Investment appraisal of Tesco plc.

Investment Appraisal Techniques & Financial Analysis of Tesco plc

Investment Appraisal Techniques for Dolapo Plc

TASK ONE

Senior management at Dolapo Plc have identified that there is a strategic need for a replacement machine to be acquired in one of its production departments. They have to make a choice between two models of the machine they have in mind. Model 1 is called Dysn and model 2 is called Texla. They are unsure as to which of the two models they should buy. They have given you the following profiles of the two models.

Cash flow (£)
Period	Dysn: Model 1	Texla: Model 2
Year0	(£250,000)	(400000)
1	120,000	95000
2	90,000	125000
3	75,000	115000
4	80,000	125000
Scrap Value	10,000	90000
Cost of Capital	12%
Cost of Capital	12%

QUESTION 1(a) :

They want you to appraise the two prospective projects using the following investment appraisal techniques:

Payback (8marks)
Accounting rate of Return (10 marks)
Net Present Value (12 marks)
Internal Rate of Return (16 marks)

Note: Funds are only available for only one model.

QUESTION 1(b) :

Write a report (of around 500 words) to the senior management of the company explaining how each of the techniques works. Your report should include the advantages and disadvantages of each technique.

QUESTION 1(c) :

Explain briefly (in around 200 words) which machine you would recommend to senior management of Dolapo Plc under each technique and state your reason why you would recommend that machine.

TASK TWO

An analysis and evaluation of the performance, liquidity, and financial structure of Tesco plc over the three-year period 2017 – 2019.

QUESTION 2(a)

Explain the company’s (Tesco plc) performance and position using the accounting ratios shown below (see page 5) and any other information relevant to Tesco plc taken from the annual report and accounts for 2019 (see the link in page 6) and any other relevant source of evidence.

QUESTION 2(b):

Highlight any five (5) limitations in the use of accounting ratios that you found in your analysis and evaluation of the company over the three-year period. This may include reference to the movements in the company’s share price particularly in 2019.

QUESTION 2(c):

Discuss other three (3) factors affecting Tesco in 2019 e.g. significant new items affecting the company’s performance, movements in share price, current retail and market conditions.

A maximum of 4 MARKS will be awarded for a high-quality analysis, presentation and references.

Note: Harvard referencing format must be used

Information on TESCO Plc

2019 2018 2017

Performance ratios

Gross profit margin (% ) 6.48 5.83 5.19

Return on total assets ( % ) 3.41 2.89 0.32

Return on capital employed ( % ) 5.90 5.07 0.55

Liquidity ratios

Current ratio ( : 1 ) 0.61 0.71 0.79

Liquidity ratio ( : 1 ) 0.49 0.61 0.68

Efficiency ratios

Inventory days (days) 14.95 14.37 15.02

Trade receivable (days) 3.42 2.96 3.20

Trade payable (days) 32.84 34.39 32.08

Gearing ratio

Gearing ( % ) 161.26 233.35 454.44

Task 1:

Total Marks for Task 1 = 70

Task 2 :

Total Marks for Task 2 = 26

For analysis and interpretation of accounting ratios for performance, liquidity and financial structure with some attempt to link this to business factors affecting Tesco over the three-year period

For brief comments highlighting any five (5) limitations in the use of accounting ratios for Tesco

For the discussion of other three (3) factors affecting Tesco in 2019 e.g. significant new items affecting the company’s performance, movements in share price, current retail and market conditions

Harvard referencing format must be used

Grading Criteria: