UGB223 Business Finance: Investment Appraisal, Ratios, and Rights

This assignment solution for a Business Finance course (UGB223) addresses four key questions. The first question involves calculating net cash flow and present value, determining the internal rate of return, analyzing the financial viability of a project, and evaluating different methods for assessing project investment viability, including net present value, payback period, internal rate of return, and accounting rate of return. The second question focuses on calculating the average operating cycle in days, calculating and interpreting current and acid test ratios, and evaluating different risks and costs that can be reduced to improve a proposed proposal. The third question involves calculating the theoretical ex-right price of an ordinary share, calculating the value of rights associated with holding shares, and evaluating the options available to investors. Finally, the fourth question calculates various financial ratios for a company (Crusher PLC) and analyzes its financial position. Desklib offers a wealth of similar solved assignments and past papers for students.

BUSINESS FINANCE

TABLE OF CONTENTS
QUESTION 1..............................................................................................................................................3
a) Calculating the net cash flow and present value method..................................................................3
b) Internal rate of return...........................................................................................................................4
c) Analysis of financial viability of investing in the project....................................................................4
d) Evaluating different method for assessing viability of project investment..........................................4
QUESTION 2..............................................................................................................................................6
a) Calculation of average operating cycle in days and how this measure is put to use.........................6
b) Calculation and interpretation of current and acid test ratio................................................................8
C) Evaluating different risk and cost that can be reduced to get proposed proposal................................8
QUESTION 3..............................................................................................................................................9
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC..............................9
b) Calculate the value of the rights associated with holding shares in Mainsbury PLC.........................10
c) Evaluating each of the option available to investor...........................................................................10
d) Comparing and contrasting the various options available to business..............................................11
QUESTION 4............................................................................................................................................12
a) Calculating the ratios for Crusher PLC..............................................................................................12
b) Analyzing the financial position of the Crusher PLC.....................................................................18
REFERENCES..........................................................................................................................................21

QUESTION 1
a) Calculating the net cash flow and present value method
Year 2011 2012 2013 2014 2015
Units of BB8 800 950 1250 900 600
cash inflow 3600000 4275000 5625000 4050000 2700000
Variable labor cost
of each unit 375 375 375 375 375
variable material
cost of each unit 250 250 250 250 250
Variable labor cost 300000 356250 468750 337500 225000
variable material
cost 200000 237500 312500 337500 150000
total variable cost 500000 593750 781250 675000 375000
administration cost 360000 384000 624000 648000 888000
Total cash outflow 860000 977750 1405250 1323000 1263000
Depreciation 500000 500000 500000 500000 500000
total cost 1360000 1477750 1905250 1823000 1763000
cash inflow after
depreciation 2240000 2797250 3719750 2227000 937000
Net cash inflow 2740000 3297250 4219750 2727000 1437000
Net present value
Year
Net
cash
flows
Discou
nt
factor
Discounte
d cash
flow
2011
274000
0
0.926
2537240
2012
329725
0
0.857
2825743

2013
421975
0
0.794
3350481.5
2014
272700
0
0.735
2004345
2015
143700
0
0.681
978597
total discounted cash
flow 11696407
Initial investment 2,500,000
Total present value of
cash flow 9,196,407
b) Internal rate of return
Year Net cash flows
2010 -2500000
2011 2740000
2012 3297250
2013 4219750
2014 2727000
2015 1437000
IRR 118%
c) Analysis of financial viability of investing in the project.
From the above computed method it can be analyzed that organization will receive various
different kind of benefits by taking this specific decision. In addition to this, the net present
value method helps in assessing that that how effectively a project can give positive cash flow in
future. On the basis of computation it can be interpreted that company will receive the cash
flow more than initial investment which is positive sign. On the basis of internal rate of return it
can be articulate that financial visibility of project is good as it will provide 118% of return.

d) Evaluating different method for assessing viability of project investment
There are four different capital appraising technique that can be used by companies for
making evaluation of investment. It involves internal & accounting rate of return, net present
value and payback period. Each method has the different types of pros and cons which provide
assistance in gaining the knowledge regarding the proper evaluation of particular investment so
that strategic decision can be taken.
 Net present value
This method helps in making evaluation of eth project by taking the time value of
money. There are various benefits that can be received by organization through implementing
this particular method for analyzing investment option.
Benefits
The organization can receive several advantages by applying this particular technique in
capital appraisal (Zhang and et.al., 2021). The foremost advantage that organization will receive
from this involves is to assess project is prudent to invest or not by giving emphasis on time
value of money. NPV method of capital budgeting accepts all conventional cash flow aids in
formulating assumption of reinvestment.
Drawbacks
The biggest drawback is ascertainment of opportunity cost through implementing net present
value tool become tough . Having higher net present value does not provide assurance of good
return on equity for meeting organizational objectives.
 Payback period
Advantages
It simple to use and understand which helps in making fast decision making by evaluating
in terms of particular period such as year In case of uncertainty it is very useful for entity as
priority in this specific method is given to liquidity.
Disadvantages

All cash flows of company are not covered via implementing the payback period that made it
non realistic and sustainable (Bader, Al-Nawaiseh and Nawaiseh, 2018). Time value of money is
being ignored while calculating pay back period that’s an important business concept which
ultimately declines its relevancy .
 Internal rate of return
Benefits
Ranking projects according to their profitability become possible via this specified capital
appraisal technique into practice. Greatest advantages that firm can get by taking internal rate of
return method into action is that time value of money is as well studied.
Limitations
Concept of economies of scale is not taken into consideration while implementing this
method for evaluating organizational performance by using the investment option which is
biggest threat.
 Accounting rate of return
Pros
This provides assistance in comparing different task or projects so that investment
decision can be taken. Comparison with other investment option become possible as it represents
the output in percentage pattern.
Cons
It is not appropriate when investment is made in installment as analysis becomes tough so
it is widely avoided by larger organization due its less reliable nature. Non controllable aspect
impacting profitability are not considered in this process which does not give accurate decision.

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
Accounts
receivable period
Accounts
receivable period=
(365/ Accounts
receivable
turnover)
60.26

Operating cycle Operating cycle=
(Inventory period +
Accounts
receivable period)
249.55
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 /
Current Liabilities)
1.39
Liquid ratio (Liquid ratio= Quick Asset /
Current Liabilities)
0.49
C) Evaluating different risk and cost that can be reduced to get proposed proposal
There are different types of the risk and cost that required to be focused as they impact
the inventory level of organization. In order to be successful in organization it becomes essential
for the company to give higher emphasis on the several different types of risk & cost that can

negatively affect the organizational processing (7 type of inventory risk that impact business,
2021). The inventory level of specified organization helps in gaining the capability to achieve
higher level of profitability & sustainability in turn better performance through minimizing
irrelevant factor scan be done.
The types of risk that can effect the stock level of company comprises inaccurate
forecasting, unreliable suppliers, shelf life, theft, loss, damage, life cycle and mitigating
inventory level. These are some of the factor that play important role in making processing of
organization affected by reducing efficiency & reliability of production, distribution and selling
functions. In order to decline such aspects company can pay attention on making significant
implementation of related inventory software and system for smooth and accurate forecasting of
requirement (Lücker, Seifert and Biçer, 2019). These will allow the firm to be prompt in ability
make proper evaluation of components that are not relevant and can decline inventory level.
Occurrence of these risk can create larger hurdles for enterprise as it results in increasing cost
which declines profitability.
There are certain forms of inventory cost that causes the processing and functioning of
firm which includes ordering, inventory holding cost, shortage, spoilage, carrying cost, etc that
creates reduction (Magni and Marchioni, 2020). it is important for firm to have appropriate level
of funds to make sure that company is capable of reducing such expenses for maintaining
required amount of stock to meet business expectations. The both the mentioned from of risks
and cost largely influence the inventory in declining level which required to be mitigate by
taking suitable course of action for having profitability & sustainability in industry.
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
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
d) Comparing and contrasting the various options available to business
There are various forms of options that can be used by company for meeting its financial
requirements. It comprises the options like self funding, family or friends, private investors,
venture capitalists, stock market, crowd funding, etc. the options of debt based fund raising
involves the taking loan from the bank, society, financial institutions, etc. the mentioned
sources rather than lies in the equity based funding which can provide several different type of
benefits as compared to the other alternative (Sources of finance debt vs equity, 2021). Venture
capital is one of the best option that can be utilized by company to fulfill its requirement of
raising fund. There are various advantages that company obtains from this specific sourcing
method such as leadership, professional skill for management, opportunity of expansion, helps
in building network, no obligation for repayments, trustworthiness, etc. in addition to this,
equity crowd funding is the method of raising capita which helps in gaining different kind of

benefits which involves brand loyalty, easier to raise, building community, easy pinching
process, etc . this allows firm to be beneficial in having business activities in control.
Angel brokers is another platform which can b taken into consideration by the firm get
the fund along with expertise knowledge. There is no limit in raising the funds which can give
help the enterprise to obtain larger amount of funds for the efficient processing and functioning.
Self funding, taking capital from friends & family as well included in the sources for raising the
required amount of capital for accomplishing objective of meeting unforeseen forces. Indulging
into stock market for raising the capital by equity method can help the firm. These are the
techniques that can be used by firm to meet its purpose.
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/(To
tal Assets-
total
liabilities )
*100
37% 30%

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
/Shareho
lders
equity
0.27 0.20
iii. Gross profit margin
Particulars Formula 2019 2020
Gross profit 7540 8710
Sales turnover 17640 25690
Gross profit
margin
Gross
profit
43% 34%

/Sales
turnover*
100
iv. Operating profit margin
Particulars Formula 2019 2020
Operating profit 3751 3453
Sales turnover 17640 25690
Operating profit
margin
Operating
profit/Sales
turnover*1
00
21% 13%
v. Inventories turnover period
Particulars Formula 2019 2020
COGS 17640 25690
Inventories 1840 3934
Inventories
turnover period
ratio
COGS/
Inventorie
s
9.58 6.53

vi. Settlement period for trade receivables
Particulars Formula 2019 2020
Trade
Receivables
1011 2190
Sales
turnover/Sales
turnover*365
17640 25690
Trade receivable
collection period
Trade
Receivables
/
20.91 31.11
vii. Settlement period for trade payable ratio
Particulars Formula 2019 2020
Trade Payables 1605 3598
COGS 17640 25690
Trade payable
period ratio
Trade
Payables/CO
GS*365
33.21 51.11
viii. Current ratio
Particulars Formula 2019 2020

Current
Assets
3273 6235
Current
Liabilities
4331 8846
Current
ratio.
Current
Assets/Current
Liabilities
0.75 0.70
ix. Acid test ratio
Particulars Formula 2019 2020
Quick assets Current Assets -
Inventories
3273-
1840=143
3
6235-3934=
2301
Current
Liabilities
4331 8846
Acid test
ratio
Quick
assets/Current
Liabilities
0.33 0.26
x. Gearing ratio
Particulars Formula 2019 2020

Total Debt 4331 11621
Total equity 10062 11494
Gearing ratio Total Debt/Total
equity
0.43 1.01
xi. Interest cover ratio
Particulars Formula 2019 2020
Net profit 2809 2332
Interest
Payable
- 344
Interest
cover
ratio
Net profit /Interest
Payable
- 6.77
xii. Earnings per share Ratio
Particulars Formula 2019 2020
Net income –
Dividend paid
4331000-
800000
= 3531000
11621000-
900000
= 10721000
Number of shares 16000 16000
Earnings per (Net income – 220.68 670.06

share ratio Dividend
paid)/Number of
shares
xiii. Dividend cover ratio
Particulars Formula 2019 2020
Earnings per
share.
1748.8855869
242
5307.42574257
43
Divided pers
share
50 56.25
Dividend cover
ratio
Earnings per
share/Divided per
share
34.97 94.35
b) Analyzing the financial position of the Crusher PLC
o From the evaluation of above calculated ratio it can be identified that company’s return
ocapital employed has decreased as compared to previous year. In the year 2019 and 2020
Crusher PLC has the outcome of 37 and 30% which is higher than the ideal ratio but declining
trend is reflecting that is negative indication of financial performance. There si requirement of
making improvement by having significant course of action like decreasing cost for increasing
operating profit, etc.
o Return on ordinary shareholders of Crusher PLC si reflecting downward sloping
movement which is indicating adverse financial position. From the year 2019 to 2020 the
company’s performance regarding the same has lessened as it has reached 0.20 to 0.27. there is
need of improvement for making modification. It helps in attracting the shareholders for longer
duration.

o Gross profit margin helps in understanding how effectively entity reduce its cost of
goods sold to gain the higher profitability. Crusher PLC performance regarding the gross profit
margin for the current & previous year. In the year 2019 and 2020 the derived gross profitability
for the two years are 34 and 43% which is decreasing s compared to previous year. The reason
behind this can be increased cost of goods sold, less sales revenue, etc there si requirement of
making alteration to increase liquidity for improving financial position of company
o Operating profit margin is one of the important ratio that si sued by investors, analyst,
lenders, suppliers, etc to have appropriate knowledge regarding the financial growth of company.
In addition to this, the obtained result regarding the specified organization is 21 and 13 for the
year 2019 and 2020 that is showing drastic fall down. On the basis of this it can articulated
that firm is not having good financial condition. It can be improved by paying attention on
decreasing operational cost to increase profitability.
o Inventory turnover period helps in assessing how effectively company replaces its
stock. It is show in the unit of times for gaining understandability. From the evaluation it can be
interpreted that company inventory turn has reached 6.53 from 9.58. it is less than the ideal
ratio therefore requires greater level of improvement for meeting desirable level of profitability
and sustainability (Dicle and Meyer, 2018). This can be done by applying effectual software as
well inventory management system to have better financial performance.
o Trade collection period is major indicator of liquidity which helps in gaining the
knowledge regarding the credit policy prevailing in the market. In addition to this, from the
assessment fo above calculation it can be interpreted that firm has increased period of collection.
It can be validate by the outcome derived for the year 2019 and 2020 which is 20.91 and 31.11
days. This required to be improved as it is showing that company ahs lower efficiency in
collecting funds from the debtors. It can be understood that specified firm has lack of efficiency
in gathering its payment from customers.
o Trade payable period is collected by stakeholders in order to get the knowledge
regarding the efficiency of firm in respect of paying off debts. The specified enterprise
performance regarding settlement of 2019 & 2020 years which are 33.21 and 51.11 days which
is in increasing direction. It is positive sign as this will aloe the organization to be capable of
meeting its day to day practices. On the other side it can affect the creditability the
sustainability of company.

o Current ratio present the efficiency of meeting short the liabilities with the cash and
equivalent. Crusher PLC ‘s current ratio for the two respective year is 0.75 and0.70 which is in
declining movement and show sign for making improvement. This is presenting the
organization current ratio is less than ideal margin of 1.2-1.5 times. In order to make the
significant performance organization require to pay attention on making suitable changes
(Hamawandy, Azzat and Hamad, 2021).
o Acid test ratio of Crusher PLC is 0.33 and 0.26 respectively for 2019 & 2020 that si
decreasing as compared to the previous year. In addition to this, it can be identified that
efficiency of company of paying short term liability with help of quick asset is lowering as
compared to the earlier period. This is reflecting negative sign of financial condition of Crusher
PLC.
o Gearing ratio helps in assessing the risk associated with company’s processing as the
performance of organization is in increasing trend as in 2019 and 2020 is 0.43 and 1.011. This
si showing the higher risk associated with company processing which require to be measured and
improved as can affect the organizational performance by making stakeholder uninterested in
company’s operational practices.
o Interest coverage ratio of Crusher PLC is nil for the previous year no interest has been
paid. In 2020 there is margin of 6.77 which si showing higher liquidity that is helping in meeting
obligations
o Earning per share has increased from 220.68 and 670.06 which is positive as well
dividend coverage ratio is in upward movement.


REFERENCES
Books and Journals
.
Bader, A., Al-Nawaiseh, H. N. and Nawaiseh, M. E., 2018. Capital Investment Appraisal
Practices of Jordan Industrial Companies: A Survey of Current
Usage. International Research Journal of Applied Finance. 9(4). pp.146-
161.
Dicle, M.F. and Meyer, J., 2018. Financial Statement and Ratio Analysis: A Classroom
Perspective. Available at SSRN 3223965.
Hamawandy, N. M., Azzat, R. S. and Hamad, S. A., 2021. The Role of Segment Financial
Reports in Rationalising Investment Decisions in Iraq. Journal of
Contemporary Issues in Business and Government. 27(1). pp.3058-3068.
Lücker, F., Seifert, R. W. and Biçer, I., 2019. Roles of inventory and reserve capacity in
mitigating supply chain disruption risk. International Journal of
Production Research. 57(4). pp.1238-1249.
Magni, C. A. and Marchioni, A., 2020. Average rates of return, working capital, and NPV-
consistency in project appraisal: A sensitivity analysis
approach. International Journal of Production Economics. 229. p.107769.
Zhang, Y. and et.al., 2021. Inventory financing under Risk‐Adjusted‐Return‐On‐Capital
criterion. Naval Research Logistics (NRL).
Online
7 type of inventory risk that impact business. 2021. [online]. Available through:
https://www.unleashedsoftware.com/blog/7-types-of-inventory-risk-and-
their-impact-on-your-business–
Sources of finance debt vs equity. 2021. [online]. Available through: <
https://business.gov.au/finance/seeking-finance/sources-of-finance-debt-vs-
equity >