
Value of Trade
Receivables 490 147 343 487 388 91
Evaluation of schemes of cost and benefits:
With the implementation of this scheme, it would be possible to collect revenue from
customers in time and there will not be any delay. Issue of over drafting will be eliminated, as
the receivables will be collected in shorter period. Organization will also have favorable impact
on current ratio and will experience improved receivable collected period (Graham and Sathye
2017). Saving bad debts to 5 million compared to 10 million is another advantage received by
company with the implementation of this particular scheme. Details of savings of debt due to this
policy are depicted in the table below. In the current scenario, amount of bad debt is standing at
5% of total revenue.

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New
policy
Existing
policy
Bad debts in million 5 10
Saved 5 million
With the implementation of the new scheme, organization will be able to save 5 million
compared to 10 million in the previous scheme.
Scheme cost is depicted in terms of interest incurred on overdraft. Organization is
required to take overdraft from the banks because of delay in receiving payments from
customers. This particular schemes cost is at 20%. Therefore, in order to accept this scheme, it is
required by BLC limited to make cost comparison and they are required to pay extra 5%.
Moreover, it is also required by organization to compare discount with debt saving to that of
cost. It can be seen from the analysis that total amount of discount that is provided to customers
is more than the amount in terms of debt savings.
After conducting the analysis, it can be inferred that cost of offering customers with
discount schemes is more than total amount of benefits received on part of company. Acceptance
of scheme should only be done when costs incurred in employing that scheme is lower than total
benefits received. It would be suitable for BLC limited to continue with the existing schemes as
costs is more than saving generated.
Conclusions and Recommendation:
From the above discussion, it can be inferred that implementation of the schemes of
providing customers with 2% discount within 30 days would not be suitable and does not
generate positive impact on business. It is so because the cost incurred in employing such

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schemes is more than total amount of savings generated. Therefore, it would be appropriate for
company to continue with existing scheme and not employing new scheme.
References and Bibliography list:
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Batra, R. and Verma, S., 2014. An Empirical Insight into Different Stages of Capital
Budgeting. Global Business Review, 15(2), pp.339-362.
Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.
Gornik-Tomaszewski, S., 2014. Capital Budgeting Simulation Using Excel: Enhancing the
Discussion of Risk in Managerial Accounting Classes. Management Accounting
Quarterly, 15(4).
Graham, P.J. and Sathye, M., 2017. Does National Culture Impact Capital Budgeting
Systems?. Australasian Accounting Business & Finance Journal, 11(2).
Meyer, K.S. and Kiymaz, H., 2015. Sustainability Considerations in Capital Budgeting
Decisions: A Survey of Financial Executives. Accounting and Finance Research, 4(2), p.1.
Roy, D., Rudra, D. and Prasad, P., 2017. Capital Structure and Capital Budgeting: An Empirical
and Analytical Study of the Relationship. Research Bulletin, 42(4), pp.50-60.

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Shimizu, N. and Tamura, A., 2015. The Eff ects of Business Strategy on Economic Evaluation
Techniques of Capital Investment.