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BTEC HND Level 5 ,Edexcel Name:Waqar Munir City Of London College Module: Managing Financial Resources and Decisions

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


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.


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


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 $16561 6961 23522

2007 $16611 6176 22787

5586 4300 3767 1230 2356 6 (165) 17080 6443 523 (76) (160) 6158 1845 4313 4313

5487 4332 3923 1139 2367 1670 (11) 18908 3879 410 (103) 3572 1237 2335 2395


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



$ 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 31152 (10898) 20255 $28462

1156 2301 1367 4825 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) 13383 $28462

4228 26462 1337 (16762) 15280 $29392

CONSOLIDATED STATEMENT OF CASH FLOWS Dollars in millions Particulars




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


$ 2395

1208 102 6 (160)

1214 (39) (316) 1670 (69)

113 91 16 (11) (40) 1956 85 5917 (2136) (147) 479 229 (50) (1625) 267 3478 (2699) (3919) (1823) 548 124 (90)

142 (85) (100) (30) (37) 72 59 4876 (1947) (229) 365 648 194 (181) (1150) 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 $ 508 1295

(3996) 123 (147) 2128 $ 1981 $ 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.

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

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.


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 Current Ratio =

Sales Total Asset - Current liabilitie s

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

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 Current Liabilitie s

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= 1st 2nd Total Asset Turnover= 1st 2nd
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360 Inventory Turnover

=360/105.71=3.41=4 no. of days =360/115.22=3.12=4

Net Sales Average Total Assets

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

Debt Capital Total Capital

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 0 1 Cash flows (2000,000) 300,000 Discount factors 15% 0.870 Present values (2000,000) 261,000

3 4 5 6

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

0.658 0.572 0.497 0.432

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


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

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

References http://investors.BURGER www.M& www.M& 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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