Analysis of Taylor Wimpey Plc's Product and Competitive Advantage

This report provides a financial analysis of Taylor Wimpey Plc, focusing on its competitive advantage within the real estate development sector, particularly in comparison to Bovis Homes Group Plc. The analysis includes an examination of the company's existing product, the impact of its financial performance on its competitive position, and the use of capital appraisal techniques to guide investment decisions. The report utilizes financial statements, including income statements, to assess profitability trends over a five-year period. It then applies capital budgeting methods such as Net Present Value (NPV), Internal Rate of Return (IRR), Annual Rate of Return (ARR), and payback period to evaluate whether the company should continue with its current product or discontinue it. The report concludes that despite a decrease in pre-tax profits, the company should continue investing in its existing product, emphasizing the importance of cost control to enhance profitability and maintain a competitive edge. The calculations indicate positive NPV, suggesting that the existing product is still financially viable in the long run.

Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Description of existing product of the organisation...............................................................1
Evaluation how existing product is affecting competitive advantage....................................2
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Accounting is crucial in the business so that each and every transaction can be justified in
the best possible manner. Present report deals with Taylor Wimpey Plc which is engaged in real
estate development such as house buildings and is facing competition from another company of
the same sector which is Bovis Homes Group Plc. The former organisation is facing less
competitive advantage because of effective strategies implemented by the rival firm. Moreover,
profits are reduced in the current situation. Furthermore, report deals with whether Taylor
Wimpey Plc should discontinue existing product or invest in the same for further improvement.
Thus, several capital appraisal methods such as IRR, NPV, ARR and payback period are used to
provide clarity to Chief Operating Officer to take better and effective decision for strengthening
company in a better way and attain competitive advantage.
MAIN BODY
Description of existing product of the organisation
Business provides goods and services to society to earn profits and as such, society is also
benefited by the same. Investment should be made by the company which yields maximum
return in the best possible manner. It is required that business should be able to scrutinise various
alternatives and then evaluate the same to invest in good project which inculcates the highest
return with much ease. In order to overcome the same, investment appraisal techniques can be
used to assess various options available to the business and as a result, organisation may easily
invest in better project. The investment appraisal techniques are NPV (Net Present Value), IRR
(Internal Rate of Return), ARR (Annual Rate of Return), Payback period which are utmost
required to be carried out in order to invest money in high yielding project in effective manner
(Scott, 2015).
Taylor Wimpey Plc which is the largest house building organisation situated in UK is
facing low competitive advantage from the rivals. Another company which is one of the
competitor of Taylor Wimpey Plc is Bovis Homes Group Plc. The organisation is required to
implement well-structured strategies so that it may be able to strengthen its market share and
may earn more profits to outreach Bovis Homes Group Plc in the best possible way (Constable
and Kuasirikun, 2018). Taylor Wimpey Plc is engaged in construction of houses and as such, it is
required that company should strengthen its base in order to beat competitor and attain
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competitive advantage at the earliest. Furthermore, by enlarging market share, it may be able to
earn more profits quite effectually.
Moreover, it is required to improve upon its performance in that way so that profits are
not affected up to high extent. In current situation, Taylor Wimpey Plc has attained a downfall in
the Pre-tax profits with larger margin. This is evident from the fact that 6.9 % of pre-tax profits is
fallen in the year 2017. It has been emphasised that profits have been decreased because of
economic risks prevailing in the nation. The downfall is observed as pre-tax profit in 2016 was
732.9 million in pounds while in 2017, it has declined to 682 million in pounds.
There are seven business units in the company which provides individual services in
order to attain good revenue with much ease (Libby, 2017). This is evident from the fact that
organisation provides effective services to client and achieving satisfaction level in effectual
manner. However, organisation is facing tough competition from the Bovis Homes Group Plc.
This is evident from the fact that Bovis Homes Group Plc has effective strategies which are
becoming hurdle for the growth of Taylor Wimpey Plc quite adversely. It is required that
organisation should make further improvement in its product portfolio so that it may be able to
inject growth in the best possible manner. For overcoming this, whether investment should be
made in existing units or discontinuing the same, capital appraisal techniques will be used to
analyse the situation and as a result, decision will be taken in effective manner (Costa and
Torrecchia, 2018).
Evaluation how existing product is affecting competitive advantage
Income statement for five years
Year 1 Year 2 Year 3 Year 4 Year 5
Particulars Amount Amount Amount Amount Amount
Revenue 6000000 6500000 6600000 6650000 6680000
Less: COGS 1600000 1800000 1900000 2000000 2100000
Gross profit 4400000 4700000 4700000 4650000 4580000
Operating expenses
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Salaries 600000 650000 680078 690000 700000
Rent 120000 125000 126000 136000 138000
Advertising expenses 50000 55000 56000 56700 56600
Administration expenses 980000 985000 995000 996000 998000
Electricity expenditure 900578 925900 960000 965000 966000
Bank Charges 15000 16500 17000 17500 18000
Depreciation on Furniture and
fixtures
25000 26000 27000 28000 29000
Total operating expenses 2690578 2783400 2861078 2889200 2905600
Operating income 1709422 1916600 1838922 1760800 1674400
EBT 1709422 1916600 1838922 1760800 1674400
Tax @ 10 % 170942.2 191660 183892.2 176080 167440
Net income 1538479.8 1724940 1655029.8 1584720 1506960
Calculation of Capital investment techniques
Computation of NPV
Year Cash flows Discounting factor Discounted Cash
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@ 10 Flows
0
1 1563480 0.909 1421345.455
2 1750940 0.826 1447057.851
3 1682030 0.751 1263734.035
4 1612720 0.683 1101509.46
5 1535960 0.621 953710.3154
6187357.115
Initial investment 5000000
NPV 1187357.115
Computation of Payback Period
Year Cash flows Cumulative cash flows
0
1 1563480 1563480
2 1750940 3314420
3 1682030 4996450
4 1612720 6609170
5 1535960 8145130
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Total cash flows 8145130
Initial investment 5000000
Payback period 0.613863744
Computation of IRR
IRR
Year Cash flows
0 -5000000
1 1563480
2 1750940
3 1682030
4 1612720
5 1535960
IRR 19%
Computation of ARR
ARR
Year Cash flows
0 -5000000
5

1 1563480
2 1750940
3 1682030
4 1612720
5 1535960
Average annual profit 1629026
ARR 33%
The calculation shows about the financial performance of the company. From the income
statements for the five years, it is clarified that business is earning less than it was earning
before. The expenditures are increased which is having impact on the competitive advantage of
the company (Khairi and Baridwan, 2015). Taylor Wimpey Plc requires that operational
expenses should be lower down up to high extent. This is needed so that net income may be
increased quite effectively. By reducing costs, more profits can be garnered in the best possible
manner. It is evident from the fact that revenue in year 1 was good and net income as well. But
after that, net profits in subsequent years are highly fluctuating which has a direct impact on
competitive advantage.
Furthermore, controlling on expenditures, firm may be able to achieve more profits and
as such, it can easily attain competitive advantage over Bovis Homes Group Plc in near future.
Competitive advantage means that favourable position of company which help to attain more
profits with incurring lower costs. This implies that firm is able to perform well as compared to
competitors in the market (Christensen, Lee, Walker and Zeng, 2015). Thus, by lowering
expenditures, organisation injects growth and as such, more profits are gained with much ease.
Taylor Wimpey Plc is required to accomplish advantage over its rivals as profits are marked
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lower which is not a good sign. It is essential for the company to improve upon its existing
product's portfolio so that desired profits may be accomplished quite effectually.
Investment appraisal techniques have been calculated such as NPV, ARR, IRR and
payback period to decide whether company should discontinue product or business unit or invest
in the same for improvement purpose. NPV is computed which is quite effective technique
shows about the profitability aspect of the project in the best possible manner. It is arrived by
taking difference between cash inflows and outflows for attaining clarity about the product with
much ease. NPV is advantageous to use as it is easy to calculate and as such, results can be
interpreted with much ease. It can be seen from the calculation that NPV of five year of cash
flows is 11,87,357. This is good over the initial investment or outlay of 50,00,000. This means
that company should not discontinue the existing products as in the future, profits will be
garnered (Nathanson, 2018). However, it is seen that pre-tax profit is lowered down in the
current year and as such, Taylor Wimpey Plc requires implementing well-structured strategies so
that organisation may be able to attain profits in the near future. Furthermore, NPV is good in
carrying out profitability aspect of the project as time value concept of money is used by this
investment appraisal technique. Moreover, it is helpful technique in clarifying management that
project should be approved or not. Generally, higher NPV is regarded good as company gains
profits in the coming period. Hence, NPV is effective capital investment method to take
enhanced decision regarding the project.
On the other hand, ARR is also computed as a part of identifying whether project is
profitable or its affecting competitive advantage quite adversely. It can be analysed from the
calculation of ARR that it is low. ARR is 33 % which implies that organisation has to improve
upon its existing products in order to make profits in the best possible manner. ARR provides
clarity about the return that will be generated on annual basis. It provides the way for the firm to
seek whether adequate return may be attained in the future. It can be said that ARR is easy to
calculate and provides an overview of the project that how much return will be produced
annually. Thus, it is effective capital appraisal technique imparting clarity to business before
investing in the project whether it is worthwhile to invest in the same or not.
ARR is calculated by taking average profits and then is divided by the value of initial
investment to get return with much ease. In the above computation of ARR, initial investment
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taken is 5000000 while on the other hand, cash flows of five years are totalled up and as such,
average annual profit is carried out by dividing cash flows with number of years. Furthermore,
after ascertaining the figure of average annual profit, investment is taken and as such, ARR is
taken out by dividing annual profit with initial outlay for ascertaining result in the best possible
manner (Petersen and et.al, 2018). Another essence of calculating ARR is that provides annual
percentage return which help to know about the effectiveness and attractiveness of the project
quite effectually.
On the other hand, ARR ignores time value of money concept which is one of the main
limitation of this technique. However, it can be interpreted from the above calculation that
competitive advantage of Taylor Wimpey Plc is affected by increasing number of expenses.
Thus, it is required that organisation should invest in the existing product and as such, initiate
control on costs. This will provide the company with increased profits and as a result,
competitive advantage will be comfortably gained in the future prospect with much ease.
Furthermore, it is cleared by ARR that though percentage is low, company should not opt for
discontinuation of existing services as revenue would be generated in future time period. Thus,
ARR is quite useful investment appraisal method providing concrete results about the project
(Busco and Quattrone, 2018).
Another useful capital budgeting technique is payback period. It provides that how much
time will be taken by the project to yield adequate results. This implies that payback period
imparts clarity about when the cost of the project will be covered by return on the same. Thus,
this method provides about the time that would be taken by the project. In relation to this,
acceptance criteria of payback period is quite impressive as it is recommended by the market
experts. Lower the period, organisation should invest in the project. This means that Taylor
Wimpey Plc should invest in the project by seeking that return will be generated within
stipulated time or not.
It can be seen from the above calculation of payback period that 0.62 is arrived which
means that investment will cover the cost of project and will provide returns in short period.
Furthermore, it can be interpreted that Taylor Wimpey Plc would be able to earn profits by
spending the investment of 5000000 and as such, company requires controlling its operational
expenses so that net income may be enhanced. This will in return automatically improve cash
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flows in the best possible manner. Thus, organisation will be able to gain profitability with much
ease (Schneider, 2018).
Payback period provides information in effective way as it is easy to compute and as
such, results can be drawn with much ease. Furthermore, this technique is understandable to
management and it can take decision in the best possible way. Investment appraisal technique
such as payback period provides clarity that how company can attain competitive advantage in
the market by beating rivals quite effectively. It can be seen that Taylor Wimpey Plc is facing
problems regarding its existing products and as such, it is planning whether to discontinue
services or make investment to improve the current position and earn profits. Competitive
advantage is affected as Bovis Homes Group Plc is performing well in the market and has
implemented effective and better strategies to gain competition advantage over Taylor Wimpey
Plc. Thus, in order to gain more market share, it is required that business should invest in the
project rather than transfer the amount to future savings.
Next appraisal technique is IRR which is quite effective one in making decision whether
investment should be done in the project. IRR is a discount rate which is derived by NPV that
makes all the cash flows equal to zero. This means that IRR is based on the calculation of NPV
method used to carry out the potentiality of investing in the project. This implies that IRR is
suitable technique of capital investment appraisal stating whether effective return will be
generated or not while investing in the project (Internal Rate of Return, 2018). Thus, IRR is quite
useful method to assess profitability and potentiality of the investment in the best possible
manner.
IRR is also useful as it helps to provide clarity regarding profitability aspect of the project
with much ease. It can be justified from the above calculation of investment appraisal techniques
that in order to attain competitive advantage which is affected by the rival, Taylor Wimpey Plc
should investment the amount in improving the goods and services. This is clarified by the fact
that investing in the project, business will be able to generate positive cash flows and as such, it
may be able to garner profits in the best possible manner. Moreover, organisation should also
control its expenditures so that revenue may be generated with much ease (Sardina and et.al,
2018).
Providing evaluation of financial management tool
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The financial management tool that can be applied in the organisation is that cash
management. This is effective tool which may be helpful for Taylor Wimpey Plc to inject
revenue and generate positive cash flows in the best possible manner. This is helpful
management tool as it provides more clarity to business regarding liquidity position quite
effectually. It is also recommended that financial performance may be improved as having higher
liquidity strengthens cash position of organisation. Furthermore, it also helps to strengthen
organisation efficiency in generating profitability in the best possible manner.
Cash management can be evaluated as business is empowered to carry out daily tasks in
effective way and as such, cash needs are attained with much ease. Furthermore, cash
strengthens organisation ability to meet operational tasks in effective way. Cash management is
required to be handle in the best possible manner so that usage of cash can be made to fulfil the
needs quite effectively. Managing cash in effective way help to generate positive cash flows and
as such, Taylor Wimpey Plc may be able to produce adequate returns when making investment
to strengthen existing product. This will provide efficiency to company in attaining competitive
advantage over the Bovis Homes Group Plc with much ease (Heitzman and Huang, 2018).
Cash collection should be strengthen which means that Taylor Wimpey Plc is required to
collect money from debtors whom credit sales are made. This will impart funds which can be
utilised by the company in the future course of action quite effectively. Furthermore, it is requied
that if there are lenient credit policies, then strict terms should be implemented so that timely
payment may be recovered and as such, liquidity and solvency of company may be improved.
The funds generated can be utilise by the management in paying-off money to creditors and as
such, effective solvency position can be attained in the best possible way.
Furthermore, Taylor Wimpey Plc should have effective cash management as it will
inculcate positive cash flows and as such, organisation would be able to inject revenue in
effectual manner. Furthermore, it is also required that company should collect money from
debtors within stipulated time and as a result, it will have increased cash that can be used to meet
operational needs with much ease (Nitzl, 2018). Thus, it can be evaluated that managing cash
will company to earn revenue. This will inject cash position and as such, competitive advantage
would be gained by the company. Hence, Taylor Wimpey Plc will be able to improve upon its
existing product by investing in the project and as such, it can achieve goals quite effectually.
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CONCLUSION
Hereby it can be concluded that accounting plays important role in the company in
meeting out operational tasks quite effectively. Investment appraisal techniques are useful for
providing clarity whether company should invest in the project or not. Furthermore, these
techniques imparts risk inherent with the project and as such, organisation can take effective and
enhanced decision whether investment is risky or profitable which is one of the greatest
advantage of using investment appraisal techniques while assessing attractiveness of project.
Moreover, it can be evaluated that discontinuation of existing product should not be done by the
company as it is being clarified by calculating investment appraisal techniques that improvement
can be done by investing in existing product. Thus, company will be able to attain competitive
advantage over its rival and as such, more profits may be garnered by attaining positive cash
flows quite easily.
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