Financial Decision Making Module: Assessment on International Financial Strategy, Investment Financi

Learning Outcomes

As part of the formal assessment for the programme you are required to submit an assessment for the Financial Decision Making module. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

1. Demonstrate knowledge of key issues in international financial strategy and their application to a range of contexts.

2. Compare and contrast complex investment financing leasing decisions.

3. Evaluate a range of financial risks management strategies and apply a range of organisational settings.

4. Appraise and recommend improvement to a company’s working capital strategies based on an analysis of financial statements.

5. Present an improvement strategy in an appropriate format using subject specific terminology.

Professional Skills - Perform effectively within the professional environment. Work within a team, demonstrating interpersonal skills such as effective listening, negotiating, persuading and presentation. Be flexible and adaptable to changes within the professional environment.

Maxwell Ltd is a retailing outlet that trades within the eurozone.

The company imports goods from China where the currency is the yuan. At January 2018 please assume that 1 euro buys 9.959 yuan. 2,000 items have just been ordered at 1,000 yuan each from the supplier in China, costing 2,000,000 yuan in total.

Transportation, insurance, advertising and selling costs of this consignment, payable in euros, will be €100,000 in total. The market selling price for each product, in euros, is €160.

The shipment of goods from China is scheduled to occur in three months’ time; that is, at the end of March 2018. Payment to the supplier must be made, in yuan, by the time the goods are despatched.

Maxwell Ltd have approached their bank for a three-month forward rate contract, and have been quoted a rate of €1 = 10.50 yuan.

(a) Calculate the total profit or loss that will be earned on the shipment if the 2,000 items are all sold for €160 each and if Maxwell Ltd were to buy the 2 million yuan dollars:

i) At the January 2018 spot price of €1 = 9.959 yuan;

ii) Under the forward rate contract of €1 = 10.500 yuan;

iii) At the end of March 2018, assuming that the spot price is then €1 = 9.0000 yuan; and

iv) At the end of March 2018, assuming that the spot price is then €1 = 11.0000 yuan. (10 marks)

(b) Explain the role of each of the following participants in the risk management process:

(i) Hedgers

(ii) Speculators

(iii) Arbitrageurs

(c) Critically discuss the potential effects of exchange rate volatility and risk on business’s that trade in foreign currencies. (10 marks)

Lightning Ltd is specialized in producing and selling washing machines. In 2018, the manufacturing cost per unit included:

Direct material £125

Direct labor (20 minutes per unit) £45/hour

Variable manufacturing overhead £20

Variable selling expenses £15

Variable administrative expenses £10

Fixed manufacturing £1,100

Fixed selling and distribution £1,450

Fixed administrative £675

The company produced and sold 220,000 units at £225 per unit.

In 2019, management has decided to increase the selling price by 25% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2019. The company has produced and sold
the same quantity in 2013 as last year.

(a) Calculate the break-even point and margin of safety in both units and revenue for the two years, 2012 and 2013, and briefly comment upon the results. (10 marks)

(b) Critically discuss key assumptions attached to the breakeven model, within the light of the reality of today’s business environments. (15 marks)

The following investment project is being considered by Garcia Ltd.

An investment of £750,000 for a machine expected to last for five years with no residual value at the end of its life. Cash flow (profit before depreciation) is as shown in the table below.

The company has a target ARR of 15% and a target payback period of two years and a target internal rate of return of 12%.

(a) Calculate payback period, accounting rate of return, net present value and internal rate of return for the investment project.
(25 marks)

(b) Prepare a report that advises the board of directors of Garcia Ltd on whether to invest in the project. Support your advice with the results of your calculations in (a).

(c) Critically explain the impact of taxation, including capital allowances, on investment appraisal.

(d) Critically evaluate the use and limitations of internal rate of return in investment appraisal.