SOE11144 - Scylace Plc Investment Decision Report & Recommendations

This report assesses Scylace Plc's investment decisions, focusing on opening new superstores at locations A and B, and a potential takeover bid for Helibeb plc. The evaluation considers financial data from 2017 and 2018, including anticipated profits, accounting rate of return, average investments, turnover of capital employed, equity returns, net profit margin, operating profit margin, and book gearing. The analysis helps determine the feasibility of building one or both superstores and whether acquiring Helibeb plc is a sound investment, culminating in a recommendation based on the financial evaluations and available resources.

Running Head: Investment Decision of Scylace Plc
Investment Decision of Scylace Plc
Name of the Student
Name of the University
Author Note

1Investment Decision of Scylace Plc
Executive Summary
The main focus of this paper is to discuss about the investment decisions of a grocery retailer,
Scylace plc. The investment decisions discuss about the opening of the two new branches at
two new locations or opening of only a new branch at a new location and the decision of
acquiring Helibeb plc, a retailer in clothing industry. In order to evaluate this decisions
Scylace plc has appointed as a management consultant which is me for making a correct
evaluation of the decisions. Therefore, the evaluation has been done based on the financial
reports and the financial statements for the two financial years 2017 and 2018. The collected
data discusses about the anticipated profit which the superstores of the new locations will be
and the accounting rate of return and the amount of average investments. Similarly, the
decision of taking over of Helibeb plc, a retailer in clothing industry over a takeover bidding
is done based on certain determinants which are- turnover of capital employed, equity returns
of shareholders, net profit margin, operating profit margin and book gearing. The report also
discusses about the conclusion and recommendation which has been done by me for the
evaluation of the investment decisions based on the two proposals of Scylace plc whether to
open only one or both the superstores and to acquire the Helibeb plc over bidding or not.

2Investment Decision of Scylace Plc
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Methodology-.........................................................................................................................3
Evaluation..............................................................................................................................5
Conclusion..................................................................................................................................7
Recommendation........................................................................................................................8
References and Bibliography...................................................................................................10

3Investment Decision of Scylace Plc
Introduction
The report discusses about the evaluation of the two proposals which was made by the
Scylace plc, a retailer of grocery. The first proposal talks about building of a new branch of
Scylace plc at a new location. On the other hand, the second proposal states whether it would
be feasible for this retail company to acquire Helibeb plc, which is retailer of clothing over
takeover bidding. The two proposals have to be evaluated by the management consultant for
which they have appointed me for the role. The evaluation has been practised based on the
available resources of the organization, Scylace plc and according to the available resources it
has been found that the amount of the resources is not sufficient enough for investing in both
of the proposals. Along with the evaluation of the proposals, the paper also discusses about
the methodologies which are important for making the evaluation of the decision of Scylace
plc. as per the availability of the resources and based on the rate of return whether to open
both the branches at the two new locations or to acquire Helibeb plc. Earlier, calculations
have been performed based on the financial statements and records of the companies for F.Y
2017 and 2018 and evaluation has been performed based on these calculations.
Discussion
Methodology-
Scylace plc is the specialist in the retail chain of grocery and they have initiated a
proposal for which they have appointed me as a management consultant for the purpose of
evaluating the two proposals, proposal 1 states whether it will be feasible for Scylace plc to
open both the superstores at two new locations or it should opt for building only one
superstore at a new location. The proposal 2 states whether it should acquire Helibeb plc over
a takeover bidding or not.

4Investment Decision of Scylace Plc
The cost of building of the first superstore at the new location will be £40.0 million
and that of building the second superstore in another new location will be £ 25.0 million. The
location of the first superstore has been denoted as location A and the location for the second
superstore is location B. Furthermore, the other financial information which is available
includes the cost of the residual value which has been calculated as £10.0 for the first option
(location A) and that of the second option (location B) it is £3.0 million. Secondly, it
discussed about the annual costs for both the options which are £7.0 for option A and for
option B it is £1.1. Next, the annual costs have been calculated as £1.1 million for option A
and £ 0.8 million for option B. The anticipated sales show a value of £13.0 million for option
A and for the next option which is option B it is £10.0 million. Another information included
in the financial statement states that the depreciation has been charged based on the straight
line method and residual value has been considered.
The directors of Scylace plc have also shown an interest of acquiring Helibeb plc
which is a retailer in clothing industry over takeover bidding. The decision of takeover has
been evaluated after taking into account the financial statements of the company of the last
two financial years which are 2017 and 2018. The information which the financial statements
contain includes the gross profit which was £189 million for the year 2017 and £197 million
for the year 2018, the operating profit for the two F.Y 2017 and 2018 are £25 million and £27
million respectively. The other information include net profit before tax which has a balance
of £19 million for the F.Y 2017 and £22 million for the F.Y 2018 and net profit after tax was
£16 million and £18 million for the last two years 2017 and 2018 and it has been calculated
dividing net profit from sales income. The retained profit and the operating margin were also
included in the financial statements which were evaluated after dividing operating profit from
sales income. The financial statements also include the equity of the shareholders with a
balance of £113 million for F.Y 2017 and £124 million for F.Y 2018. Therefore, all these

5Investment Decision of Scylace Plc
information will help me as a management consultant to take a proper decision about opening
of the new superstores and acquiring Helibeb plc over takeover bidding.
Evaluation
The evaluation of the feasibility of the proposal of opening of new superstores at the
new locations has to be done by me as the management consultant of the organization. I am
designated to evaluate whether the location A or location B is suitable for opening the new
superstore or both of the locations are suitable for opening the new superstore.
I have done the evaluation after taking into account the cost of making the new
superstores. According to the financial information, the cost of making the new superstore at
location A is £40.0 million and that of location B it is £25.0 million which is basically the
cost of investment which is to be made for the opening of the superstores. Secondly, the
investment decision has been evaluated based on the annual profit which will be earned in
both the locations. The annual profit plays an important role as it helps to measure the
success of the company (Scharfenaker & Semieniuk, 2017). The annual profit has been
computed using Annual Sales Revenue – Annual Cost of Sales – Annual Staff Costs –
Depreciation – Other Annual Costs for both locations A and B and the value has been
anticipated as £1.0 million for location A and £0.66 for location B. Therefore, a greater profit
will be earned at location A. The average investment is the next determinant which has been
used for the evaluation purpose. The average investment which is also known as accounting
rate of return or average rate of return (ARR) is used as a financial ratio for the process of
capital budgeting and helps to determine the return of investment from the capital investment
(Easton & Monahan, 2016). The higher ARR indicates the attractiveness of the project. The
average investment in this case study has been calculated as (Cost of New Superstore +
Residual value) /2 which show a value of £25 million for option A and £14 million for option

6Investment Decision of Scylace Plc
B. On the other hand, the accounting rate of return has been calculated using Annual Profit
divided by Average Investment. The accounting rate of return shows a percentage of 4% for
option A and 4.71% for option B. The anticipated sales are also found from the financial
statements and it shows a value of £13.0 million for option A and for option B the value of
sales has been anticipated as £10.0 million.
At the same time the decision of taking over of Helibeb plc which is a clothing retailer
company is also has to be done by me as the management consultant of the company. In order
to make a proper evaluation the financial records and statements of Helibeb plc for the two
financial years, 2017 and 2018 has been taken into consideration. The factors which have
been pointed out for making the decision include firstly, the return on the equity of
shareholders which is used to measure the profitability of the business (Kaczmarek, 2014). It
is also known as net assets which evaluates the performance of the company based on the use
of the investments for the generation of the earnings (Khadafi, Heikal & Ummah, 2014).The
return on the equity of the shareholders has been calculated here as (Net Profit after Tax *2)/
Opening Shareholders’ equity + Closing shareholders’ equity and the value for 2017 was
14.81% and in 2018 it was 15.19%. The second factor which has helped for making the
evaluation is the turnover of the capital employed. The capital employed helps in the
measurement of the sales which have been generated with the help of the employed capital. It
is the key for making any investment decision (Penman, 2016). Here in this case study, the
capital employed has been calculated as (Sales Income * 2)/ Opening Total Assets + Closing
Total Assets - Opening Current Liabilities - Closing Current Liabilities and the turnover of
capital employed for the two years was calculated as 3.60 for the F.Y 2017 and 3.55 for the
F.Y 2018. The net profit margin is the next determinant which helped in making the
evaluation decision of acquiring Helibeb plc. The net profit margin helps in the measurement
of profitability (Vintila & Nenu, 2015). It also helps in the indication of pricing strategies of

7Investment Decision of Scylace Plc
an organization as well as the controlling of costs and it is subject to change with the changes
in product mix and competitive strategies (Cachon, & Feldman, 2015). The net profit for
Helibeb plc stood at 2.35% for F.Y 2017 and 2.58% for the F.Y 2018. The next determinant
which has been taken into consideration for the purpose of making the evaluation includes the
operating margin which is also known as operating profit margin. The operating profit margin
is helpful for making the decision of acquisition (Bauman, 2014). It is measured as the ratio
of operating income to sales and measures the rates and levels of the fundamental
profitability of the business (Al-Matari, Al-Swidi & Fadzil, 2014). The operating profit
margin for Helibeb plc has been calculated as operating profit divided by sales income and
the value which has been calculated shows a value of 3.67% and 3.87% for the financial
years 2017 and 2018 respectively. The last determinant which has been used for making the
evaluation related to the decision of acquisition is the book gearing. The book gearing is used
for the purpose of measuring the financial leverage of an organization and which ultimately
helps in exhibiting of the funded activities of the shareholders as well as the creditors (Reid &
Myddelton, 2017). The book gearing is also useful for making the comparison of the
companies which operates in the same industry (Goldfarb & Barmina, 2016). The book
gearing ratio in this case study has been calculated as (Total Assets – Current liabilities –
Equity)/ Total Assets – Current Liabilities. The value of book gearing which has been
computed for the years 2017 and 2018 showed a value of 41.45% and 38% respectively.
Conclusion
After considering the evaluation made for making the decision it can be concluded
that two proposals have been undertaken by Scylace plc which is a specialist in the retail
chain of grocery. The proposals include the opening of two new branches at the two new
locations or whether it will opt for opening only one new superstore at a one new location

8Investment Decision of Scylace Plc
and acquiring of Helibeb plc which is a retailer in clothing over a takeover bidding. In order
to make this decision the company, Scylace plc has appointed me as a management
consultant based on the available financial data in the financial records and statements for the
last two financial years which are 2017 and 2018. The decision of opening the new
superstores has been evaluated with the help of average investment, annual profit, accounting
rate of return, annual sales and the comparison between the two locations has been done
based on these data. Alternatively, the decision for making a takeover of Helibeb plc, a
retailer in clothing industry has been done based on the financial reports of the last two years.
The financial reports contain the information related to net profit margin, return on
shareholders’ equity, operating profit margin, turnover of capital employed and book gearing.
I as a management consultant have done the recommendation based on the above mentioned
financial information.
Recommendation
The recommendation has been provided by me as the management consultant of
Scylace plc after taking into consideration the above discussion. After making a proper and
complete evaluation the decision can be summed up as- it will be feasible for Scylace plc to
open only one superstore at the second location which is the option B and it should acquire
the clothing retailer company, Helibeb plc. This recommendation has been done by me as per
the given financial statements as well as the financial reports for the last two years which are
2017 and 2018. The second location which is location B has been chosen for the opening of
new superstore despite of the fact that the first location which is the location A will be
earning more profit and as well as more sales but this location would involve a huge amount
of investments. The other factor which has seconded this decision is that the accounting rate

9Investment Decision of Scylace Plc
of return is also higher than that of the second location which is location B and more higher is
the accounting rate of return the project will be more attractive (Focacci, 2017).
At the same time, the decision of acquiring Helibeb plc is also evaluated on the basis
of the financial reports of the company which shows that it has a favourable return on equity
of shareholders. The return on equity of the shareholders has been calculated as 15.19% for
the F.Y 2018 as the return on equity of the shareholders should vary between 14-15%
(Penman, 2016) and it has shown an increasing trend compared to the F.Y 2017 and it is a
positive sign for making investment. The net profit margin along with the operating profit
margin has also showed an increasing trend in the year 2018 compared to the year 2017
which indicates that the business is running successfully. Thus it can be said that, though
there are certain drawbacks like decrease in the capital employed turnover and book gearing
but still it is a feasible decision for acquiring Helibeb plc.

10Investment Decision of Scylace Plc
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