Financial Analysis and Investment Appraisal Case Study

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Learning Outcomes

1.Critically evaluate the purpose and use of the annual report and financial statements

2.Demonstrate a critical understanding of the relationship between ethics, culture and finance

3.Understand the Regulatory Environment and offer an analysis how this influences corporate governance, business conduct, leadership and decision-making

4.Critically appraise linkages between the financing, investment and distribution decisions

Part 1:

Select a company listed on the London Stock Exchange, from an industry of your choice. As a financial journalist, you have been asked to write an article evaluating profitability and liquidity for the past 3 years, using appropriate ratios, commenting on trends observed. Include a section explaining the context in which ratio analysis can provide useful information for decision-making including inherent limitations in the technique. Include a table of key financial data in an appendix. (2,000 words)

Section	Content	Mark
Introduction	Brief introduction of the chosen company. Concise summary of issues addressed in the article, methods used, types of resource	5%
Financial Analysis	Critical evaluation of the various aspects of profitability and liquidity of the chosen company for the past 3 years.	15%
Critical Evaluation	Explanation and evaluation of ratio analysis as a tool to evaluate performance. Critical evaluation of assumptions, limitations, context and applicability, suggestions of complementary techniques	20%
Conclusions	Clearly presented conclusions based on the preceding analysis	5%
Referencing and presentation	Correctly applied Harvard Referencing, clear structure to both articles, appropriate use of language, use of charts and general presentation.	5%
TOTAL MARKS:		50%

Part 2

You are the financial controller of Webster Plc, a manufacturer of massage equipment (“the Soother”) for domestic use, serving the UK and export markets. The company sells through a network of independent distributors both home and abroad.
The managing director has asked for your help in connection with a long-term investment decision:
Webster Plc is considering purchasing a new production machine. At present, it uses an old machine which can produce 8,000 “soothers” per week. This machine could be replaced with a new machine, which can produce 20,000 “soothers” per week. The new machine will cost
£400,000. Removing the old machine and preparing the area for the new machine will cost
€20,000. The new machine will occupy additional space in the factory which was planned to be rented out for £15,000 per annum payable in advance each year.

The company has already spent £40,000 on a market study to ascertain how many more “soothers” can be sold. Demand is expected to be 12,000 units per week for three years, after which a newer product will replace the “soother”. In the fourth year, the new machine would be sold for € 50,000. This sale is not expected to take place until later in the fourth year. Each “soother” sells for £7.00 and has a contribution to sales ratio of 0.2 per unit. The company works for 48 weeks in the year. Webster Plc normally expects a payback within two years and it’s cost of capital is 10% per annum.

As a report to management,
a)Evaluate the acceptability of the investment project using both the Payback and NPV methods. Clearly show your workings and separate conclusions for each method (500 words equivalent).

b)Evaluate the merits and de-merits of each method, referring to your answers above and suggest the context where each method might be appropriate (750 words).

c)Briefly discuss techniques to assess and manage risk and uncertainty in the investment appraisal process and relate the discussion to an industry of your choosing (750 words).

Section	Content	Mark
Introduction	Concise summary of issues addressed in the report, methods used, types of resource, a business focused terms of reference	5%
Investment appraisal calculation	Clearly presented calculations of payback and NPV calculations, with explanations of items included.	10%
Evaluation of methods	Thorough analysis of advantages and disadvantages of both methods, illustrating your arguments with reference to the calculations above	15%
Risk and uncertainty	Discussion and evaluation of risk management techniques in investment appraisal	10%
Conclusions	Clearly presented summary and conclusions based on the preceding analysis	5%
Presentation and referencing	Professional presentation, adequate properly referenced sources using Harvard Referencing	5%
TOTAL MARKS:		50%