BTEC HND Level 5 ,Edexcel

Name:Waqar Munir
City Of London College
Module: 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 multibrand 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 Corporations
The 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 fastfood 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 1
1.1Introduction 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 INCOME
Dollars in millions, except per share data

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Particulars
REVENUE
Company-operated sales
Franchised revenues
Total revenues
OPERATING COSTS AND EXPENSES
Company-operated restaurant expenses
Food & paper
Payroll & employee benefits
Occupancy & other operating expenses
Franchised restaurantsoccupancy expenses
Selling, general & administrative expenses
Impairment and other charges, net
Other operating (income) expense, net
Total operating costs and expenses
Operating income
Interest expensenet of capitalized interest of $12.3,
$6.9 and $5.4
Non-operating (income) expense, net
Gain on sale of investment
Income from continuing operations before
provision for income taxes
Provision for income taxes
Income from continuing operations
Net income

2008

2007

$16561
6961
23522

$16611
6176
22787

5586
4300
3767
1230
2356
6
(165)
17080
6443

5487
4332
3923
1139
2367
1670
(11)
18908
3879

523

410

(76)
(160)

(103)

6158

3572

1845
4313
4313

1237
2335
2395

CONSOLIDATED BALANCE SHEET

Dollars in millions
Particulars
ASSETS
Current assets
Cash and equivalents
Accounts and notes receivable
Inventories, at cost, not in excess of market
Prepaid expenses and other current assets
Total current assets
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2008

2007

$ 2063
931
112
412
3518

$ 1981
1054
125
422
3582

Other assets
Investments in and advances to affiliates
Goodwill
Miscellaneous
Total other assets
Property and equipment
Property and equipment, at cost
Accumulated depreciation and amortization
Net property and equipment
Total assets
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Notes payable
Accounts payable
Other taxes
Accrued interest
Accrued payroll and other liabilities
Current maturities of long-term debt
Total current liabilities
Long-term debt
Other long-term liabilities
Deferred income taxes
Preferred stock, no par value;
authorized 165.0 million shares; issued none
Common stock, $.01 par value;
authorized 3.5 billion shares; issued 1,660.6 million
shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Common stock in treasury, at cost; 545.3 and 495.3
million shares
Total shareholders equity
Total liabilities and shareholders equity

1222
2237
1230
4689

1156
2301
1367
4825

31152
(10898)
20255
$28462

32204
(11219)
20985
$29392

$ 620
253
174
1459
32
2538
10186
1410
945
17

$ 1127
624
248
148
1487
865
4499
7310
1343
961
17

4600
28954
101
(20289)

4228
26462
1337
(16762)

13383
$28462

15280
$29392

CONSOLIDATED STATEMENT OF CASH FLOWS

Dollars in millions
Particulars
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2008

2007

Operating activities
Net income
Adjustments to reconcile to cash provided by
operations
Charges and credits:
Depreciation and amortization
Deferred income taxes
Income taxes audit benefit
Impairment and other charges, net
Gain on sale of investment
Gains on dispositions of discontinued operations, net of
tax
Share-based compensation
Other
Changes in working capital items:
Accounts receivable
Inventories, prepaid expenses and other current assets
Accounts payable
Income taxes
Other accrued liabilities
Cash provided by operations
Investing activities
Property and equipment expenditures
Purchases of restaurant businesses
Sales of restaurant businesses and property
Latam transaction, net
Proceeds on sale of investment
Proceeds from disposals of discontinued operations, net
Other
Cash used for investing activities
Financing activities
Net short-term borrowings
Long-term financing issuances
Long-term financing repayments
Treasury stock purchases
Common stock dividends
Proceeds from stock option exercises
Excess tax benefit on share-based compensation
Other
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$4313

$ 2395

1208
102

1214
(39)
(316)
1670

6
(160)

(69)
113
91

142
(85)

16
(11)
(40)
1956
85
5917

(100)
(30)
(37)
72
59
4876

(2136)
(147)
479

(1947)
(229)
365
648

229
(50)
(1625)

194
(181)
(1150)

267
3478
(2699)
(3919)
(1823)
548
124
(90)

101
2117
(1646)
(3943)
(1766)
1138
204
(202)

Cash used for financing activities

Effect of exchange rates on cash and equivalents
Cash and equivalents increase (decrease )
Cash and equivalents at beginning of year
Cash and equivalents at end of year
Supplemental cash flow disclosures
Interest paid
Income taxes paid

(4115)
(96)
82
1981
$2064

(3996)
123
(147)
2128
$ 1981

$ 508
1295

$ 393
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,
Dont loss control,
Ownership doesnt 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.
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 Short-terms loans, long-term loans

Have to pay the interest.
Need to regulate the period interest of loan can be high when
organization getting profit but when organization is not getting profit,
itll 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 liabilities
Where:
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
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 operation lease: dont need of ownership and its routinely have to pay
payment
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 finance
Finance 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, net
In 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
Companys Board of Directors decided that beginning in 2008, dividends
declared will be paid on a quarterly basis, at the Boards 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 Companys
confidence in the ongoing strength and reliability of its cash flow. As in the
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past, future dividend amounts will be considered after reviewing profitability

expectations and financing needs.
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 planning
Financial 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 Companys 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 3
3.1Purpose of the main financial statement of BURGER KING
Corporation
Financial 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 Companys 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 liabilities
1st In 2007 = 3582 4499 = (917)
2nd In 2008 = 3518 2538 = 980
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Liquidities ration=
1st
2nd

Sales
Total Asset - Current liabilitie s

=16611/(29392-4499)=0.67:1
=16561/ (28462-2538) =0.64:1

Current Ratio =

Current Assets
Current Liabilitie s

In 1st
=3582/4499 = 0.80:1
nd
In 2
=3518/2538 = 1.38:1
Here appears current asset more than previous year more than 1

Current Assets - Stock

Quick Ratio =
Current Liabilitie s
In 1st
In 2nd

=3582-125/4499 = 0.77:1
=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.

Cost of Good sold

Inventory Turnover=
Average Inventory
food & paper payroll & employee benefits Occupancy
Or =
Average Inventory
1st
2nd

= (5487+4332+3923)/ (135+125)/2=105.71 times per year

= (5586+4300+3767)/ (125+112)/2=115.22

Average Age of Inventory=

360
Inventory Turnover

1st
2nd

=360/105.71=3.41=4 no. of days

=360/115.22=3.12=4

Total Asset Turnover=

Net Sales
Average Total Assets

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

=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

Total Debt
Debt ratio=
Total Assets
1st
=(6445)/29392=0.22:1
nd
2
=(10154)/28462=0.36:1
Debt 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=

1st
2nd

Earnings Before Interest & taxes

Interest Expense

=3879/410=9.46
=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
Gross Profit Margin=
Net Sales (Gross profit=Net sales- cost of sales)
1st
2nd

=9045100%/22787=39.69%
=9870100%/23523=41.96%

Net Income
Net Profit Margin=
Net Sales
1st
=2395/22787=10.51%
nd
2
=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
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

Net Income
Return on Total Assets=
Average Total Assets
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1st
2nd

=2395/29823=8.03%
=4313/28927=14.91%

Net Income
Return on Common Equity=
Shareholders' Equity
1st
2nd

=2395/15280=15.67%
=4313/13383=32.23%

Return on capital employed=

Net Profit
Capital employed

1st
=3879/(865+7310)=47.45 %
nd
2
=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 companys average borrowing rate.
Debt Capital to Total Capital (Gearing Ratio) =
1st
2nd

Debt Capital
Total Capital

=7310/29392=24.87%
=10186/28462=35.79%

Debt Capital
Debt Capital to Equity Capital=
Equity Capital
1st
=7310/15280=47.84%
nd
2
=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
Earnings per share=
1st
2d
Dividend cover=
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Net Profit after Interest& Tax

No of Share

=2395/1660.6=$1.44 per Share

=4313/1660.6=$2.60

Net Profit after Interest& Tax

Total Dividend

1st
2nd

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

Total Dividend
Dividend per share=
No of Share
1st
2nd

=1766/1660.6=$1.06 per dividend

=1823/1660.6=$1.1

Dividend per share

Dividend Yield=
Market price per share
1st
=1.06 /1.44=73.61%
nd
2
=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 cost
Administrative cost
Total Fixed cost=3000, 000
Variable cost
Trade payables, salaries and wages, variable overheads, sales and distribution
cost.
Total Variable cost=23965, 000
Number of units= 590,000
Total cost =fixed cost +variable cost
Fixed cost per unit= fixed cost/units.
Variable cost per unit=variable cost/units.
Fixed cost
3000, 000/590,000 =5.084 per unit.

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Variable cost
23965000/590000= 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)
000
As sales will increase by 20 %. (590 x20/100)
Sales =590 +118=708
Cost of sales will also increase by 20%. (24314 x20/100)
Cost of sales = 24,314 +4862.8= 29176.80
10% cut from the current selling price of 60.40 = 54.36
000
Sales (708 x 54.36)
38486.88
Cost 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.
(C) I will be assessing project A and project C
The 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
PRESENT VALUE

15%

0
(2000,000)
(2000,000)
1
400,000
0.870
348,000
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2
3
4
5
6

700,000
900,000
600,000
400,000
300,000

0.756
0.658
0.572
0.497
0.432

529,200
592,200
343,200
198,800
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
DISCOUNT PRESENT
CUMMALTIVE
FLOWS
FACTORS
VALUE
NPV

15%
0
(2000,000)
(2000,000)
1
400,000
0.870
348,000
(165,2000)
2
700,000
0.756
529,200
(1122,800)
YEAR

Cash flows

0
1

(2000,000)
300,000

3
4
5
6

900,000
600,000
400,000
300,000

0.658
0.572
0.497
0.432

Discount factors
15%

Present values
(2000,000)
261,000

0.870

592,200
343,200
198,800
129,600

(530,600)
(187,400)
11,400
141,000

Calculation of payback period

187,400/11,400+187400 x 12 = 11 months
The total payback period of the project A is 4 years and 11 months

NET PRESENT VALUE (PROJECT C, PLASTIC)

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2
3
4
5
6

500,000
700,000
1000,000
800,000
500,000

0.756
0.658
0.572
0.497
0.432

378,000
460,600
572,000
397,600
21,6000

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

YEAR
0
1
2
3
4
5
6

Discount payback period

CASH FLOWS DISCOUNT
PRESENT

FACTORS 15% VALUE

(2000,000)
300,000
0.870
261,000
500,000
0.756
378,000
700,000
0.658
460,600
1000,000
0.572
572,000
800,000
0.497
397,600
500,000
0.432
21,6000

CUMMALTIVE
NPV
(2000,000)
(173,9000)
(136,1000)
(900,400)
(328,400)
69,200
285,200

Calculations of discount payback period

328,400/69,200+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 VALUE
Advantages
Interest 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.
21 | P a g e

 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 method
Advantages
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=irolnewsEarnings
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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