Strategic and Financial Decision Market Analysis for Eden PLC

This report provides a comprehensive analysis of Eden PLC's strategic and financial decision-making processes regarding the launch of two Bluetooth speaker models, Blaster and Hounddog. The report begins with an executive summary outlining the investment appraisal techniques employed, including Net Present Value (NPV), Internal Rate of Return (IRR), and the application of the Capital Asset Pricing Model (CAPM) to determine the cost of capital and Weighted Average Cost of Capital (WACC). The analysis evaluates the profitability of each product, considering factors such as project costs, cash flows, and discount rates. The report also assesses the advantages of using the Accounting Rate of Return (ARR) and Payback Period for project evaluation, along with the impact of debt capital enhancement. Furthermore, the report explores organic growth and acquisition strategies for Eden PLC, providing insights into the company's potential expansion options. The report concludes with a detailed examination of project evaluation, including the calculation of NPV and IRR for both the Blaster and Hounddog products, and a discussion of the comments provided by Beverly Sparkes and Paschal Hickson. The analysis uses different investment appraisal techniques to identify the profitability of each project, and the benefits of organic and acquisition growth strategies are also examined.

Running Head: STRATEGIC AND FINANCIAL DECISION MARKET
Strategic and financial decision market
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Author’s Note

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Executive summary
The study sheds light on the investment appraisal technique through which the Eden PLC.
makes their investment decision over their product launch. However the study includes an
explanation over the project cost the cash flow over a future period. To identify this, the
report identifies the NPV of each of the product. For the better evaluation the report also
identifies the internal rate of return, kipping the NPV at 0. This helped the study to evaluate
the project return. The study further explains the advantages of using ARR and Payback
period for evaluating a project capability. The study identifies the effect of enhancing the
debt capital. The study also includes an explanation over the adoption of the different
discount rate. The study explains the importance of CAPM model in acquiring the cost of
capital for the company. The cost of capital further helped the study to identify the NPV as
the WACC value has been taken as the discount rate of cash flow for each of the product
investment. With the help of different investment appraisal techniques the report identifies
the profitability of each of the project on the investment. This means that the study identifies
the return to evaluate the profitability on their investment at the future period. Lastly, the
study identifies the benefits of growing through using Organic growth strategy and
acquisition strategy. This helps the study to identify the growth option for the Eden plc and
chooses a strategy at which the company can expand easily without damaging their
profitability.

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Table of Contents
Introduction................................................................................................................................3
Task 1: Evaluation of project.....................................................................................................4
Task 2: Beverly Sparkes’ comment evaluation..........................................................................5
Task 3: Analysis Paschal Hickson’s comment...........................................................................7
Task 4: NPV and CAPM for the risk adjusted return................................................................9
Task 5: Benefit of organic and acquisition growth strategy....................................................10
Conclusion................................................................................................................................12
Reference..................................................................................................................................13

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Introduction
Analysing a project helps in identifying profitability associated with the project.
Hence, this gives a secure option for an investor to identify their investment return. The
investment analysis can be done through using various investment appraisal techniques.
These analysis helps the investor to choose difference between two project or product
investment through identify their profitability. The net present value helps the investors to
identify the present value of an asset through understanding their cash generation capability
in future. However, rest of the methods help in identifying the profit earning capacity for a
project which helps investors to understand the rate of return that the project in going to
generate in future date. For the better evaluation the report undertakes an investment analysis
of Eden PLC. This report undertakes an NPV analysis to evaluate the net present value of
their investment. Further the report identifies the payback period, IRR and ARR for the better
evaluation of the investment option. This helps in identifying the worthiness of the
investment in the future. Further, the report analyses the various comments with the help of
different investment appraisal techniques. The report also analyses the cost of capita using
CAPM method. The report further identifies the weighted average cost of capital to
understand the company’s minimum amount of payment to pay their security holders. Hence,
this is the amount which is identified as the cost of capital for the company. The report also
identifies the discounting rate at which the interest has been provided and the NPV has been
calculated. Analysing different discounting rates study identifies the difference between
future profit and the cash flow earning capability. This makes idea in choosing a discount rate
at which the company needs to identify their investment interest and NPV needs to be
calculated. Finally the report identifies two types of growth options such as organic growth
and acquisition through which the company could expand their business.

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Task 1: Evaluation of project
The net present value identifies the project’s present value of future cash flow
generated by the project. This identifies the profitability through identifying the difference
between present value of cash inflow and the present value of cash outflow over a period.
Along with the net present value, the IRR has been calculated to understand the internal rate
of return. This has been calculated to understand the return deepening on the internal factor
and excluding the external factors. However, internal rate of return is a discount rate that
makes the net present value (NPV) of all cash flows from a particular project equal to zero.
The net present value has been achieved at WACC rate which is 12.29%. This has been
recognised that the discounting rate has been assumed at 12.29 % for the blasters and
hounddog. Using this discounting rate the Blaster NPV has been achieved at a positive value
at £3094082. Hence, through the analysis of different discounting rates this has been
identified that the WACC rate has generated more net present value (Ondraczek,
Komendantova and Patt 2015) compared to other discounting rates. With the positive value in
the NPV this indicates towards the positive investment option for the investors. On the other
hand the IRR also represents a positive value which is higher than the cost of capital. This
means that the IRR covers the minimum required rate return or the cost of capital and makes
profit. Hence this represents the project for Blasters is to be profitable in future and the
positive cash flow opportunity is present there. Hence, depending on this IRR, the positive
investment decision can be made as this indicates that the investment on the blaster project
will give a positive return and profitability in future. On the other hand using 12.29%
hounddog has generated more return compared to the blasters as this has been identified that
the product or the project for the Hounddog generates more internal rate of return. The NAV
which has been achieved through using the discounting rate from the WACC calculation has
provided a positive implication over its investment in project (Rossi 2014). Here the internal

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rate of return also generates return higher than cost of capital or the WACC acquired by the
company (Krüger, Landier and Thesmar 2015). The cost of capital has acquired a value at
12.29% and both the products and the investment projects have generated IRR which is more
than cost of capital. Therefore this can be said that investment for both the project can be
done as this would generated a positive cash flow in future. However comparing both the
projects investment, the Hounddog seems to be more profitable as this reflects more IRR and
generates more NPV at the 12.29% compared to Blasters. Hence with reference to the NPV
and IRR the investor would want to invest more on Hounddog.
Task 2: Beverly Sparkes’ comment evaluation
As per the comment stated in the case study by the Beverly Sparkes’ the IRR and the
NPV has been compared to the ARR and the payback period to identify which project is
taking minimum period to generated a required amount of return, or in other words the
payback period has been calculated to identify the minimum return period that a project takes
to cover their cost of capital through the generation of cash flow in future (Gorshkov, Murgul
and Oliynyk 2016). This process become easier to evaluate a project compared to the
evaluation through the IRR as this method only identifies the period that a project takes to
complete their cost portion. No other calculation is further required to identify which project
is to acquire. On the other hand the ARR tries to acquire the annual rate of return through
identifying the average rate of return (Kotas 2014). This identifies the average rate of return
at an annual period depending the initial investment and the cash inflow that the Company is
generating in each year. As per Beverly’s statement further advantages of using ARR has
been identified below:
1. The accounting rate of return only takes accounting information to identifying the
return rate. Therefore this does not require any other information while calculating the
rate.

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2. This undertakes operating income into account while calculating ARR hence this
provides exact idea of income before making an external expenses such as income
tax.
3. This method is easier method to obtain an idea over a project adoption compared to
IRR and NPV which is tough to calculate.
4. This method recognizes the concept of net earnings that is profit after tax and
depreciation. This is a vital factor in undertaking an investment proposal.
5. This provides an idea on the average rate of return which gives a positive or negative
idea over the cash flow for a stipulated period.
6. Compared to NPV this method provides a clear picture of profitability as profitability
has been calculated on operating profit only.
7. This method satisfies the interest of owner as this method as they are only interested
in return on investment.
Since the accounting rate of return is much easier to calculate for identifying the rate
of return this facilitates the investors to identify the average return on each period. While on
the other hand the NPV or the IRR proves to be much complicated method to identify return
over its cash flow (Mishra and Rai, 2014). The NPV identifies the present value of cash flow
and the ARR identifies the overall return on annual period and provides an overall idea
return. This helps in measuring a project return as this assumes higher the average annual
return is the higher the overall return that the project is generating. Hence unlike NPV or IRR
calculation the decision can be made just by seeing the average rate of return that the project
is generating.
Advantage of identifying Payback period:
On the other hand identifying a project profitability or the capacity to earn profit in a
quick time can only be identified through the calculation of payback period. The payback

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period helps in identifying the minimum period that a project would take to generate return or
profit or cover a portion of cost. This has been easier method for an investors to evaluate a
project as this only measures the time a project takes to earn its cost amount (Žižlavský
2014). Choosing a project become easier among the different projects as this evaluates both
the projects depending on the period a project take to earn their cost. The decision can be
taken straightaway just by measuring the period, such as lower the payback period of a
project higher the chance to adopt for the investment appraisal. Unlike NPV or IRR the
Payback period provides an exact idea over a project capacity for generating a quick return.
The NPV does not give a proper idea on the period that a project would take to recognise the
required return, However the PB provides an exact idea over the return period. Which means
it does not measures the amount that a project would generate rather this helps the investors
to identify the required time period that a project would take to generate that return through
which the cost of capital would be covered. Hence this can be said that evaluating a project is
much easier with the help of calculating the payback period as this only measures the time
that a project take to recover its cost of capital (Li 2015). The minimum a project takes time
is the high the chance to invest into the project. For instance the project identifies that the
“Blaster” takes less payback period while recovering the cost of capital investment compared
to Honddog. Therefore blaster is more profitable and generates a faster earning opportunity
(Lin et al. 2014). No other information is not required.
Task 3: Analysis Paschal Hickson’s comment
While describing a company’s capital structure this defines the money or the capital
that the company is associated with. Company’s capital structure depends on the investment
that the company is financed with (Kurshev and Strebulaev 2015). This means that the
company can have a capital structure which is fully dependent and financed by equity or fully
dependent or financed by the debt. The third category also takes into the consideration the

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combination of debt and equity finance. This means that a portion of company’s capital
structure financed by the debt and rest of the portion is financed by the equity. Hence, with
the debt finance the company become liable towards the debt holders as the debt holders are
need to be paid first. With the over financed by the debt capital or through debt instrument
such as corporate bond the company realizes a chance of becoming insolvent or bankrupt
(Baghai, Servaes and Tamayo 2014). However the debt capital facilitates the company in the
decision making process as the debt holders doesn’t have any right to take part into the
decision making process. However, with the advice of taking more debt the company can
realize a huge amount of liability into their account. This may reduce the profitability and
may harm the sustainability of the Eden PLC. However on the other hand the debt capital
helps the company to acquire more capital and along with that this gives chance to expand
further more through utilizing the capital. This also provides a support to the company’s
financial strength as this enhances the portion of total capital (Robb and Robinson 2014).
However further advantage and disadvantages have been identified below:
1. Maintain ownership: Financing through issuing bond would facilitate the company
with the decision making process as the debt holders don’t have any right to take part
into decision making process.
2. Tax deduction: The capital acquired through the issue of bond enhanced the capital
source but this doesn’t not involve any tax deduction. In this way company can
maximize the profitability through reducing the tax expenses (Sun et al. 2016).
3. Lower interest rate: Capital arrangement through the debt such as bond finance would
help the company to reduce their expenses. The means company pays less interest to
their capital resources compared to the equity share holders. This facilitates the
company to arrange money with spending less capital expenditure as the money has

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been acquired through spending less interest compared to the interest payment to the
equity share holders (Maina and Ishmail 2014).
Disadvantage
1. Repayment: The sole obligation to the debt finance is the repayment of debt. This
means the debt holder are needed to be paid first. If the debt has not been cleared, this
generates the possibility of company’s insolvency (Bradley and Roberts 2015).
2. Impact on credit rating: With the increase in the debt fund this reduces the company’s
credit rating as this gets noted into the credit report.
3. Reduction in company’s valuation: with the increase in the debt capital this reduces
the company’s value into the market. This reduces the opportunity to attract investors
(de Almeida and Eid Jr 2014).
In the case study this has been identified that the total capital has been recognized at
£8000000. Out of which the debt capital has taken a major portion of capital funding which is
at £500000. With the increase in the debt capital or bond finance the company will have to
pay more debt interest which would reduce the profitability for the company and also this
would increase the debt to equity ratio. Therefore funding more through the bond finance is
not a good option for the company (Mostafa and Boregowda 2014).
Task 4: NPV and CAPM for the risk adjusted return
This has been recognised that different discounting method has been applied to
achieve the best NPV into the project investment. With the discounting rate 14% the NPV for
the blaster came at £2733959 and at the 15% discounting rate the NPV has been achieved at
£2536817.80. However using the CAPM method the WACC capital has been acquired and
this has been used as the discount rate for achieving the best NPV for the product Blaster.
This has been resigned that the discount rate achieved using CAPM is the best rate for
achieving higher NPV of the product. At the 12.29% discount rate, the product achieves the

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NPV at £3094082.36 which is far better than rest of the NPVs achieved through different
discounting rate (Krüger, Landier and Thesmar 2015).
For the Hounddog the best NPV has been achieved at 12.29%. However with the 14%
discount rate this provides a NPV at £357482.36 and at 15% this generates NPV at
£3340039.32. Using the CAPM method the discount rate at 12.29% generates more NPV
which means using cost of capital as discount rate provides the product with the best NPV
compared to other options. Hence the discounting rate achieved through calculating the cost
of capital using CAPM method is the best possible discounted rate that the company could
have for achieving its high NPV. This proves that the CAPM is the exact method of
achieving exact cost of capital which has been implied as discount rate of the cash flow.
Along with that, with the help of achieving exact amount of cost of capital this helped
acquiring exact NPV of the product or project. Hence calculating cost of capital through
using CAPM model is the widely useful model to acquire NPV as this correctly estimates the
discount rate for NPV calculation (Žižlavský 2014). However this can be said at any
circumstance the Hounddong generates more NPV. Therefor this indicates a positive earning
possibility for the product and would generate a positive cash flow in future (Kisman et al.
2015).
Task 5: Benefit of organic and acquisition growth strategy
Organic growth benefit: The Eden PLC. Has an option off growing through optimizing the
management and internal resources. This could help them to strengthen their position with the
improvement in the core value of the company (Cai and Jiang 2017). This helps the company
to adopt changes in the marketplace and into the internal, external environment. Along with
that this facilitates the company with the choice of growth as this gives the company to
choose the rate at which the owner wants to grow their business. Instead of merging with

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other company the organic growth gives the Eden Plc. an opportunity to sell their business at
any time owner of Eden PLC. would want (Cai and Jiang 2017).
However the disadvantages into the Organc growth can be:
1. Takes long time to grow.
2. It can takes a long time to adopt big changes in the market.
3. Market size not effected by the organic growth.
4. If market don’t grow the organic growth become static and does not grow. Rather for
selling the product the company find new market place.
5. Through following organic growth business might miss out the opportunity for more
ambitious growth as this only focuses on internal growth.
Benefit of acquisition
1. The acquisition facilitates the company with the growth and expansion opportunity.
2. The company namely Eden Plc. Can acquire a new market.
3. This provides the company with the opportunity to gain more market share and gain a
strong market position.
4. With the expansion of the company this gives the company to expand the customer
base.
5. This generates more liquidity position through achieving more current assets of
acquired company(Lebedev et al. 2015 ).
Disadvantages:
1. With the acquisition the Eden plc’s activities may start conflicting with the acquired
company’s activity.
2. The cultural conflict can get generated.
3. The returns from acquisitions may not be attractive. Executed cost saving may
not materialize.