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MOD003319 Business Finance

tag 0 Download 13 Pages / 3,132 Words tag 02-07-2021


Part 1
Excellence Electrics Ltd (“EEL”) owns and operates three factories in London, Birmingham and Manchester producing electrical components for household appliances. The company last year had turnover in excess of £35 million.The company is managed by Dieter Braun, the grandson of the founder who established the business in the 1930s making radio parts. Dieter owns 25% of the shares in the company, while the remaining 75% is split between three other grandchildren, Hild, Angela and Ragnar.Most of EEL’s clients are large manufacturers in the UK and EU. Two key customers are Canterbury Cookers Ltd and Radios Formidables SA.The other shareholders are concerned about the business. Although there seems to be plenty of work coming in and the last year has been reasonably profitable(Operating profit was £5 million last year before interest and tax), the company’s debt has increased to £18 million from £15 million the year before and Dieter hasstarted talking about the need for them to invest more money to reduce the debt. The company is owed £1.5 million pounds for a series of large orders placed by Canterbury last year. There is also an outstanding dispute about a £2 million consignment for Radios Formidables completed in 2015 which has led to payment being withheld while negotiations continue between lawyers and technical specialists.
There is a further problem that Dieter believes the Radio Formidable issue arose from faulty workmanship by a contractor EEL engaged in 2014. He has refused to pay the contractor who is now threatening legal action. Because this area of work has been suspended a large stock of materials and supplies has built up at the company’s London site. Dieter insists that the company needs to have this level of stock for when the dispute is sorted out He is also reluctant to press his key customers too hard for payment.The sisters have approached EEL’s accountants to review the situation.
i. A clear understanding of the difference between profitability and cashflow and how these are expressed in the company’s accounts.
ii. Explaining the application of the concept of working capital management to the company and how the current situation is a reflection of how the business in managed.
iii. Analysing what steps should now be taken to improve the company’s working capital management.
Part 2
Continuing with EEL, Dieter is contemplating investing in a new facility in either Leeds or Bristol. Both will involve a significant investment, and, assuming the issues noted above are sorted out, the shareholders have the resources to finance either project but not both. 
The Leeds venture would involve construction on a derelict site from scratch which will cost £10m and would operate for 9-10 years before substantial further investment would be required. 
The Bristol venture involves taking over an existing but slightly out of date plant. This will need about £6 million investment and will have an expected useful life of 5-6 years.
In the past, to assess the financial viability of new projects, the company has only considered profitability. At present it does not have any formal procedure for assessing capital projects.
i. An understanding of the stages of the capital budgeting process and of the main capital investment appraisal methods
ii. The potential application of these methods to the projects under consideration
iii. Analysing which of these methods (or a combination) would be mostappropriate for the decision making process in this case
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Total 13 pages

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