FINANCIAL MANAGEMENT &

POLICY

ASSIGNMENT
“Award Winning”
Contents
1 Executive summary........................................................................................................4
2 Terms of references.......................................................................................................5
3 Analysis...........................................................................................................................7
3.1 NPV Analysis........................................................................................................7
3.1.1 NPV analysis for option 01...............................................................................7
3.1.2 NPV analysis for Harold’s idea.........................................................................7
3.2 Advantages and disadvantages of NPV calculation.............................................8
3.3 Consideration of IRR............................................................................................8
3.4 Sensitivity analysis...............................................................................................9
3.4.1 Sensitivity analysis for option 01.....................................................................9
3.4.2 Sensitivity analysis for Harold’s idea...............................................................9
3.4.3 Sensitivity analysis in terms of two variables................................................10
3.5 Consideration of non-financial information......................................................10
4 Conclusion....................................................................................................................11
5 Recommendations.......................................................................................................12
6 Appendix.......................................................................................................................13
7 Bibliography..................................................................................................................16

LIST OF ABBRIVIATIONS

ARR-Accounting Rate of Return

IRR-Internal Rate of Return

NPV-Net Present Value

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 1 Executive summary

Considering on the key findings of the report, it can be identified that the best method to
be used in evaluating the investment opportunities will be the NPV methods especially it
considers on time value of money as well as cash flows on the entire life of the proposed
project.

According to the case study, in both circumstances, the proposed options are viable to
execute and therefore the company can go further with those options. Between both
options the idea of the director has a higher internal rate of return and therefore it is much
better than the other option considering the director has given accurate data as well as
predicted well.

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 2 Terms of references

This report considers on appraising available investment options of a Plymouth based light
engineering company Blunt Gardner Ltd, using one of the most suitable Investment
appraisal methods and that is the Net Present Value (NPV) or Discounted NPV method.
There it considers three options to be used in surviving the company as the recent
recession of the market has highly impacted on fall the sales of the company

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3 Analysis
3.1 NPV Analysis

3.1.1 NPV analysis for option 01

Assumptions

 In NPV calculation, the land related expenses, £3.4m will be considered as sunk cost.
 The two considered cost of capitals will be 10% & 7.5%

According to the NPV analysis (Refer Annexure 01-Excel sheet) when it is considered the
cost of capital as 10%, the net present value of the proposed option will be £ 1.776 Mn
when it comes to 7.5%, the net present value will be £ 2.481 Mn. In both circumstance, the
NPV shows a positive value where it indicates that the proposed option is viable for
execute.

3.1.2 NPV analysis for Harold’s idea

Assumptions

 The tax rate will be changed from 28% to 24% from 2022
 Capital allowance of plant will be 100%

According to the NPV analysis in terms of Harold’s idea, (Refer Annexure 02-Excel sheet)
when it is considered the cost of capital as 7.5%, the net present value of the proposed

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option will be £ 12.619 Mn when it comes to 10%, the net present value will be £ 10.317
Mn. In both circumstance, the NPV shows a positive value where it indicates that the
proposed option is viable for execute.

3.2 Advantages and disadvantages of NPV calculation

As identified the NPV model carries advantages as well as disadvantages that should be
taken in to account when using such model for appraising investment options. As like the
above calculations, the model considers the whole life of the proposed project and that is
from FY2018 to FY2028 where it has used cash flows instead of accounting profits that
include estimates as well as provisions etc. One of the vital advantages is that the NPV
model considers on realistic situation for the whole year in term of time value of money.
According to the given calculations it has discounted using the cost of capital rates such as
7.5%.

Although NPV model carries several advantages, there are disadvantages with those
applications too. One is that this method is difficult to apply since it has sophisticated
calculations as well as theories. The components use for calculations such as COC needs to
be realistic in order to get the real picture of the investment viability. This consumes time
as well as knowledge. Although positive NPV treated as the viable projects, due to
resource constraints, all the positive NPVs cannot be executed.

3.3 Consideration of IRR

According to the IRR analysis (Refer Annexure 03-Excel sheet), the IRR rate will be
approximately 19.5%. That mean in making the project viable and that is been positive, the
Cost of capital rate should be less than 19.5%. If cost of capital is more than IRR, then the
considering option should not further proceed.

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According to the IRR analysis (Refer Annexure 03.1-Excel sheet), the IRR rate will be
approximately 37%. That mean in making the project viable and that is been positive, the
Cost of capital rate should be less than 37%. If cost of capital is more than IRR, then the
considering option should not further proceed.

In analysing the IRR in both circumstances, the Harold’s idea has a wider IRR. There may
be several deviations in the forecasted data since t there is a huge variance in between the
IRR of option 01 and Harold’s Idea.

Point to Note-Calculating IRR alone for appraising investments is not a good decision
since it shows Multiple IRRs for the same data. (Refer Annexure 03-Excel sheet)

3.4 Sensitivity analysis

3.4.1 Sensitivity analysis for option 01

According to the results generated from sensitivity analysis, it can be identified that the
sale component is much sensitive with the NPV of the given option. In the current
situation, the NPV shows a positive figure of 1.776Mn where the positive NPV is getting
larger with the increase of sales component. As per the given scenario when sales increase
by 10%, the NPV will increase to 3.888Mn and in an increase of sale by 20%, the NPV
will be increased to 6Mn and at the point where sales will increase by 30%, the NPV will
be lifted to 8.111Mn. The same theory applies for sales reduction too. When sales drops by
10%, the NPV will be a minus of 0.162Mn and -2.447Mn and -4.559Mn for 20% and 30%
reduction respectively

When sales drop, the NPV gets a negative figure, where the project will be non-feasible to
be carried out. So, the management must be given priority for the sales factor of the
company.

3.4.2 Sensitivity analysis for Harold’s idea

When it comes to the results derived from Harold’s information, the sales components
seem not much vital for the decisions to be taken on investments. As per the given scenario
when sales increase by 10%, the NPV will increase to 15.5Mn and in an increase of sale by

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20%, the NPV will be increased to 18.4Mn and at the point where sales will increase by
30%, the NPV will be lifted to 21Mn. According to the example, even though the sale
drops by 30%, still the NPV is a positive figure amounting 3.85Mn where it indicates the
viability of the considered option.

According to the graphs in sensitivity analysis, it can be noted that there is a positive
relationship in between the change in sales and the change in NPV in both scenarios.
(Refer Appendix 01 and 02 Graphs)

3.4.3 Sensitivity analysis in terms of two variables

According to the graphs in sensitivity analysis, it can be noted that there is a positive
relationship in between the change in sales and the change in NPV in both scenarios
whereas there a negative relationship in between the change in production is cost and the
change in NPV (Refer Appendix 03)

3.5 Consideration of non-financial information

As like the financial information, non-financial informations are to be evaluated such as

effectiveness and the efficiency of the employees, efficiency of the machinery, social and
ethical barriers etc.

When it comes to the effectiveness and the efficiency of the employees, there is a positive
relationship in-between the component and the NPV where when it increases the
production cost will getting down and it leads in increasing the NPV. This theory applies
to the efficiency of the machinery too. Considering on the social and ethical pressures and
barriers, since these situations creates costs or loss to the company, it will surely reduce the
NPV value that hinders the viability of the proposed investments.

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4 Conclusion
This report has considered on appraising available investment options of a light
engineering company Blunt Gardner Ltd, where it has considered three options to be used
in surviving the company as the recent recession of the market has highly impacted on
sales of the company.

Even though IRR considered on both time value of money as well as the cash flows, as
like the results, there is a risk of having multiple IRRs for the same data set.

Since both considered options got positive NPVs, both are viable to be executed, where the
ideas of the director to be further analysed for make sure on the accuracy of the results
derived from the investment analysis that was based on the ideas of Harold.

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5 Recommendations

 Although the NPV is the best method for appraising investment options, in taking
vital decisions like investments, one or two more alternative appraisal methods
need to be used.
 In calculations, realistic data need to be used and doubtful ideas should not be
included.
 In analysing sensitivity, it is recommend considering more components rather than
concerning on one such as sales.
 As like the financial information, non-financial informations are to be evaluated
such as effectiveness and the efficiency of the employees, efficiency of the
machinery, social and ethical barriers etc.

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6 Appendix
Appendix 01

Sensitivity analysis for option 01 ((Refer Annexure 04 and Scenario Summary 1-Excel
sheet for further information)

Sale 10% Sale 20% Sale 30% Sale -10% Sale -20% Sale -30%

NPV 3,888 6,000 8,111 (162) (2,447) (4,559)

Table 01- Sensitivity Analysis for Option 01

(Refer Scenario Summary Sale-Excel sheet for further information)

NPV
10,000

8,000

6,000

4,000 NPV
2,000

-
Sale 30% Sale 20% Sale 10% Sale -10% Sale -20% Sale -30%
(2,000)

(4,000)

(6,000)

Graph 01- Sensitivity Analysis for Option 01

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Appendix 02-Sensitivity Analysis for Harold’s Idea ((Refer Annexure 04.1and Scenario
Summary 2-Excel sheet for further information)

Sale Sale Sales - Sales - Sale -

Sales 10% 20% 30% 10% 20% 30%
18,4 21,3 9, 6, 3,
NPV 15,541 63 85 698 776 854

Table 02- Sensitivity Analysis for Harold’s Idea

NPV
25,000

20,000

15,000
NPV
10,000

5,000

-
Sale 30% Sale 20% Sales 10% Sales - Sales - Sale -30%
10% 20%

Graph 02- Sensitivity Analysis for Harold’s Idea

(Refer Scenario Summary Sale-H Excel sheet for further information)

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Appendix 03-Sensitivity analysis in terms of Sales and Production Cost

Option 01

10,000

8,000

6,000

4,000
Sale
2,000
PC
-
30% 20% 10% -10% -20% -30%
(2,000)

(4,000)

(6,000)

Graph 03- Sensitivity Analysis using two variables for Option 01

(Refer Scenario Summary Sale & PC Excel sheet for further information)

Harold’s Idea

25,000

20,000

15,000
Sales
PC
10,000

5,000

-
30% 20% 10% -10% -20% -30%

Graph 04- Sensitivity Analysis using two variables for Harold’s Idea

(Refer Scenario Summary Sale & PC-H Excel sheet for further information)

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7 Bibliography
David Dugdale, F. M. R. R., 2009. http://www.cimaglobal.com. [Online]
Available at: http://www.cimaglobal.com/Documents/Thought_leadership_docs/CIMA
%20Tools%20and%20Techniques%2030-11-09%20PDF.pdf
[Accessed 2009].

Drury, C., 2007. Management and Cost Accounting. New Delhi : Akash Press.

Horque, Z., 2006. Strategic Management Accounting. Australia : Pearson Education .

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