BTEC – HND Level 5 ,EdexcelName:Waqar MunirCity Of London CollegeModule: Managing Financial Resources and Decisions

INTRODUCTION

Introduction of BURGER KING Corporation BURGER KING Corporation is the world's largest chain of hamburger fast food restaurants, serving nearly 47 million customers daily. At one time it was the largest global restaurant chain, but it has since been surpassed by multi-brand operator BURGER KING Corporations (KFC, Taco Bell and others) and sandwich chain Subway.

In addition to its signature restaurant chain, BURGER KING Corporation held a minority interest in Pret A Manger until 2008, and owned the Chipotle Mexican Grill until 2006 and the restaurant chain Boston Market until 2007. The company has also expanded the BURGER KING menu in recent decades to include alternative meal options, such as salads and snack wraps, in order to capitalize on growing consumer interest in health and wellness.

Each BURGER KING restaurant is operated by a franchisee, an affiliate, or the corporation itself. The corporations' revenues come from the rent, royalties and fees paid by the franchisees, as well as sales in company-operated restaurants. BURGER KING revenues grew 27% over the three years ending in 2007 to $22.8 billion, and 9% growth in operating income to $3.9 billion.

BURGER KING primarily sells hamburgers, cheeseburgers, chicken products, French fries, breakfast items, soft drinks, milkshakes, and desserts. In response to obesity trends in western nations and in the face of criticism over the healthiness of its products, the company has modified its menu to include such healthier alternatives as salads, wraps and fruit.

History of BURGER KING CorporationsThe business began in 1940, with a restaurant opened by brothers Dick

and Mac McDonald in San Bernardino, California. Their introduction of the "Speedee Service System" in 1948 established the principles of the modern fast-food restaurant. The original mascot of BURGER KING was a man with a

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chef's hat on top of a hamburger shaped head whose name was "Speedee." Speedee was eventually replaced with Ronald McDonald in 1963.

The first BURGER KING restaurants opened in the United States, Canada, Costa Rica, Japan, the Netherlands, Germany, Australia, France, El Salvador and Sweden in order of openings.

The present corporation dates its founding to the opening of a franchised restaurant by Ray Kroc, in Des Plaines, Illinois on April 15, 1955 , the ninth BURGER KING restaurant overall. Kroc later purchased the McDonald brothers' equity in the company and led its worldwide expansion and the company became listed on the public stock markets in 1965. Kroc was also noted for aggressive business practices, compelling the McDonald brothers to leave the fast food industry. The McDonald brothers and Kroc feuded over control of the business, as documented in both Kroc's autobiography and in the McDonald brothers' autobiography. The site of the McDonald brothers' original restaurant is now a monument.

With the expansion of BURGER KING into many international markets, the company has become a symbol of globalization and the spread of the American way of life. Its prominence has also made it a frequent topic of public debates about obesity, corporate ethics and consumer responsibility.

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Task 11.1Introduction of Finance

Businesses need money. They need money in the short-term to pay their bills and to pay their staff, but they also need money in the long-term to be able to invest and develop the business. Clearly, banks are one of the key sources of finance and we look in this section at how the banks can help to provide finance and also at some of the other sources available. We also look at investment and see what businesses should be looking at to help them judge whether an investment is worthwhile.Follow the links below to the area you would like to look at in more detail:

Sources of finance - in this section we look at where businesses can get their money from. How can the banks help with the different needs of businesses and what other sources of finance may be available?

Investment - in this section we look at investment appraisal. A business can choose between different investment proposals. Criteria should use and methods.

1.2 Source of finance: Businesses essentially need finance for the short-term and the long-term. The way in which they may raise these funds will differ a great deal and in this section we start to look at the different sources and what area of business activity they may be useful for.

Two key sources of finance are internal sources and external sources. 'Internal sources' refers to money they can raise from within the firm. This may include profit, or perhaps better management of existing resources. External sources mean raising money from outside the firm. In many cases this will mean turning to the banks, but it may also be that the firm tries to issue more shares on the stock market or perhaps sells debentures to raise money.

CONSOLIDATED STATEMENT OF INCOMEDollars in millions, except per share data

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CONSOLIDATED BALANCE SHEETDollars in millions

Particulars 2008 2007ASSETSCurrent assetsCash and equivalents $ 2063 $ 1981Accounts and notes receivable 931 1054Inventories, at cost, not in excess of market 112 125Prepaid expenses and other current assets 412 422Total current assets 3518 3582Other assetsInvestments in and advances to affiliates 1222 1156

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Particulars 2008 2007

REVENUECompany-operated sales $16561 $16611Franchised revenues 6961 6176Total revenues 23522 22787OPERATING COSTS AND EXPENSESCompany-operated restaurant expensesFood & paper 5586 5487Payroll & employee benefits 4300 4332Occupancy & other operating expenses 3767 3923Franchised restaurants–occupancy expenses 1230 1139Selling, general & administrative expenses 2356 2367Impairment and other charges, net 6 1670Other operating (income) expense, net (165) (11)Total operating costs and expenses 17080 18908Operating income 6443 3879Interest expense–net of capitalized interest of $12.3, $6.9 and $5.4

523 410

Non-operating (income) expense, net (76) (103)Gain on sale of investment (160)Income from continuing operations before provision for income taxes

6158 3572

Provision for income taxes 1845 1237Income from continuing operations 4313 2335Net income 4313 2395

Goodwill 2237 2301Miscellaneous 1230 1367Total other assets 4689 4825Property and equipmentProperty and equipment, at cost 31152 32204Accumulated depreciation and amortization (10898) (11219)Net property and equipment 20255 20985Total assets $28462 $29392LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesNotes payable - $ 1127Accounts payable $ 620 624Other taxes 253 248Accrued interest 174 148Accrued payroll and other liabilities 1459 1487Current maturities of long-term debt 32 865Total current liabilities 2538 4499Long-term debt 10186 7310Other long-term liabilities 1410 1343Deferred income taxes 945 961Preferred stock, no par value;authorized – 165.0 million shares; issued – noneCommon stock, $.01 par value;authorized – 3.5 billion shares; issued – 1,660.6 million shares

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Additional paid-in capital 4600 4228Retained earnings 28954 26462Accumulated other comprehensive income 101 1337Common stock in treasury, at cost; 545.3 and 495.3 million shares

(20289) (16762)

Total shareholders’ equity 13383 15280Total liabilities and shareholders’ equity $28462 $29392

CONSOLIDATED STATEMENT OF CASH FLOWSDollars in millions

Particulars 2008 2007Operating activitiesNet income $4313 $ 2395

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Adjustments to reconcile to cash provided by operations Charges and credits:Depreciation and amortization 1208 1214Deferred income taxes 102 (39)Income taxes audit benefit (316)Impairment and other charges, net 6 1670Gain on sale of investment (160)Gains on dispositions of discontinued operations, net of tax

(69)

Share-based compensation 113 142Other 91 (85)

Changes in working capital items:Accounts receivable 16 (100)Inventories, prepaid expenses and other current assets (11) (30)Accounts payable (40) (37)Income taxes 1956 72Other accrued liabilities 85 59Cash provided by operations 5917 4876 Investing activitiesProperty and equipment expenditures (2136) (1947)Purchases of restaurant businesses (147) (229)Sales of restaurant businesses and property 479 365Latam transaction, net 648Proceeds on sale of investment 229Proceeds from disposals of discontinued operations, net 194Other (50) (181)Cash used for investing activities (1625) (1150)

Financing activitiesNet short-term borrowings 267 101Long-term financing issuances 3478 2117Long-term financing repayments (2699) (1646)Treasury stock purchases (3919) (3943)Common stock dividends (1823) (1766)Proceeds from stock option exercises 548 1138Excess tax benefit on share-based compensation 124 204Other (90) (202)Cash used for financing activities (4115) (3996)

Effect of exchange rates on cash and equivalents (96) 123

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Cash and equivalents increase (decrease ) 82 (147)Cash and equivalents at beginning of year 1981 2128Cash and equivalents at end of year $2064 $ 1981

Supplemental cash flow disclosuresInterest paid $ 508 $ 393Income taxes paid 1295 1436

1.3 Implication of different financial sources

1.3.1 Long term such as share capital- Ordinary shares is also known as equity shares and they are the most common form of share in the UK. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.Advantages:

Dividends are only pay if organization getting profit. Considered less risky when you have rather than debt.

Disadvantages: Organization is getting high profit so have to pay high dividends.

1.3.2 Retained profit: This is often a very difficult idea to understand but, in reality, it is very simple. When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that are kept and not spent retained profits. That's all. In the BURGER KING’ Corporations Retained profit is $28954 in 2008 and $26462 in 2007. It seems that retained earnings decreased in 2007 than 2008. Advantages:

No obligation to pay, Dividends pay back, Don’t loss control, Ownership doesn’t dilute.

Disadvantages: Have to pay higher amount of dividend because retain profit is owned by

shareholders

1.3.3 Loans: The term debenture is a strictly legal term but there are other forms of loan or loan stock. A loan is for a fixed amount with a fixed repayment schedule and may appear on a balance sheet with a specific name telling the reader exactly what the loan is and its main details.

Short-terms loans, long-term loans Have to pay the interest.

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Need to regulate the period interest of loan can be high when organization getting profit but when organization is not getting profit, it’ll be expansive.

Need to offer assets or property for the security purpose.

1.3.4 Working capital stock control: This is the short-term capital or finance that a business keeps. Working capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. Working capital is defined as:

Working capital = current assets - current liabilitiesWhere:current assets are short term sources of finance such as stocks, debtors and cash - the amount of cash and cash equivalents - the business has at any one time. Cash is cash in hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short term and highly liquid investments which are easily and immediately convertible into cash. current liabilities are short term requirements for cash including trade creditors, expense creditors, tax owing, dividends owing - the amount of money the business owes to other people/groups/businesses at any one time that needs to be repaid within the next month or so.

1.3.5 Bank overdraft: BURGER KING Corporations companies have the need for external finance but not necessarily on a long-term basis. A company might have small cash flow problems from time to time but such problems don't call for the need for a formal long-term loan. Under these circumstances, a company will often go to its bank and arrange an overdraft. Contrast the effects of an overdraft with the effects of a loan:Advantages:

A pre- arrangement- agreement that you can withdraw in access of what you have and available immediately.Disadvantages:

Amount is not high, if need high amount not enough and get high interest and time period is short.

1.3.6 Leasing: Source of finance can be use when you want to use fixed assets or purchase

operation lease: don’t need of ownership and its routinely have to pay payment

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Financing lease: get ownership, have responsibility to maintain, and can sale anytime.

1.3.7 Hire Purchase: Hire Purchase is a method of acquiring assets without having to invest the full amount in buying them. Typically, a hire purchase agreement allows the hire purchaser sole use of an asset for a period after which they have the right to buy them, often for a small or nominal amount. The benefit of this system is that companies gain immediate use of the asset without having to pay a large amount for it or without having to borrow a large amount.

1.3.8 Sale of Assets:Business balance sheets usually have several fixed assets on them. A fixed asset is anything that is not used up in the production of the good or service concerned - land, buildings, fixtures and fittings, machinery, vehicles and so on. At times, one or more of these fixed assets may be surplus to requirements and can be sold.

Alternatively, a business may desperately need to find some cash so it decides to stop offering certain products or services and because of that can sell some of its fixed assets. Hence, by selling fixed assets, business can use them as a source of finance. Selling its fixed assets, therefore, has an effect on the potential capacity of the business - the amount it can produce.

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Task 2

2.1 Assessment and comparison of the cost of different source of financeFinance costs: tangible costs

Interest: Interest expense for 2008 increased primarily due to higher average debt levels, and to a lesser extent, higher average interest rates. Interest expense for 2007 increased primarily due to higher average interest rates and stronger foreign currencies, partly offset by lower average debt levels.

Non-operating (income) expense, netIn millions 2008 2007 Interest income $(85) $(124) Translation and hedging activity (5) 1 Other expense 12 20 Total $(78) $(103)

Interest income consists primarily of interest earned on short-term cash investments. Translation and hedging activity primarily relates to net gains or losses on certain hedges that reduce the exposure to variability on certain intercompany foreign cash flow streams. Other expense primarily consists of gains or losses on early extinguishment of debt and minority interest. Interest income decreased for 2008 primarily due to lower average interest rates and average cash balances, while 2007 decreased primarily due to lower average cash balances.Dividends: The Company has paid dividends on its common stock for 33 consecutive years and has increased the dividend amount every year. The Company’s Board of Directors decided that beginning in 2008, dividends declared will be paid on a quarterly basis, at the Board’s discretion. The 2008 full year dividend of $1.625 per share reflects the quarterly dividend paid for each of the first three quarters of $0.375 per share, with an increase to $0.50 per share paid in the fourth quarter. This 33% increase in the quarterly dividend equates to a $2.00 per share annual dividend rate and reflects the Company’s confidence in the ongoing strength and reliability of its cash flow. As in the past, future dividend amounts will be considered after reviewing profitability expectations and financing needs.

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Opportunity costs e.g. loss of alternative projects when using retained earnings; tax effects. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2.2 Importance of financial planningFinancial planning is important because it assures that you have a

financial plan for your future. Some people hate planning but it is always good to prepare yourself financially. As we age, expenses tend to increase...from kids who want toys, to teens who want to support the party lifestyle to being an adult, buying a home, a car, getting married....up until the day we die by planning our funerals. Unexpected things happen all the time - so being financially ready for it makes like much easier. People who don't financially plan often find themselves living from paycheck to paycheck or struggling to come up with money when something does unexpectedly occur. Not to worry though, usually those who don't have financial plans can easily create one even to get themselves out of debt. Plans included everything from fixed and variable cost to saving for vacations etc :)

2.3 Financial planning and decision making of BURGER KING Corporation

BURGER KING Corporation Company’s Budget for cash planning and control that presents expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding idle cash and possible cash shortages. The cash budget typically consists of four major sections:

In Receipts section, the beginning cash balance is $1981.3, cash collections from customers, and other receipts;

Disbursement section comprised of all cash payments made by Net Cash Provided by Operating Activities is $59170.2, Net cash used in investing activities is $1624.7 gain, so cash in investing is gaining but cash in operating is bearing loss so manager must consider in cash in operating. Net Cash Used in Financing Activities is $4114.5 gained, so organization must go on.

Cash deficit section showing the difference between cash receipts and cash payments i.e. Net increase in Cash and Cash Equivalents is $82.1 in 2008.

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Financing section providing a detailed account of the net short-term borrowings is $266.7 and repayments of Net long-term debt are $2698.5 expected during 2008.

Task 33.1Purpose of the main financial statement of BURGER KING CorporationFinancial statements may be used by company for different purposes:

Organization requires financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures

Employees also need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.

Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.

Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.

3.2 Differences between 2008 and 2007 of the BURGER KING Corporation:

The Company generates significant cash from its operations and has substantial credit availability and capacity to fund operating and discretionary spending such as capital expenditures, debt repayments, dividends and share repurchases.

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Cash provided by operations totaled $5.9 billion and exceeded capital expenditures by $3.8 billion in 2008, while cash provided by operations totaled $4.9 billion and exceeded capital expenditures by $2.9 billion in 2007. In 2008, cash provided by operations increased $1.0 billion or 21% compared to 2007 primarily due to increased operating results and changes in working capital, partly due to lower income tax payments and the receipt of $143 million related to an IRS examination completed in 2007. In 2007, cash provided by operations increased $535 million compared to 2006 primarily due to increased operating results and lower income tax payments. Cash used for investing activities totaled $1.6 billion in 2008, an increase of $475 million compared with 2007. Proceeds from certain asset sales were lower in 2008 (Pret A Manger) than 2007 (Latam and Boston Market). In addition, capital expenditures increased $189 million in 2008, primarily driven by increases in Europe and APMEA, partly offset by the elimination of capital expenditures as a result of the Latam transaction. The increase in cash used for investing activities was partly offset by higher proceeds from the sales of restaurant businesses and property and lower expenditures on purchases of restaurant businesses in conjunction with our overall refranchising strategy. Cash used for investing activities totaled $1.2 billion in 2007, primarily due to net proceeds received from the Latam transaction and the sale of Boston Market in 2007, partly offset by higher capital expenditures. Cash used for financing activities totaled $4.1 billion in 2008, an increase of $118 million compared with 2007. Financing activities in 2008 reflected lower proceeds from stock option exercises, mostly offset by higher net debt issuances. In 2007, cash used for financing activities totaled $4.0 billion, primarily due to higher net debt issuances, partly offset by higher treasury stock purchases and an increase in the common stock dividend.

As a result of the above activity, the Company’s cash and equivalents balance increased $82 million in 2008 to $2.1 billion, compared with a decrease of $147 million in 2007. In addition to cash and equivalents on hand and cash provided by operations, the Company can meet short-term funding needs through its continued access to commercial paper borrowings and line of credit agreements.3.3 Financial statements analyzed using appropriate ratio 3.3.1financial ratio analysis with internal comparisons:

1st year means 2007 and 2nd year means 2008

Net working capital = Current Assets - Current liabilities1st In 2007 = 3582 – 4499 = (917) 2nd In 2008 = 3518 – 2538 = 980

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Liquidities ration=

SalesTotal Asset-Current liabilities

1st “ =16611/(29392-4499)=0.67:1 2nd =16561/ (28462-2538) =0.64:1

Current Ratio =

Current AssetsCurrent Liabilities

In 1st “ =3582/4499 = 0.80:1In 2nd “ =3518/2538 = 1.38:1

Here appears current asset more than previous year more than 1

Quick Ratio =

Current Assets-StockCurrent Liabilities

In 1st “ =3582-125/4499 = 0.77:1In 2nd “ =3518-112/2538 = 1.34:1

Net working capital is negative, Current ratio and Quick ratio are less and liquidity ratio is greater than one in both years. So, Current Asset is less than Current liabilities. So company must increase Current Asset like cash, stock, receivables and must decrease liabilities like account payable.

Inventory Turnover=

Cost of Good soldAverage Inventory

Or =

food & paper+payroll &employee benefits+OccupancyAverage Inventory

1st = (5487+4332+3923)/ (135+125)/2=105.71 times per year2nd = (5586+4300+3767)/ (125+112)/2=115.22 ” ”

Average Age of Inventory=

360Inventory Turnover

1st =360/105.71=3.41=4 no. of days2nd =360/115.22=3.12=4 ” ”

Total Asset Turnover=

Net SalesAverage Total Assets

1st =22787/ (29392+30254)/2=0.76 times per year

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2nd =23522/ (28462+29392)/2=0.81 ” ”In this company there are no credit sales so no Account receivable turnover. Company must come with new strategies to improve the sales more effective. Stock holding period is good timing

Debt ratio=

Total DebtTotal Assets

1st =(6445)/29392=0.22:12nd =(10154)/28462=0.36:1Debt ratio of both years is less than 1 indicates that a company has more assets than debt. Used in conjunction with other measures of financial health, the debt ratio can help investors determine a company's level of risk.

Time interest Earned=

Earnings Before Interest & taxesInterest Expense

1st =3879/410=9.462nd =6443/523=12.32

No credit sale on this company.Stockholders' equity is often referred to as the book value of the company. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.

Gross Profit Margin=

Gross ProfitNet Sales

(Gross profit=Net sales- cost of sales)1st =9045×100%/22787=39.69%2nd =9870×100%/23523=41.96%

Net Profit Margin=

Net IncomeNet Sales

1st =2395/22787=10.51%2nd =4313/23523=18.34%Looking at the earnings of a company often doesn't tell the entire story. Increased earnings are good, but an increase does not mean that the profit margin of a company is improving. For instance, if a company has costs that

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have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control

Return on Total Assets=

Net IncomeAverage Total Assets

1st =2395/29823=8.03%2nd =4313/28927=14.91%

Return on Common Equity=

Net IncomeShareholders' Equity

1st =2395/15280=15.67%2nd =4313/13383=32.23%

Return on capital employed=

Net ProfitCapital employed

1st =3879/(865+7310)=47.45 %2nd =6443/(32+10186)= 63.06%

(Capital employed=average debt liabilities + average shareholders’ equity)The return on capital employed is an important measure of a company's profitability. Many investment analysts think that factoring debt into a company's total capital provides a more comprehensive evaluation of how well management is using the debt and equity it has at its disposal. Investors would be well served by focusing on ROCE as a key, if not the key, factor to gauge a company's profitability. An ROCE ratio, as a very general rule of thumb, should be at or above a company’s average borrowing rate.

Debt Capital to Total Capital (Gearing Ratio) =

Debt CapitalTotal Capital

1st =7310/29392=24.87%2nd =10186/28462=35.79%

Debt Capital to Equity Capital=

Debt CapitalEquity Capital

1st =7310/15280=47.84%2nd =10186/13383=76.11%

A company with high gearing (high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. A greater proportion of equity provides a cushion and is seen as a measure of financial strength

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Earnings per share=

Net Profit after Interest & TaxNo of Share

1st =2395/1660.6=$1.44 per Share2d =4313/1660.6=$2.60 ” ”

Dividend cover=

Net Profit after Interest & TaxTotal Dividend

1st =2395/1766=1.36 of times2nd =4313/1823=2.37 no. of times

Dividend per share=

Total DividendNo of Share

1st =1766/1660.6=$1.06 per dividend2nd =1823/1660.6=$1.1 ” ”

Dividend Yield=

Dividend per shareMarket price per share

1st =1.06 /1.44=73.61%2nd =1.1/2.6=42.31%

Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable dividend yields.

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Task 4

(A)

The company have currency difference in its financial statements as the profit& loss is in £ and the cash flow is in $ which can make the figures complicated and not effective to make good decisions.

There is 30 days difference in trade receivable and payables as a result Company will have cash flow problems as after paying its creditors they will have little cash left for day to day operations.

The opening cash balance is negative in January which highlights that the company is facing cash flow problems from last year. The other payments include with payments early to creditors is creating a cash flow problem.

The company should improve its cash flow structure by collecting their debts early and paying their creditors late, which will have a significant impact on its working capital as they will not need to raise external finance or borrow loans overall reducing their finance cost.(B)(i)Jan to June, 2009 Fixed costAdministrative cost Total Fixed cost=3000, 000Variable cost

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Trade payables, salaries and wages, variable overheads, sales and distribution cost.Total Variable cost=23965, 000Number of units= 590,000Total cost =fixed cost +variable costFixed cost per unit= fixed cost/units.Variable cost per unit=variable cost/units.Fixed cost3000, 000/590,000 =5.084 per unit.

Variable cost23965000/590000= 40.61 per unit.Total cost per unit =fixed cost + variable cost / units

Total cost per unit =3000, 000 +23965000/590,000 = 45.70 per unit

(ii) £’000As sales will increase by 20 %. (590 x20/100)Sales =590 +118=708Cost of sales will also increase by 20%. (24314 x20/100)

Cost of sales = 24,314 +4862.8= 29176.8010% cut from the current selling price of £60.40 = £54.36 £’000Sales (708 x 54.36) 38486.88Cost of sales (29176.8)Gross profit 9310.08

The decision should not be taken as we sell 590(‘000) units at the selling price of £64.40 which gives us sale of £35,636 and eventually gross profit of £11,322.

As we reduce the price per unit from £60.40 to £54.36(10% discount) no doubt our sales has increased but our cost of sales has also increased to £29176.8 which is reducing the gross profit to £9310.08.As the figures show it will not be a good decision to reduce the selling price This decision will also increase the production, labour cost.

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(C) I will be assessing project A and project CThe methods which will be used to assess the viability of the above two projects are;

NET PRESENT VALUE DISCOUNT PAYBACK PERIOD

NET PRESENT VALUE (PROJECT A, STEEL)YEAR CASH FLOW

£DISCOUNT FACTORS

15%PRESENT VALUE

£0 (2000,000) (2000,000)1 400,000 0.870 348,0002 700,000 0.756 529,2003 900,000 0.658 592,2004 600,000 0.572 343,2005 400,000 0.497 198,8006 300,000 0.432 129,600

Total cash inflows= 2141,000 (Cash inflows- cash outflows) 2141000- 2000000 = 141,000 Net present value

The net present value of project A is positive.DISCOUNT PAYBACK PERIOD

YEAR CASH FLOWS£

DISCOUNT FACTORS 15%

PRESENT VALUE

CUMMALTIVE NPV

0 (2000,000) (2000,000)1 400,000 0.870 348,000 (165,2000)2 700,000 0.756 529,200 (1122,800)3 900,000 0.658 592,200 (530,600)4 600,000 0.572 343,200 (187,400)5 400,000 0.497 198,800 11,4006 300,000 0.432 129,600 141,000

Calculation of payback period187,400/11,400+187400 x 12 = 11 monthsThe total payback period of the project A is 4 years and 11 months

NET PRESENT VALUE (PROJECT C, PLASTIC)YEAR Cash flows Discount factors

15%Present values

0 (2000,000) (2000,000)1 300,000 0.870 261,000

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2 500,000 0.756 378,0003 700,000 0.658 460,6004 1000,000 0.572 572,0005 800,000 0.497 397,6006 500,000 0.432 21,6000

Total cash inflows =2285, 200 - 2000,000 =285,200 net present valueThe net present value is positive.

Discount payback periodYEAR CASH FLOWS

£DISCOUNT FACTORS 15%

PRESENT VALUE

CUMMALTIVE NPV

0 (2000,000) (2000,000)1 300,000 0.870 261,000 (173,9000)2 500,000 0.756 378,000 (136,1000)3 700,000 0.658 460,600 (900,400)4 1000,000 0.572 572,000 (328,400)5 800,000 0.497 397,600 69,2006 500,000 0.432 21,6000 285,200

Calculations of discount payback period328,400/69,200+328,400 x12 =10 months

The total payback period of project C is 4 years and 10 months.After comparing by different appraisal methods project C is more suitable to invest because the return on investment is higher than project A. The payback period is same but the return on investment is higher.NET PRESENT VALUEAdvantagesInterest rates and timing in cash flows can be identified Effortlessly Comparing the returns from different investment options. The opportunity cost of investment is taken into account. This means that the investment decision is based not simply on the net cash flows but on the interest foregone by not depositing the money in the bank.Disadvantages

If a computer cannot be used then this method may be time consuming NVP does not provide an accurate means of comparison if the initial

outlay on projects is significantly different.

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The future rate of interest is possibly to vary changeably (because the NVP is calculated by the interest rate). This makes comparison and calculation tremendously tricky and doubtful

Discount payback methodAdvantages

it is simple to calculate the managerial mistakes are limited It is generally a good tool for approximation to evaluate an investment.

Disadvantages

The time value of money is completely ignored The payback rule also fails to consider any risk differences between

various investment opportunities.

References

http://www.businessdictionary.com/definition/average-total-assets.html http://www.financialmodelingguide.com/financial-ratios/financial-ratios/ http://www.google.co.uk/ http://www.bized.co.uk/current/research/2003_04/010304.htm http://wiki.answers.com/ http://www.investopedia.com/terms/ http://www.hnc-business.co.uk/unit02_1.html http://investors.BURGER KING.com/phoenix.zhtml?c=117941&p=irol-

newsEarnings www.M&Scoporate.com www.M&S.co.uk www.moneyterms.co.uk www.bized.co.uk www.accaglobal.com www.aat.com www.google.com Financial times newspaper CLC notes

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BIBLIOGRAPHY Francis, Jack Clark, 1986: "Investment Analysis and Management",

McGraw-Hill Publication Pandey, I.M. 1995: "Financial Management", New Delhi: Vikas

Publishing House Pvt. Ltd. Pradhan, Surendra, "Basics of Financial Management" Educational

Enterprise Pvt. Ltd., Kathmandu, P-250 Van Horne, James C. 1997:" Financial Management and Policy", New

Delhi: Prentice Hall of India Pvt. Ltd. Van Horne, James C. 1998:" Financial Management and Policy", New

Delhi: Prentice Hall of India Pvt. Ltd. Weston, J. F. and Copeland, T. E. 1989:"Managerial Finance", New

York: Holt Saunders, International Editors Weston, J. Fred and Eugene F. Brigham, "Essentials of Managerial

Finance" 9th ed., The Dryden Press, Chicago. P-123-127

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