S plc Financial Report: Investment Appraisal, Break-Even Analysis

This report provides a detailed analysis of S plc's financial strategies, focusing on capital investment appraisal techniques such as payback period, net present value (NPV), and internal rate of return (IRR). It assesses a new investment project by S plc, examining cash flow analysis, payback period, and NPV to determine project acceptability. The report also contrasts equity issues with long-term bank loans, evaluating the advantages and disadvantages of each. Furthermore, it calculates break-even sales revenue and margin of safety, analyzing the consequences of price changes and critically assessing the assumptions of cost-volume-profit analysis. Finally, the report compares different categories of suppliers, discusses the advantages of single versus multiple sourcing, and explores cross-sourcing with examples, providing a comprehensive overview of S plc's financial and procurement strategies.

Business Report

Table of Contents
INTRODUCTION ..........................................................................................................................3
SECTION-A....................................................................................................................................3
Reason behind the importance of capital investment appraisal to S plc.....................................3
Cash flow analysis Statement of new investment by S plc.........................................................4
Calculate the pay back period and check whether the project is acceptable if S plc imposes a
three-year maximum payback period..........................................................................................4
Determine whether the project is acceptable or not according to its net -present value.............5
Determine the logic of net present value approach and its relation with cost of capital.............6
Calculate internal rate of return for investment proposal to know if the project should be
accepted or not............................................................................................................................6
Explain the reason behind considering net present value method superior to internal rate of
return...........................................................................................................................................7
SECTION-B.....................................................................................................................................7
Critically contrast Equity issue with long term bank loan..........................................................7
SECTION-C.....................................................................................................................................8
Calculate break-even sales revenue and the margin of safety.....................................................8
consequences of increase and decrease in price of 10%............................................................8
Critically analyse the assumption of cost volume profit analysis...............................................9
SECTION-D..................................................................................................................................10
Compare the three categories of suppliers................................................................................10
Compare the advantages of single sourcing and multiple sourcing of procurement................10
Discuss Cross-sourcing with example and its benefits to the buyer.........................................12
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................14

INTRODUCTION
Financial strategies of a business are concerned with acquisition and utilization of funds
and assets. They focuses on procuring resources for the firm, evaluation of costing techniques
and structure, ascertaining profit earning potential, managing accounts and many more. Their
main aim is to align the working of finance department in the direction of attaining business
objective by gaining strategic advantage (Banerjee, Tarazi and Akre., 2018). This report is based
on S plc and is divided into four sections. It discusses about the various financial strategies like
budgets, cash flow analysis, net present value approach, intern al rate of return and many more. It
further recognises the cheapest source of loan from bank along with comparing it with equity
shares. The report also determines the break even sales point and consequences of change in
price. At last, there is a description on various types of suppliers and sources of procurement.
SECTION-A
Reason behind the importance of capital investment appraisal to S plc.
It is technique of measuring the performance of a new project. It provides the answers of
questions that a particular investment will be proved beneficial to firm or not. There are various
techniques applied by S plc like payback period, accounting and internal rate of return, net
present value and many more. These are various reasons which proves that this process is very
important for S plc.
 Involvement of company resources- Large amount of efforts and resources are applied
on a particular project. A single wrong decision by S plc can lead to huge loss of all these
things. So, it is always recommended to conduct this appraisal to identify the profitability
from that investment (Block, Hirt and Danielsen., 2018).
 To tap possible alternatives- There are always some sort of options for all jobs. So, to
earn maximum profit, it required that S plc performs these techniques and examine the
benefits of all similar projects and find out the best alternative.
 For avoiding uncertainty- The tools of capital investment appraisal recognises the
impact of inflation on prices and some other uncertain factors, through which true value
of project can be determined. Without applying this technique, management would not be
able to identify the costs and profits associated with it correctly and can result in taking
wrong procurement decision (Young and Legister., 2018).

Cash flow analysis Statement of new investment by S plc.
Initial cash outflow
Initial cash investment Amount in (£000)
Production equipment 1000
Staff training provision 100
Advertising & promotion costs 20
Incremental working capital 180
Total initial outflow of cash 1300
Cash flow Analysis statement of 5 years of new project
(In £000s)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5
Cash inflows
Sales 600 1000 1200 1000 800
Total cash inflow 600 1000 1200 1000 800
Cash outflow
Cost of materials 180 300 360 300 240
Incremental
operational cost
100 100 100 100 100
Total outflows 280 400 460 400 340
Net Cash flow 320 600 740 600 460
Opening balance 320 920 1660 2260
Closing Balance 320 920 1660 2260 2720

Calculate the pay back period and check whether the project is acceptable if S plc imposes a
three-year maximum payback period.
Total investment required to be made in the new project by S plc would be £1,300,000.
Pay back amounts of the project
Year £000
Annual cash inflow Cumulative cash flow
0 -1300
1 320 -980
2 600 -380
3 740 360
4 600 960
5 460 1420
Pay back period = Initial investment/ Annual pay back
= 2+380/740 = 2+0.51 = 2.51 Years
According to the above calculations, it is ascertained that the new project is capable of
earning its investment back in two and half years. S plc has imposed a pay back period of 3 years
which is more than the result driven above. So, it should consider the opportunity and can hold
the project.
Determine whether the project is acceptable or not according to its net -present value.
Cost of capital = 20%
Discounted cash flow = net cash flow / (1+i)^t
Net present value of cash flows (£000s)
Year Cash Flow Discounted cash flow
1 320 266.67
2 600 416.67
3 740 428.24

4 600 289.44
5 460 184.86
Total 1585.87
Net present value of project = Present value of total cash inflows – Present value of cash
outflows
= 1585.87 – 1300
=285.87
The net present value of project is around £ 285,000. This means the firm can opt to
acquire the project as the result driven is positive and is far more than the value which would be
invested in the project.
Determine the logic of net present value approach and its relation with cost of capital.
Net present value means to ascertain the discounted value of all the cash inflows and
outflows over a period of time. It is used for analysing the feasibility of a project, on the basis of
which the decision of acceptance of rejection of investment is taken by firm. The value of cash
flow in future is always less than its present value because with time, the value of money
decreases. Thus the amount estimated to be received in future in always less than the cash
actually received. This tool helps in generating knowledge about the value which will be actually
received in future by applying discounting factor (Bulturbayevich and et.al., 2020). By applying
this tool, S plc can know the present value of all the projects it is holding or desires to invest.
Relation among net present value and cost of capital
Net present value of a project is directly related to the cost of capital associated with that
project. While calculating the amount, this tool makes use of interest rate which is paid by firms
for acquiring any type of debt. For companies, this rate is the cost of capital. Thus, there is a
great relation among these two terms, which can also be viewed in the formula below:
Net present value= net cash flow / (1+i)^t
Here, i denotes cost of capital.

Calculate internal rate of return for investment proposal to know if the project should be
accepted or not.
Whole calculating Internal rate of return, The net present value of project is considered to
be zero. The value is then ascertained with the help of hit and trial method.
Formula used for calculating IRR is :
Net present value= net cash flow / (1+i)^t
0 = -(1300[1+i]^0)+(320/[1+i]^1) + (600/[1+i]^2) + (740/[1+i]^3) + (600/[1+i]^4) +
(460/[1+i]^5)
By applying then percentage of around 27 % the value of NPV can be ascertained to be
zero. So, Internal rate of return for the project is 27 %. As per this result, it can be said that the
project can be accepted by the firm because IRR is much higher than the cost i9ncurreed by the
capital.
No, change in cost of capital would not have any effect on the internal rate of return as
there is no relation among the two when calculated differently. In actual, both the terms are
same.
Explain the reason behind considering net present value method superior to internal rate of
return.
Only IRR cannot handle multiple discount rates, but net present value holds this capacity.
Also , it cannot calculate the mixture of negative and positive cash flows. Thirdly, the value of
IRR in never known and works on hit and trial method (Cai and et.al., 2021).
SECTION-B
Critically contrast Equity issue with long term bank loan.
S plc preferred to choose bank loan for supporting its long term finance needs as a
cheapest source. But, it could have also issued equity shares to raise the funds. Here is a
comparison between the two modes of acquiring finance.
Bank Loan- It is an amount given by bank to a person on interest. This value is required
to be returned by the holder to the owner. Normally, This amount is given some collateral
security (Chi and et.al., 2020).

Equity Shares- These are issued by companies to the general public for fulfilling there
need of funds. The holder of these shares have right on the company and shares the profit and
losses faced by them.
Comparison between the bank loan and the equity shares
Basis Bank loan Equity shares
Risk Interest on borrowings is fixed and
thus, it is required to be paid even if
the company is facing losses.
Dividend is only paid at the the time of
profits and is not fixed, which means
firm can decide its amount on the basis
of their own requirement of cash.
Return The holder of loan is required to pay
the principle amount with interest, at
the time of completion of time period.
There is no compulsion of repayment of
amount, until liquidation.
Limitation on
use of funds
The creditor can put a limit on the use
of funds.
There is no stipulation on the usage of
money raised from shareholders.
Tax benefit Interest on this amount attracts tax
deduction by reducing it from profit
(EvmenchikBanerjee, Tarazi and
Akre., 2018).
The dividend paid on shares is not
acclaimed for taxation benefit as it is
not reduced from the taxable income.
Loss of
control
There is no risk of loss of control as the
creditors do not have any interest in the
functions of organisation.
Issuing more equity will result in more
control of outsiders on the firm and the
owners share in business will
automatically reduce.
SECTION-C
Calculate break-even sales revenue and the margin of safety.
Selling price per game = £100
Variable cost per game = £60
Fixed cost per annum = £300,000
Break- even Sales = Fixed Cost / (Selling price per unit – Variable price per unit)

= 300000 / ( 100 – 60)
= 300000 / 40
7500
so , the break even sales is 7500 units
The target of the firm is to achieve the sales revenue of £120000. So, the margin of
safety of the firm will be :
Margin of Safety = ( Current sales – Break even point) / Current sales * 100
= (120000 – 7500) / 120000 * 100
= 112500 * 120000*100
= 93.75 %
Margin of safety for S plc is 93.75%.
consequences of increase and decrease in price of 10%.
Increase in price by 10 %
Selling price per game = £110
Break- even Sales =
= 300000 / ( 110 – 60)
= 300000 / 50
6000
Margin of Safety =
= (120000 – 6000) / 120000 * 100
= 112500 * 120000*100
= 95 %
With the increase in the sale price of the game, the break even point of the firm will also
reduce. This means that now the firm will be able to cover its cost by selling less products than
earlier. Also the margin of safety will increase for S plc.
Decrease in price by 10 %
Selling price per game = £90
Break- even Sales =
= 300000 / ( 90 – 60)
= 300000 / 30
10000

Margin of Safety =
= (120000 – 10000) / 120000 * 100
= 112500 * 120000*100
= 91.67 %
With the decrease in the price of product , the break even sales point of firm will reduce
which mean for covering the cast of manufacturing now, S plc would require to sell more
products which is up to 10000 units from 7500 units. Also the margin of safety will also reduce.
Critically analyse the assumption of cost volume profit analysis.
Cost volume profit analysis helps in determining the way in which changes in the cost
tends to affect the profit of the firm. Firms use this tool to determine the number of units it
requires to sell to gain minimum profits.
Critical analysis of the assumptions
 Constant selling price- with the change in the volume of production, selling price in this
tool does not change which can negatively impact the analysis. As when number of units
increase, their costs tends to decrease and its impact on price is neglected (Labbe., 2017).
 Division of cost sin fixed and variable- It created division among the cost incurred on
various products which means proper analysis on the basis of cost can be done.
SECTION-D
Compare the three categories of suppliers.
Suppliers are the persons, organisation or a firm which provides or sells goods or services
to its customers, normally the businesses. It acts as a middle man between the manufacturer and
the user of product by offering good quality material at effective rates. There are different types
of suppliers which have been distinguished below:
 Strategic suppliers- These are the vendors on whom form trusts on, for good service and
supplies. They are long term partners of the firm and provides goods that are either tough
to arrange or a very important part for the success of product. The relationship with these
persons are usually tricky and requires special attention for ensuring regular supply of
raw material (Liu, Chiang and Tsai., 2020). But other then these, there are some other
preferred suppliers from whom all other requirements of material is fulfilled.

 Preferred suppliers- It is the person or the company which is pre-assessed by the firm
for arranging its supplies of goods and services. The process ensures that the party with
whom it will be dealing with help in the growth of business by providing goods in right
quantity, at correct time, and of high quality.
 Transactional suppliers- It means to sign a contract of sale for providing specific types
of goods to the purchaser. There is a fixed time period in the the receiver of goods had to
make payment to the giver of product as per the agreement. These are usually made in the
cases of foreign suppliers as this case demands some sort of legal security regarding the
delivery of products (Mitik and et.al., 2017).
As discussed above all the above mentioned three suppliers are different form each other,
but the basic difference among them is the types of goods supplied by them. Where Strategic
ones deals in important products, preferred suppliers deals in remaining all kinds of products.
While transactional ones deals in the goods to be arranged from foreign parties.
Compare the advantages of single sourcing and multiple sourcing of procurement.
Single Sourcing means when a person or firm decides to purchase its raw material or
other inputs from a single vendor. It is the decision taken by the company by analysing the list of
number of vendors, out of which only one is shortlisted. Another usual process of this selection
is also based on bidding or quotation, from which, the business chooses the best one (Oleghe.,
2019).
Multiple sourcing means to arrange goods from the different number of vendors. In this
type, various vendors are contacted for fulfilling the need of raw materials.
Basis of advantages Single sourcing Multiple sourcing
Quality When a firm get its sources
from a same vendor, then there
are chances to get products of
same quality every time. This
is because, with time, the
vendor comes to know about
the exact requirement of the
buyer and tries to provide that
By adopting this technique, a
firm can have assess to various
qualities of same product,
according to which it can make
its goods as per its requirement
and quality it ants to choose
for a particular type of thing
(Sommer., 2018).

product with same quality.
Lower prices As the firm tends to purchase
all the type of raw material
form the single firm, it makes
it easier to build good
relationship with the vendor.
Effective tie-ups and bulk
orders attracts the availability
of discounts at large level,
which tends to reduce the price
of raw material (Vilks., 2017).
As there are number of options
of suppliers with the company
to choose from , it can bargain
about the price of raw material
from them. It can also change
its supplier if any of the them
tends to increase the prices.
This gives the power to the
company to arrange material at
low prices.
Less complications As there is only single
supplier, the firm does not
have to keep track on multiple
chain systems and also the
availability of products could
be ascertained before time.
With the help of multiple
suppliers, a business can
handle the peak time , when
the requirement of material is
more and a single supplier
could not handle it.
So, there are various advantages on single and multiple suppliers according to the
requirement of material to the company.
Discuss Cross-sourcing with example and its benefits to the buyer.
The cross-sourcing is the system where the company uses one supplier for the one
component and another supplier for the another component. Where each supplier acts as a
backup for the other. It is a broad routine for store network with respect to utilizing the two
providers for the given part, item or administration. It takes the use of two different suppliers for
the particular raw material, product, service or component. This approach is used by the
companies to lower the risk of relying on one supplier. It is important for the strategy of supply
chain risk management as it helps the companies in growth and customer demand is also
increased (Pando and et.al., 2018). For example, a cake manufacturing company, prefers to take,