Financial Management Report: Analyzing Investment Options for AYR Co.

This report provides a detailed financial analysis of two investment projects, Aspire and Wolf, for AYR Co. It calculates and interprets key financial metrics including Net Present Value (NPV), Internal Rate of Return (IRR), and payback period for each project. The analysis reveals that Project Aspire is financially superior, exhibiting a higher NPV, IRR, and a shorter payback period compared to Project Wolf. The report recommends that AYR Co. undertake Project Aspire. Additionally, the report explores the investment appraisal techniques used, including justifications and evaluations. It also considers the sources of finance available to AYR Co., namely Equity and Debt, analyzing their associated costs and the impact of their selection on the company's Weighted Average Cost of Capital (WACC), shareholders, and lenders. The report concludes by summarizing factors to be considered and information needed prior to the decision-making process, emphasizing both financial and non-financial aspects like competitor actions and customer satisfaction.

FINANCIAL MANAGEMENT

Table of Contents
INTRODUCTION................................................................................................................................3
MAIN BODY.......................................................................................................................................3
1. Calculation and interpretation..........................................................................................................3
2. Analysis and evaluation of the investment project options..............................................................6
1. Recommendation regarding project to be undertaken by the company.......................................6
2. Justifications including evaluation of the investment appraisal techniques used in task 1.........7
3. Summary of factors to be considered and information needed prior to decision making
process.............................................................................................................................................8
3. Two sources of finance considered by the board of AYR Co. .........................................................9
1. Description of Equity and Debt...................................................................................................9
2. Explaining cost of each source of finance.................................................................................10
3. Analysing of effect of selection of the source of finance on AYR Co.’s weighted average cost
of capital........................................................................................................................................10
4. Assessing the impact of selection of finance on the shareholders and lenders of AYR Co.......11
CONCLUSION...................................................................................................................................11
REFERENCES...................................................................................................................................13

INTRODUCTION
The term financial management is concerned with the process of managing financial resources of
the business in an effective and efficient manner. The overall process of financial management is
related with planning, organising, controlling, analysing and monitoring resources of financial and
monetary nature which are crucial for attainment of business goals and objectives. It deals with all
types of ratios, portfolio management, dividend, capital etc. The present report is based on AYR Co.
which is dealing with two projects named as Aspire and Wolf. Both are of different nature but
capable of increasing the overall market share value of AYR Co. This report will define various
calculation such as Net Present Value, Payback Period, Internal Rate of Return etc. along with
proper interpretation. Also, on the basis of calculation which project is more viable and to be
considered by AYR Co. will be determined. Sources of finance taken into consideration by AYR Co.
and cost related to it will be described in this report.
MAIN BODY
1. Calculation and interpretation.
Project Aspire
Computation of cash inflows
Particulars (in $) / Year 0 1 2 3 4 5
Initial Investment -2250000
Working Capital -140000
Cash Inflows 650000 698750 751156 807493 868055
-Variable Costs -27000 -28823 -30768 -32845 -35062
-Depreciation -450000 -450000 -450000 -450000 -450000
+Capital Allowance 600000 390000 345000 300000 240000
Profit before tax 773000 609927.5 615388 624648 622993
-Tax -154600 -121985.5 -123078 -124930 -124599
Profit after Tax 618400 487942 492311 499718 498394
+Depreciation 450000 450000 450000 450000 450000
Profit after tax before
dep. 1068400 937942 942311 949718 948394
+Salvage Value 375000
+Working Capital 140000
Total Cash inflows -2390000 1068400 937942 942311 949718 1463394
Discounting Factor 0.909 0.826 0.751 0.683 0.621
Discounted Cash
Inflows 971273 775159 707972 648671 908653

Calculation of NPV
Particulars Figures (in $)
Discounted Cash Inflows 4011727
-Cash Outflows -2390000
Net Present Value 1621727
Computation of IRR
Initial Investment -2250000
Year Cash Inflows (in $)
1 1068400
2 937942
3 942311
4 949718
5 1463394
Internal Rate of Return 36.23%

Calculation of payback period
Initial Investment -2250000
Cash Inflows
1 1068400
2 937942
3 243658
Pay Back Period 2 Years 3 Months
Project Wolf
Cash flow assessment
Particulars (in $) / year 0 1 2 3 4 5
Initial Investment -2250000
Cash Inflows 955000 955000 955000 955000 955000
-Variable Costs -14400 -15480 -16641 -17889 -19231
-Other Expenses -18000 -19350 -20801 -22361 -24038
-Depreciation -450000 -450000 -450000 -450000 -450000
-Loss of rental Income -75000 -75000 -75000 -75000 -75000
Profit before tax 397600 395170 392558 389750 386731
-Tax -79520 -79034 -78512 -77950 -77346
Profit after Tax 318080 316136 314046 311800 309385
+Depreciation 450000 450000 450000 450000 450000
+Loss of rental income 75000 75000 75000 75000 75000
Profit after tax before
dep. 843080 841136 839046 836800 834385
Discounting Factor 0.909 0.826 0.751 0.683 0.621
Discounted Cash
Inflows 766436 695154 630388 571545 518087
NPV assessment
Particulars Figures (in $)
Discounted Cash Inflows 3181611
-Cash Outflows -2250000
Net Present Value 931611
Internal rate of return (IRR)
Initial Investment -2250000
Year Cash Inflows (in $)
1 843080
2 841136
3 839046
4 836800
5 834385
Internal Rate of Return 25.19%

Payback period
Initial Investment -2250000
Year Cash Inflows (in $)
1 843080
2 841136
3 565784
Pay Back Period 2 Years 8 Months
Interpretation and Analysis-
Project Aspire is much better than Project Wolf in every criteria as it is having higher NPV
than Project Wolf by $690116 which represents that Project Aspire is having more cash inflows than
cash outflows as compared to Project Wolf. Also, IRR of Project aspire is 36.23% i.e. better than
Project Wolf having only 25.19%. In IRR also Project Aspire giving more returns than Project Wolf.
In terms of Pay Back Period, Project Aspire paying back its whole investment within 2 years
3 months whereas project wolf is taking more time in paying off its investment back in 2 years 8
months. Therefore, AYR Co. should go for taking Project Aspire as Net present value, Internal Rate
of Return and Pay Back Period are higher than the Project Wolf.
2. Analysis and evaluation of the investment project options.
1. Recommendation regarding project to be undertaken by the company.
As per the calculation made, it is recommended that Project Aspire is performing much
better than Project Wolf in different criteria. It will be considered as profitable business project for
AYR Co. to go with Project Aspire as it is having higher Net Present Value than Project Wolf by
$690116. It represents that Project Aspire is having more cash inflows than cash outflows during the
time period. The Internal Rate of Return for Project Aspire calculated is 36.23% which is far better
than Project Wolf which is having only 25.19% of IRR. Thus, it can be interpreted that Project
Aspire is giving more returns as compared to Project Wolf over the time frame of 5 years.
In terms of Pay Back Period, if AYR Co. adopts Project Aspire then it is able to recover its
whole initial investment amount within a time period of 2 years and 3 months. In case of Project
Wolf will be capable of recovering its initial investment in 2 years and 8 months which is more than
Project Aspire.
Therefore, for AYR Co. it is better to undertake Project Aspire as its Net present value,
Internal Rate of Return and Pay Back Period are performing better than Project Wolf. Thus,
company should go with Project Aspire.

2. Justifications including evaluation of the investment appraisal techniques used in task 1.
Investment appraisal is defined as a gathering of different techniques or methods by use of
which a company can determine the overall effectiveness of investment. With the help of
investment appraisal tool, AYR Co. can easily assess the viability aspect of the project in which
investment has to be made. It also assists in decision making process related to investment to be
done. Investment Appraisal is considered as one of the fundamental aspect for company in context
of investment as it involves large amount of resources of the company including human, capital,
land and other financial resources. Before making any investment in form of large amount of
company resources, capital amount and efforts, it is very much important to make proper evaluation
and analysis of the project and the value it will generate.
Net present value - It defines the value of difference arising between the present value of all the
cash inflows and the outflows over a specified period of time. This tool assist AYR Co. in making
analysis about the best and suitable project and its profitability aspects (Konstantin and Konstantin,
2018). It is used in relation with the capital budgeting and for making plan related to investment
decision for the investors to helps them to choose the best investment proposal which having
capability of earning good amount of return.
Advantage
 It helps company in calculating the future value of money.
 It helps investor in deciding the best investment and project opportunities.
 It considers all the cash flow values.
Disadvantage
 It is complex method from calculation prospective.
 It does not calculate the accurate and appropriate value of money.
Payback period – This tool of capital budgeting defines the time period in which company will be
able to recover its original cash investment amount in the project. With the help of this tool,
Unilever can determine the number of years in which it will recover all the initial investment
amount.
Advantage
 Pay back provides deep insight about the liquidity aspect of the project as it determines the
early recovery of investment (Häcker and Ernst, 2017).
 It is considered as one of the simple method for assessing the viability of project.

 It helps in determining the risk factor associated with the project.
Disadvantage
 Is not an appropriate method for measuring profitability index of project because it doesn't
take into consideration cash inflows entirely of project.
 It also ignores the time value of money.
Internal Rate of Return - It is concerned with the process of equating the present value of all the
cash flows with the present value of all the cash outflows of an investment made in project. This
tool of capital budgeting helps Unilever in determining the cash outlay and proceeds amount from
making investment in a particular project.
Advantage
 While determining the rate of return, it takes into account the time value of money
associated with the project.
 Also, it involves all the value of cash flows of the project.
 It helps the Unilever in analysing whether by making investment, the value of firm will
increase.
Disadvantage
 The process of internal rate of return calculation is considered as complex one as it involves
complicated problems.
 Also, negative or multiple number of rate can be ascertained making decision making
process more complicated for the investor (Petković, 2015).
3. Summary of factors to be considered and information needed prior to decision making process.
For making sound and effective decision regarding investment, it is very important for every
business organisation to considered both the financial as well as non financial aspects of the
business such as meeting current and future legislation requirements, following industry standards,
norms and good practice, improving the morale of staff etc. which are creating impact on the
decision making process. Thus, not only financial factors affects the decision making process of
investment but some non financial factors also plays a significant role in the investment decision.
Some of the non financial factors influencing the decision making process of AYR Co. are as
follows:
1. Competitor Action – Making proper and accurate analysis of rivalry plans, actions and

strategies can help the company in gaining competitive advantages. Before investing amount
in any project, it is very important to have full knowledge about competitor plans and
policies which it is using for seeking competitive edge (Schlegel, Frank and Britzelmaier,
2016).
2. Customer Satisfaction – Before making investment in any project, it is very important to
conduct market survey so as to analyse the current market trend, customer demand. For
every company, customer satisfaction is one of the most important factor which assist AYR
Co. in remaining competitive and earn high profit margin.
3. Motivation level of Staff – Improving the overall morale of the company's staff and
employees can help company in making high productivity as well as better performance
level. If the motivation level of staff is high, it will provide ease to AYR Co. in recruitment
and retention of its employees.
4. Availability of human resource – One of the factor which is essential to taken into
consideration is that there is proper availability of human resource and manpower with the
company. Making investment in project will not be of any use, unless and until there is no
manpower for operating the machinery and equipment is there (Rossi, 2015).
5. Government Regulation – Before making investment in any project, it is very important to
consider all the regulations, laws which is applicable on the project. Also, making timely
compliance of applicable rules can help the company in earning more profit and market
share thereby increasing its market value and image.
3. Two sources of finance considered by the board of AYR Co.
1. Description of Equity and Debt.
For carrying on a business operation and activity, every company requires fund or financial
resources in sufficient manner. There are number of sources from which a business can raise funds
or meets its financial needs such as equity, debt, retained earnings, term loans, letter of credit,
venture funding etc.
Debt finance – The word debt financing is related with the process of borrowing of money from the
external lenders such as banks, financial institutions etc. The aim behind adopting this source of
financing is to acquire any type of business asset. Debt financing is also known as Financial
leverage. By using this source of financing, AYR Co. can sell its debt instrument to its investors and
stakeholders for raising of money for meeting the capital requirements of the business. This facility
helps the existing stockholders of the company in maintaining of ownership percentage as there is
no issue of new stock is being made.

Equity finance – It is a method which focuses on investing of own money or funds amount from
other stakeholders in exchange sharing of partial ownership with them. In this source of financing,
money is raised by selling of new shares or stock resulting in dilution of holdings of the existing
shareholders (Drover and et.al., 2017). Raising funds by this source result in low income proportion
of its existing shareholders. Equity financing leads to increase in the equity of owner and of
stockholders as well with the purpose of acquiring of asset.
2. Explaining cost of each source of finance.
The term Cost associated with source of financing is defined as the amount which company
has to incurred for obtaining capital. Thus, cost is related with the cost amount expenses for raising
the capital and fund resources which is of measurable nature. It is very important to have proper
estimation about the amount of cost to be incurred for raising capital so as to overcoming the
problem faced during cost determination. For calculating the cost of raising of capital by the
business, AYR Co. has to considered number of factors such as the amount of capital spent on
facility related to the infrastructure, employees, taxes, insurances and material involved etc.
The cost of raising capital has to be considered at the time of establishing a new business
organisation or also for the running business firm. The amount of capital spent on the payrolls of
employee, machinery and equipment, taxes and other production costs has to be calculated correctly
(Attig and El Ghoul, 2018). By framing budget, AYR Co. can makes estimates about its amount of
cost required for raising capital, fund or financial resources. In case of Debt financing, the cost is in
form of the interest expenses which every company is required to make by paying it on its debt
capital amount. AYR Co. is thus required to pay interest to its holders in lieu of stock hold by them
which is a cost expense for the company and income for its stockholders. When company prefers
Equity financing option, the cost is the amount which is paid by the company in form of earnings to
its shareholders because of their ownership stake in the business capital.
3. Analysing of effect of selection of the source of finance on AYR Co.’s weighted average cost of
capital.
When company raises capital or financial resources from more than one sources, then
Weighted average cost of capital is required to be calculated. Weighted Average cost of capital
depicts about the level of minimum rate at which each business organisation earns or receive from
its business activities and operations so that the provider of financial assistance can receive their
return as per their expectation. Also, with the help of the weighted average cost of capital, AYR Co
is able to create value for its shareholders (Frank and Shen, 2016).

Thus, the weighted average cost of capital helps in measuring the total cost of capital of
AYR Co. If the rate or cost of debt is not equal to the equity cost of capital, then the amount
determined of Weighted Average Cost of Capital will be altered with the change in the structure of
the capital of the company. With increase in the debt amount causes changes in the leverage ratios
too such as rise in the debt to equity ratio and debt to total capital ratio. This in turn brings changes
in the overall Weighted Average cost of capital of the company.
4. Assessing the impact of selection of finance on the shareholders and lenders of AYR Co.
It is very important for every business organisation to select best and suitable financial
option for raising capital amount. Investment decision has to be made as per the requirements and
needs of business operations taking into consideration, investors and lenders expectations. In this
case, the company AYR Co. is using two sources of finance viz. Debt financing and equity
financing option.
With adoption of equity source of financing, AYR Co. can influence the wealth part of its
shareholders. Every investor and shareholder invest in the company, with the aim of increasing its
wealth i.e. wealth creation over the time period. Also, expecting high return in case of high
profitability period of company by its shareholder is always there (Coleman, Cotei and Farhat,
2016). When a new company is using equity source of financing causes dilution in control but has
one advantage which is that is it is not having any obligation or required to pay any dividend to its
shareholders or will increase its credit period in case of lenders. This leads to dis - satisfaction
among both the shareholders and lenders. In case of debt financing, lender is not having any claim
to equity and profits of business and also debt source doesn't result in dilution of ownership interest.
Thus, lenders are only entitled for repayment of amount lend along with interest on it.
CONCLUSION
From the above report it can be concluded that management of financial resources is very
crucial for every business organisation. With sound and effective financial policies, plans and
strategies AYR Co. has been able to make correct investment decision regarding investment. From
the report, it has been assessed that Project Aspire is more viable than Project Wolf for AYR Co. to
make investment in as per the investment appraisal techniques viz. net present value, IRR and
payback period. As the net present value calculation of Project Aspire determine is $1621727 with
36.23% internal rate of return and payback of 2 years 3 months. Further, company has been using
debt and equity source for raising capital amount. With this mode of financing, shareholders and
lenders has been able to increase their wealth by earning returns.

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