LO1Analyse a range of financial strategies including budgets, financial

management and accounting
LO2 Evaluate approaches to procurement and contracting within an organisation
LO3 Assess the commercial context that an organisation operates within
 
CASE STUDY
S plc is to add a new line of computer games to its highly successful product
range. You are required to provide an evaluation of the new investment with a five-
year expected live. The following budgeted projections relate to the new
investment proposal for this new line.
 
Initial cash investment:                           (£000)
              Production equipment               1,000 
              Staff training provision                   100
              Advertising & promotion costs        20
              Incremental working capital           180
 
Year 1 2 3 4 5
Projected sales revenues in £000s 60 1000 1200 1000 800
0
 
Cost of sales: 30% of sales revenues
Incremental operation costs £100,000 per annum
Depreciation of production equipment: 20% on straight line with no salvage value.
S plc is a listed company. Its cost of capital is set at 20%.     
 
TASK
Write a report to address the following
A)
1) Why is capital investment appraisal process so important to S plc?
 
2) Prepare a cashflow analysis statement for the above new investment.
 
3) What is the payback period for the new investment? If S plc imposes a three-
year maximum
   payback should the project be accepted?
 
4) Determine the net present value for the new investment? Should the investment
proposal be accepted? Explain why?
 
5) Describe the logic behind the net present value approach. What is the
relationship between net present
  value and cost of capital. 
 
7) Calculate the internal rate of return for the investment proposal. Should the
proposal be accepted?
   Would a change in the cost of capital affect the internal rate of return?
 
8) Discuss why the net present value method is often regarded to be superior to
internal rate of return.
                                                                  
                                                                  
[LO1]           
 
B)
 
S plc finds that the cheapest source of long-term finance available to it is through a
bank loan.
Critically contrast this with an equity issue for all its long-term finance
requirements. 
                                                                  
[LO3]
 
C)
 
An existing computer game is to be introduced into a new marketsegment by S
plc. 
   The following details relate to this product:
   Selling price per game: £100.
   Variable costs per game: £60.
   Fixed costs per annum specific to this game: £300,000.
 
Required: 
 
1) Calculate the breakeven sales revenue, the sales revenue to achieve a target
profit of £120,000 
   and the margin of safety. 
 
2) What are the consequences of a price increase or decrease of 10%.
 
 3) Cost-volume-profit analysis provides important information for management
decisions. The analysis illustrates relationships that prevail under a particular set of
assumptions. Critically comment on these assumptions.                                                                 
                                                                  
[LO3]
 
D)
 
1) Distinguish between three categories of suppliers: strategic suppliers, preferred
suppliers and
  transactional suppliers. 
 
2) Compare the advantages of single sourcing and multiple sourcing in the context
of procurement. 
                                                                                                                                                           
3) Explain what cross-sourcing is using an example and how it benefits the buyer. 
 
[LO2]
 
Other relevant assessment information:
 
• You will need to include and reference at least 8 different sources including 4
academic textbooks and 2 academic journals to help provide supporting evidence
for any assertions that you make within your report. 
• Your report should outline your research, judgements as well as the conclusions
drawn. 3,000 words (+ or - 10%). Reference list and Harvard references style
required.