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SAMPLE OF THE STUDENT WHO GOT PASSED

Financial Resource Management & Performance


British Sky Broadcasting Group plc (BskyB)


The purpose of this report is to know how a company receives, manage, and apply financial &
other resources to meet objectives and requirements. Whole report is divided into three
components. Component 1 comprises different stakeholders of BskyB with different interest and
priorities. Component 2 comprises business and financial performance of BskyB with the help of
financial ratios and horizontal analysis. In component 3, different investment appraisal
techniques are discussed with an example of 123 LTD that wants to set up a manufacturing unit
in one of three countries- USA, France and Switzerland.

Component 1
Stakeholders: BskyB

A Stakeholder is one who is directly or indirectly attached with companys resources, attention
and output and both affects each other in one way or other (Bryson, 2011). Each stakeholder
has different interest with companys business and companys output affects them in different
level. Customers, Political parties, financial institutions, employees, governments, unions, board-
members, citizens, volunteers, NGOs and many more groups or individual or organization can
be a stakeholder of a company. Stakeholders can be different for a government, for a company
or for a NGO but the relationship with the stakeholders is attached with companys business.
Key to success of company is the key to satisfaction to its stakeholders.

British Sky Broadcasting Group plc is a UK based company that provides pay television services
and home communication services. Its 174 pay television services and 300 free channels are
provided to the residents of UK and Ireland in form of SD, HD and 3D through satellite. It also
provides telephonic and broadband services to millions of homes in UK in the brand name of
sky. Like any other organization it also has multiple stakeholders but the important ones are
customers, suppliers, regulatory body, employees and community. Interest of each stakeholders
of BskyB is discussed separately with a discussion that how company manages their interest



with the help of strategies and policies. Stakeholder information is taken from annual report-
2012 from company own website.

Customers
Sky broadcasting services reaches more than 10 million homes everyday with a promise to
provide high quality television with numerous choices or channels. Customers of television
services want clear & quality pictures, multiple channels and paid services in lesser prices.
Customers of broadband and telephonic services need uninterrupted line 24 7 in a cheaper
rate. To earn the trust of the customer, BskyB makes the technology simple, controllable and
affordable. More than 300 free channels and 174 paid channels are provided with operational
efficiency. BskyB entertains customers with the help of creative ideas and programme of new
skill development in youth in sports, arts and environment. BskyB satisfy its customer by
providing better screen, new & worthy entertainment, easy and accessible content, suitable
progammes, valuable subscription, range of services, easy watching and expandable
communication and entertainment products. During 2012, BskyB added 3 million customers in
its 28 million subscriptions base in UK in communication segment and around 40% of UK
household watch sky television and that is called the achievement of BskyB.

Employees
The prime concerns of the employees are salaries in time, promotion in a period, bonus at
profitability and a secure career. To engage the employees in the business BskyB does regular
external and internal survey to its employees. In this way, not only employee think about the
company but they try to improve themselves in productivity, business ethics and performance.
The employee of BskyB (around 797) donates fund to charity and their contribution is around
50% of the amount send by the company as a charity. BskyB has online Development Studio
where around 9000 advisor can access e-learning suite. Employees can access more than
240,000 e-learning course to improve itself and improve the workings.

Suppliers
The interest of suppliers is related with the continuity of the business so that they can sell their
products or services to the company. BskyB manages its suppliers with the help of strong, fair
and ethical relationship and continuous improvement in services. BskyB see whether the
suppliers comply all rules and regulation set by regulatory body. They set Responsible Sourcing
Questionnaire which helps to know the environmental effect of product and services by the
suppliers and its helps the suppliers to reduce these.

Community
The community is directly or indirectly associated with the company. They get job environment
for local people, money-flow in local market and improvement in living standard due to change



in society. BskyB supports local community by providing career opportunity to young local
people through skills development. BskyB works with partner Sports Inspired to bring
community in events organized by the company like sports. During 2012, the company helped
2000 school students in sports events with the help of 400 sky volunteers.

Shareholders
They are interest to know how much profit company is making every quarter. Growth of the
company in term of revenue and positive profitability add value to the share prices means
adding value to shareholders money. During 2012, BskyB proposes a dividend of 25.4 pence
per share with an increase of 8% from the previous year. The company also returned 750
million through share-buyback offer to the shareholders in year 2012.

Lenders
Banks and other financial institution lend money to the company to get benefit in term of
interest. Their interest lies on the profitability and growth of the company so that the company
would be able to pay the interest. BskyB has taken 750 million Revolving Credit Facility from
10 syndicated banks during 2012 and it has been used to return shareholder money in shares
buyback process. The company maintained Net debt to EBITDA ratio to 3:1 ratio. On the other
hand company deposit cash and cash equivalent in Banks. Total cash and cash equivalent
including short-term deposit of BskyB was 1,174 million in year 2012. In this manner company
lend the money to finance operational activity and deposit the surplus in Banks.

Conclusion
BskyB relationship with its different stakeholders is different and it has the ability to deal
differently to manage their interest and companys interest as well. The satisfaction of each
stakeholder is as important as the satisfaction of owner and BskyB has done it superbly.






















Component 2
Financial & Business Position: BskyB
In this component 2, the financial and business position of BskyB has been described. This
segment shows more clearly and broadly the way the company utilizes its financial and other
resources. Horizontal analysis, vertical analysis and ratio analysis is the best process to get
stretching view of key financials of BskyB. On the other hand business position and business
strategy is judged on the basis of past and current happenings.

Business Position
By the year of 2012, 40% of UK household uses sky television and its telephonic services where
the total subscription base is 28 million. It was incorporated in 1988 and now it has millions of
customers in 25 years. 3 million is added only in the year 2012 due to provision of multi-product
plan of BskyB. This transition changed the total product size double from the year 2008. The
company has 174 pay channels in which 29 are sky channels and 145 are distributed channels
(Bloomberg Businessweek). The company has also remarked that it provides more than 300
free air television channels and radio channels. BskyB also give wi-fi services from the same
cable used in television and telephone to the UK and Ireland households. Apart from
households, its business is associated with commercial television customers, hotels, retail
outlets, clubs and pubs. The technology used in transmission of pay television channels is SD,
HD and 3D technology and it is transmitted with the help of satellite. Telephone line is
connected with broadband a facility which also contributes in sales of BskyB. Advertising and
sponsorship in channels, online advertising through broadband, mobile advertising, advertising
in video & movies on demand, green-button advertising and advertising sales representatives
are other means of income of BskyB. It also engages in distribution of channels to other
operators, game facilities in internet, interactive television (sky vegas, sky bingo, sky poker),
online sports media brands and development of set-top boxes.

Financial Position
Financial position of BskyB is reviewed on the basis of ratio analysis, horizontal analysis and
vertical analysis. Horizontal and vertical analysis captured recent trend in income and balance



sheet statement. Income and financial statement is extracted from companys financial
published in year 2012 and 2011 (Annual report-2012, Annual report-2011: BskyB)

Horizontal Analysis of Income Statement
Income statement of BskyB reflects that revenue growth during 2012 is less than 2011.
Revenue has grown by 2.9% only during 2012 to 6791 million. The growth in operating profit
Horizontal
Analysis
12 month
to 30
June2012
Change over
2011
12 month
to 30
June 2011
Change over
2010
12 month
to 30
June2010
m Amount % age m Amount
%
age m
Income Statement

Total Revenue 6,791 194 2.9% 6,597 888 15.6% 5,709
Operating
Expenses 5,548 24 0.4% 5,524 659 13.5% 4,865
Operating Profit 1,243 170 15.8% 1,073 229 27.1% 844
Net Profit 906 96 11.9% 810 -68 -7.7% 878
from the previous year also went down from 27% to 16% but net profit variation increased
from -7% to 12%.

Horizontal Analysis of Balance Sheet
Change in current asset over a year in 2012 is -2.3% whereas it was 17.3% in 2011 and it is
because of cash outflow in share buyback offer during 2012. Non-current liabilities have
increased by 60 million because of increase in non-current borrowings by 73 million.
Horizontal
Analysis
12 month
to 30
June2012
Change over
2011
12 month
to 30
June
2011
Change over
2010
12 month
to 30
June2010
m Amount
%
age m Amount % age m
Current Assets 2275 -54 -2.3% 2329 343 17.3% 1986
Non-Current
Assets 3234 209 6.9% 3025 207 7.3% 2818
Current Liabilities 2098 186 9.7% 1912 205 12.0% 1707
Non-Current
Liabilities 2467 60 2.5% 2407 -130 -5.1% 2537
Equity 944 -91 -8.8% 1035 475 -84.8% 560
Equity portion has decrease due to share-buyback activity by the company. Non-current
increased by 6.9% is due to expansion plan where towers and other machines are installed.


Vertical analysis of Income Sheet



Vertical analysis reveals that BskyB has cut its operating expenses against revenue in 2012
against 2011. Operating profit is 18% of revenue during 2010 which was 16.3% growth in
2011. Good operating and net profit is due to increase in subscription revenue and cost cutting
drill during 2012.


Vertical
Analysis
12 month
to 30
June2012 % of
12 month
to 30 June
2011 % of
12 month
to 30
June2010 % of
m Revenue m Revenue m Revenue
Income Statement

Total Revenue 6,791 100% 6,597 100% 5,709 100%
Operating
Expenses 5,548 82% 5,524 83.7% 4,865 85.2%
Operating Profit 1,243 18% 1,073 16.3% 844 14.8%
Net Profit 906 13% 810 12.3% 878 15.4%

Vertical analysis of Balance Sheet
Vertical analysis tells us that current asset went down in % of revenue due to cash outflow in
share-buyback and non-current asset increased from 45% to 48% due to infrastructural
development for new subscription. Equity size is just 14% of revenue in 2012 which was 15.7%
during 2011.
Vertical Analysis
12 month
to 30
June2012 % of
12 month
to 30 June
2011 % of
12 month
to 30
June2010 % of
m Revenue m Revenue m Revenue
Balance Sheet

Current Assets
2275
34%
2329
35.3%
1986
34.8%
Non-Current Assets 3234 48% 3025 45.9% 2818 49.4%
Current Liabilities
2098
31%
1912
29.0%
1707
29.9%
Non-Current
Liabilities 2467 36% 2407 36.5% 2537 44.4%
Equity
944
14%
1035
15.7%
560
9.8%

Ratio analysis
Profitability ratio (Operating profit margin, net profit margin), liquidity ratio (current ratio &
quick ratio), leverage ratio (debt-equity ratio), activity ratio (creditor collection period, debtor
collection period and stock turnover) and investment ratio (Return on equity) has been
calculated in this segment for recent three year from 2010 to 2012. BskyB financial data is
extracted from companys financial published in year 2012 and 2011 (Annual report-2012,
Annual report-2011: BskyB) and Industry data is taken from Reuters:UK website.




Operating profit margin
It shows how a company runs its operation to earn profit after cutting all the operating
expenses (Groppelli and Nikhbakht, p-467, 2006). Operating profit should be consistent and
positive for any company to stand itself in the market.

Year ended 30
th
June
2012 2011 2010 Industry
m m m m
Revenue 6,791 6,597 5,709
Operating Expenses 5,548 5,524 4,865
Operating Profit 1,243 1,073 844
Operating Profit Margin 18.3% 16.3% 14.8% 5.8%
The BskyBs operating profit increased from 1073 million in 2011 to 1,243 million in 2012 and
the reason of this 18.3% growth was growth in subscription revenue and cost cut in operating
expenses. Table shows that operating margin grow substantially from 14.8% to 18.3% in three
years.


Net profit margin
Net profitability is the amount of profit rest after deducting all the expenses including interest,
depreciation, tax and amortization (Brown, p-209, 2000). Net profitability is very important
because that is the money attributed to the common shareholders. Higher the net profit, higher
the value of share increases.
Year ended 30
th
June
2012 2011 2010 Industry
m m m m
Revenue 6,791 6,597 5,709
Net Profit 906 810 878
Net Profit Margin 13.3% 12.3% 15.4% -0.67%
BskyB net profit margin in year 2012 was 13.3%, a increase of 1% from 2011 and fall of 2%
from 2010. Net profit in current year was 906 million which contributed earnings per share of
50.8 pence. Industry average was not quite satisfactory because it shows negative net profit
margin. Thus BskyB has beaten the market with its good performance in term of profitability.

Current ratio



Current ratio tells us how much current asset a company has against its current liabilities. If it
lies above 1 it means company has enough money to pay the liabilities instantly (Dickie, p-96,
2006).
Year ended 30th
June
2012 2011 2010 Industry
m m m m
Current Asset 2275 2329 1986
Current Liabilities 2098 1912 1707
Current ratio 1.08 1.22 1.16 0.72
Current asset of BskyB has decreased by 54 million and it decreases the current ratio during
2012. Decrease in cash and cash equivalent by 177 million due to share buyback during 2012 is
the cause of decrease in current ratio from the previous year value of 1.22. Still companys
current asset positive is way better than industry average of 0.72 which means that company
has enough liquid asset to pay current liabilities.

Quick ratio
Quick ratio is quick asset divided by current liabilities. Quick asset is the most liquid asset of the
company which is calculated after deducting inventory from the current asset (Mayo, p-279,
2010). Quick ratio near to one is judged a good capability of the firm to have most liquid asset
to pay working capital requirement.
Year ended 30th
June
2012 2011 2010 Industry
m m m m
Current Asset
X
2275 2329 1986
Inventory
Y
456 375 343
Quick Asset
X - Y
1819 1954 1643
Current Liabilities 2098 1912 1707
Quick ratio 0.87 1.02 0.96 0.59
Quick ratio went down from 1.02 to 0.87 due to increase in inventory and decrease in current
asset due to cash outflow in share buyback offers to its shareholders. 0.87 quick ratio is way
better than industry average of 0.59 and it is near to one which means companys most liquid
asset position is well enough to fight with current liabilities if claimed.

Debt-Equity Ratio
It calculates the proportion of debt in mean of financing against equity because company
constructs its capital using above two ways only (Smart & Magginson, p-53, 2008). Debt equity
ratio tells us the burden of interest and dividend in the company. Interest has to be paid
without wished and dividends are paid with wishes to value share prices.
Year ended 30th June
2012 2011 2010 Industry
m m m m



Equity 944 1035 560

Debt (Long-Term) 2398 2325 2450

Debt-Equity Ratio 2.54 2.25 4.38
1.23
Non-current borrowing has been increased by 73 million and around 100 million of equity was
purchased as a buyback policy and due to it the debt-equity ratio has been increased from 2.25
to 2.54. During 2010 it was 4.38 which were restructured after issuing new IPO in public and
during 2012 the reverse decision has been taken by the management. Greater debt proportion
carries interest with itself and increase in debt-equity ratio had increased the interest amount of
the company that has to be paid to the lenders (Banks).


Creditors collection Period
Suppliers of a company sell their products or services to the company in credit and company
pays that credit amount in certain period of time and that time-period is called creditors
collection period (Periasamy, p-448, 2009). Greater the creditor collection period better for the
company to use creditors money as a cheap mean of financing its working requirement.
Year ended 30th June
2012 2011 2010 Industry
m m m m
Trade Payables 1855 1675 1526
Revenue 6,791 6,597 5,709
Trade Creditors Collection
Period (In Days) 100 93 98 NA
The supplier of BskyB had given 100 days during 2012 to pay the bill which wa 93 days in 2011
and 98 days in 2010. It means suppliers become more liberal towards the company in the
recent year and it happens when supplier feels that it would get the payment for sure from the
company.

Debtors collection Period
BskyB supply their services to the customer and between them there is called channel partner.
Now company provide the services in credit which it has to receive after a certain period of time
and that time period is called Debtors collection period (Dooley, p-34, 2006). Shorter the
debtor collection period is, better for the company to recycle the money collected from
customer into production.
Year ended 30th June
2012 2011 2010 Industry
m m m m
Trade Receivables 621 592 538
Revenue 6,791 6,597 5,709
Trade Debtors Collection
Period (In Days) 33 33 34 149



The customer of BskyB paid the bill in 33 days in last two years which was 34 days during 2010.
Industry average is around 149 days which is too long and thus company has beaten its own
performance from 2010 and from the industry as well in collecting the payment from the
customer which was given to the customer as a credit.



Stock Turnover Period
It is the time period a company spends to keep the inventory or stock. It is calculated against
cost of sales or operating expenses because keeping inventory means keeping cost of company
as a product or services in inventory (Stickney et al p-252, 2009).

Year ended 30th June
2012 2011 2010 Industry
m m m m
Operating Expenses 5,548 5,524 4,865
Inventory 456 375 343
Stock Turnover 30 25 26 25
BskyB kept the inventory for 30 days during 2012 higher than 2011 where it was only 25 days.
Industry average is also 25 days, lesser than BskBy. It means keeping the product in 30 days in
inventory incur cost for the company and an improvement is required.


Return on Equity (ROE)
Profit in respect to total equity of the company is called return on equity (ROI(Morrel, p-59,
2007) . Good ROE add value to the shareholders money and it is very important factor in the
capital market.
Year ended 30th June
2012 2011 2010 Industry
m m m m
Net Profit 906 810 878
Equity 944 1035 560
Return on Equity 96.0% 78.3% 156.8% 3.26%

BskyBs return on equity increased from 78.3% to 96% but lower than 2010 average of 156%.
When it is compared with industry average ROE of 3.26% then it can be said that company has
done remarkably well in the recent year.

Conclusion



The company BskyB has done very good in 2012 in generating revenue, maintaining operating
profit, maintaining liquidity, handling activity in collecting payment and return on equity. This is
because of contribution of management team and other employees who helped the
organization to increase the subscription base and to decrease the cost per subscription.
Company new capital structure policies also helped the company to get better viability in the
market and competition against other players in the market.


Component 3
Investment Appraisal Technique: 123 LTD
Component 3 combined all kind of investment appraisal techniques required by 123 LTD to set
up its manufacturing unit in one of three countries in option USA, France and Switzerland.
Running expenses, expected revenue, license fees, approval fees, residual amount and spot
rate required in each country for a plant is given in Appendix-X. Cash outflow and inflow is also
calculated in Appendix-X. Before putting figures into different investment appraisal techniques,
the theoretical part is covered to understand the calculation, advantage and disadvantage. This
component covers two investment appraisal techniques namely accounting rate of return
(ARR) and net present value (NPV).

Any investment needs some motives. Few investments is done for expansion of business, few
are done for expansion of staff, few are done to buy fixed assets and many more reasons are
there for investment. Investment appraisal technique is the way to judge whether the
investment going to make has some worth in future or give some return in future or not and we
do it with the help of financial data available(Schuster, p-3, . Main financial data of any
investment is how much investment is required and how much income we are expecting from
that investment and the difference of the two is called profit or loss of the project. Few investor
uses time value of money to calculate above financials and it is done by discounting with the
interest rate we are losing against investment in some project which is called opportunity cost
of capital. Different investment appraisal uses different method to calculate financials and
return and that would be seen in the later part with an example of 123 LTD.

Accounting Rate of Return (ARR)
Accounting rate of return is a non-discounting model which calculates the return in respect to
income (Hansen and Mowen, p-568, 2006). Average Income is calculated by subtracting
average cash flow minus average depreciation.




Average Income Average Cash flow - Depreciation
Accounting rate of return = ---------------------------- = ---------------------------------------------
Average investment Average investment

Average cash flow is calculated by adding each years cash flow till the life of the project and
dividing it by life of the project. Average Investment is the average of initial investment
(cashflow in zero year) and salvage value. Depreciation is calculated using straight-line method
and the method is:

Cost of Machine Salvage value
Depreciation = -------------------------------------------------
Life of machine

Positive accounting rate of return (ARR) is good for any investment and when two or more
projects are compared with the help of ARR then the project having highest ARR value has to
be chosen for investment or project.

Calculation: ARR
ARR for each of three case has been examined and the calculation of cash flow is done in
appendix-X which covers all the expenses and income of 123 LTD. Following is the calculation
of ARR:

Case-1: Country-USA
Average Cashflow = Expected cashflow of 123 LTD in 5 year of life cycle.

Cashflow in year 1 + Cashflow in year 2 + Cashflow in year 3 +
Cashflow in year 4 + Cash flow in year 5 Salvage value (SV)
= ---------------------------------------------------------------------------------
5
(Note: cash flow is calculated in Appendix-X where SV is added and thats why it
is subtracted in actual cashflow)

101,333 + 86,182 + 72,348 + 101,333 + 321,111 220,000
= -----------------------------------------------------------------------------------
5

462,307
= ----------------- = 92,461
5




Purchased value of Machine Residual value
Average Depreciation = -------------------------------------------------------------
Life of Machine

340,000 - 220,000
= -----------------------------------------
5 Years


120,000
= --------------------------- = 24,000
5 Years

Initial outlet (Cashflow in 0 year) + Salvage Value
Average Investment = --------------------------------------------------------------
2

362,000 + 220,000
= ----------------------------------------
2

582,000
= ---------------------------------------- = 291,000
2

92,461 - 24,000 68461
Thus ARR in case of USA = ------------------------------ = ------------ = 23.52%
291,000 291,000


Case-2: Country-France
Average Cashflow = Expected cashflow of 123 LTD in 5 year of life cycle.

Cashflow in year 1 + Cashflow in year 2 + Cashflow in year 3 +
Cashflow in year 4 + Cash flow in year 5 Salvage value (SV)
= ---------------------------------------------------------------------------------
5
(Note: cash flow is calculated in Appendix-X where SV is added and thats why it
is subtracted in actual cashflow)




35,000 + 21,842 + 10,000 - 714 + 260,769 220,000
= -----------------------------------------------------------------------------------
5

106,897
= ----------------- = 21,379
5


Purchased value of Machine Residual value
Average Depreciation = -------------------------------------------------------------
Life of Machine

340,000 - 220,000
= -----------------------------------------
5 Years

120,000
= --------------------------- = 24,000
5 Years

Initial outlet (Cashflow in 0 year) + Salvage Value
Average Investment = --------------------------------------------------------------
2

390,000 + 220,000
= ----------------------------------------
2


610,000
= ---------------------------------------- = 305,000
2

21,379 - 24,000 -2621
Thus ARR in case of France = ------------------------------ = ------------ = -0.85%
305,000 305,000





Case-3: Country-Switzerland
Average Cashflow = Expected cashflow of 123 LTD in 5 year of life cycle.

Cashflow in year 1 + Cashflow in year 2 + Cashflow in year 3 +
Cashflow in year 4 + Cash flow in year 5 Salvage value (SV)
= ---------------------------------------------------------------------------------
5
(Note: cash flow is calculated in Appendix-X where SV is added and thats why it
is subtracted in actual cashflow)

150,000 + 86,667 - 28,571 + 86,667 + 312,308 220,000
= -----------------------------------------------------------------------------------
5

387,070
= ----------------- = 77,414
5



Purchased value of Machine Residual value
Average Depreciation = -------------------------------------------------------------
Life of Machine

340,000 - 220,000
= -----------------------------------------
5 Years

120,000
= --------------------------- = 24,000
5 Years

Initial outlet (Cashflow in 0 year) + Salvage Value
Average Investment = --------------------------------------------------------------
2

370,000 + 220,000
= ----------------------------------------
2





590,000
= ---------------------------------------- = 295,000
2

77,414 - 24,000 53414
Thus ARR in case of Switzerland = ------------------------------ = ------------ = 18.11%
295,000 295,000

Net Present Value (NPV)
Net present value is the sum of all present value of future cash flow starting from beginning of
investment. In the beginning, company does investment which is counted as cash outflow.
Later on the revenue comes which is counted as cash inflow. To run the operation company
incur cost which is operating expenses which is also a cash outflow. The difference of revenue
and expenses is called net cash flow. It can be negative or positive depending how much
revenue a company is generating after incurring expenses. Present value is calculated by
discounting cashflow using interest rate. It is calculated as (Needles et al, p-1162, 2010):


NPV = CF
0
+
CF
1

+
CF
2

+ +
CF
n

(1+r)
1
(1+r)
2
(1+r)
n


Where CF = cash flow in year 0, 1, 2up to n. and r= discounted rate (Interest rate)

NPV is used differently by investors. If there is single project then investor checks whether the
NPV of the project is positive or not. If there are multiple projects then investor checks- which
project has given maximum NPV value and that would be selected for particular investment.

Calculation of NPV
NPV is calculated for each case and the interest rate is taken as a discounting rate. Cashflow is
already calculated in Appendix-X. NPV is represented in tables because of simple understanding.

NPV in case USA
Interest rate = 10% which is treated as discounting rate for calculate present value.
Cash flow in Present Value

Present Value
Year Cash Flow of 1@ 10% of Cash flow
0 (362,000) 1.000 (362,000)
1 101,333 0.909 92,121



2 86,182 0.826 71,225
3 72,348 0.751 54,356
4 101,333 0.683 69,212
5 321,111 0.621 199,385
( Sum of PV of all cashflow) = NPV = 124,299
(Note: Cash flow is calculated in Appendix-A)




NPV in case of France
Interest rate = 10% which is treated as discounting rate for calculate present value.
Cash flow in Present Value Present Value
Year Cash Flow of 1@ 10% of Cash flow
0 (390,000) 1.000 (390,000)
1 35,000 0.909 31,818
2 21,842 0.826 18,051
3 10,000 0.751 7,513
4 (714) 0.683 (488)
5 260,769 0.621 161,917
( Sum of PV of all cashflow) = NPV = (171,188)
(Note: Cash flow is calculated in Appendix-A)

NPV in case of Switzerland
Interest rate = 10% which is treated as discounting rate for calculate present value.
Cash flow in Present Value Present Value
Year Cash Flow of 1@ 10% of Cash flow
0 (370,000) 1.000 (370,000)
1 150,000 0.909 136,364
2 86,667 0.826 71,625
3 (28,571) 0.751 (21,466)
4 86,667 0.683 59,194
5 312,308 0.621 193,919
( Sum of PV of all cashflow) = NPV = 69,636
(Note: Cash flow is calculated in Appendix-A)


Conclusion
In both finding of ARR and NPV, it is found that USA is the best option for an investment if 123
LTD wants to set up a manufacturing unit. ARR in case of USA is 23.52% which is highest in all
three cases.
County ARR NPV
USA 23.52% 124,299



France -0.85% -171,188
Switzerland 18.11% 69,636
NPV of the investment in USA is also highest with a value of 124,299. Above table was the
findings and it is clearly seen that 123 LTD has to choose USA to set up its plant.






Appendix-X

Country : USA Current Interest rate = 10%
Expected Revenue

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash Inflow Expected Revenue $700,000 $700,000 $700,000 $700,000 $700,000
Spot rate against USD 2.10 2.20 2.30 2.10 2.25
Expected Revenue in 333,333 318,182 304,348 333,333 311,111
Cash Outflow Cost of Machine in (340,000)
Running Expense (210,000) (210,000) (210,000) (210,000) (210,000)
Approval Fee (22,000) (22,000) (22,000) (22,000) (22,000) 0
Residual Value 220,000
Net Cash Flow (362,000) 101,333 86,182 72,348 101,333 321,111

Country : France Current Interest rate = 10%

Expected Revenue

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash Inflow Expected Revenue

450,000

450,000

450,000

450,000

450,000
Spot rate against Euro 1.80 1.90 2.00 2.10 1.95
Expected Revenue in 250,000 236,842 225,000 214,286 230,769
Cash Outflow Cost of Machine in (340,000)
Running Expense in (190,000) (190,000) (190,000) (190,000) (190,000)
Approval Fee in (25,000) (25,000) (25,000) (25,000) (25,000)
Royalty fee in (25,000)
Residual Value 220,000
Net Cash Flow (390,000) 35,000 21,842 10,000 (714) 260,769

Option 3 : Switzerland Current Interest rate = 10%
Expected Revenue
Option 3 : Switzerland Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash Inflow
Expected Revenue in
Swiss Franc 3,800,000 3,800,000 3,800,000 3,800,000 3,800,000
Spot rate against Euro 10.00 12.00 14.00 12.00 13.00



Expected Revenue in 380,000 316,667 271,429 316,667 292,308
Cash Outflow Cost of Machine in (340,000)
Running Expense in (200000) (200000) (200000) (200000) (200000)
Approval Fee in (30000) (30000) (30000) (30000) (30000)
Royalty fee in (70000)
Residual Value 220,000
Net Cash Flow (370,000) 150,000 86,667 (28,571) 86,667 312,308




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