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Evaluation of Herts Gadgets International plc's Investment Proposal

Knowledge and Understanding tested in this assignment
  1. evaluate strategies available to an organisation to enable the creation and maintenance of value;
  2. assess the financing choices available to organisations and the relevance of capital structure;
  3. analyse the financial and operating risks faced by organizations and the strategies for mitigating these risks;
  4. research the specific issues relating investing and raising finance on an international basis
  1. analyse financial statements and interpret the results in the context of value creation;
  2. critically evaluate capital investment proposals both domestic and international including estimation of component and overall capital costs;
  3. devise strategies for identifying and managing foreign exchange risk and the risks of international investment;
  4. devise financial strategies f or enhancing enterprise value.

Herts Gadgets International plc manufactures and sells a range of machine tool accessories.

The company is considering an investment of £13.0 million in new production plant and  machinery for the product. The new facility is to be operational from 1 January 2022. It will have a life of five years and at the end of its life it will have a residual value of £1.0 million. It is expected that the facility will have significant benefits.

Firstly, it will increase Herts Gadgets’ production output of diamond milling tools by 10%. Total contribution from new sales is expected to be £2,865,000 in 2022 increasing annually by 5% per annum until 2026. All the increased production will be exported in approximately equal proportions to South Korea, Spain and Canada. Thus, the firm will have cash flows denominated in Won, €, and $Ca and the contribution figure given above is the sterling equivalent of these cash flows at current exchange rates.

Secondly, it will reduce the product’s direct labour and direct material costs by 20% per unit which will result in savings of £1,680,000 on existing production in 2022. Having made these cost savings, the company expect costs to remain constant to 2026 due to continual efficiency improvements. The project also requires additional working capital of £2.0 million.

Herts Gadgets pays corporation tax at the rate of 20% on its taxable profits which is paid one year in arrears. (Assume that net cash flow is the same as taxable profit).

Evaluate the investment proposal on behalf of Herts Gadgets Intl plc and advise the firm  whether the project is acceptable on a financial basis. Also, comment on the potential impact  of foreign exchange risk on the project. Also discuss and recommend the alternative sources of financing the project. You should support your arguments with relevant  theory and calculations and indicate any non-financial matters you feel should be taken into  consideration.

Your answer should be presented in the form of a report of 2500 words total (excluding  the reference list). You must also submit an Excel spreadsheet containing your  calculations.

For deferred coursework, submissions up to 24 hours late will attract a daily late 10% penalty. Reports submitted more than 5 days late will attract a mark of zero.  Submit one electronic copy via Studynet/Canvas as a Word file. In addition, submit an Excel  spreadsheet containing your calculations. Non submission of the spreadsheet will incur  a penalty of 10%.

This is an individual assignment and the report submitted should be entirely your own  work.

This assessment is subject to anonymous marking so do not put your name on any  document you submit. However, you must put your SRN on each document you submit.

The purpose of this assignment is simply to give you the opportunity to demonstrate  that you have acquired the knowledge and skills identified in the Module Handbook and  that you can apply them in a typical business situation. Do refer to the assessment criteria given in the Module Guide which gives an outline of how marks will be awarded. You should approach the task as a business manager dealing with a ‘real’ business and  should:

  1. Adopt a coherent approach to dealing with the set task with a clearly stated business purpose.
  2. Identify an appropriate theoretical dimension and consider the implications for practice.
  3. Adopt appropriate analytical methods and a critical perspective.
  4. Refer to empirical work where appropriate.

Do refer to the assessment criteria given in the Module Guide which gives a general outline of how marks will be awarded. Further specific advice about how marks will be  awarded for the Coursework is given below.

Task Specific Assessment Criteria: Coursework

Communication Skills (Written) – 20 Marks:

  1. For the physical presentation and layout of your report,
  2. Adopting logical well supported (ie using appropriate citations) arguments,
  3. The extent to which the report is accurate, brief, concise and clear,
  4. The standard of English, and,
  5. Compliance with standard Harvard referencing. Equal account will be taken of each

You should establish a clear business focussed conceptual basis for your report – ie you  need to show what you are seeking to achieve and why it is important for managing the Herts Gadgets plc business (supported using appropriate citations).

From the case data given you should identify the nature of the decision(s) facing  Herts Gadgets plc and identify appropriate theory to support the approach you adopt  and give your reasoning. Ie which analytical tools are consistent with ‘business focussed  conceptual basis’ referred to above? (supported using appropriate citations).

Using the case data given, you should apply the analytical methods identified in the  previous section and evaluate the impact on the business in relation to the ‘business  focussed conceptual basis’ referred to above.

Conclusions should be arrived at based on your analysis of Herts Gadgets plc  issues; ie what do the results of your analysis tell you? In your conclusions section you should summarise the results of your analysis. Your recommendations will be assessed on  the extent to which they are linked to the analysis of Herts Gadgets plc issues and on  the extent to which they are theoretically coherent - ie the extent to which they are  consistent with the theoretical/conceptual base you establish

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