Financial Performance Analysis and Capital Investment Appraisal Measures for SD Ltd

Task Description 1

In the recent board meeting the Managing Director expressed concern with cross-business strategic fit through related diversification along the value chain activities and value network of the group. As part of the corporate-level strategy exercise, he approached you to assess the financial performance of the group and its contribution towards shareholder value creation. 

1.As the Group Finance Director for the group, one of your main tasks is to provide competitive analysis of the key competitors, market offerings in the industry and identify the market trends.

Critically evaluate the key drivers of change that have affected the industry and the group as a whole.

Your report should critically evaluate the FOUR years of financial performance of the group. This report should cover the areas of profitability, liquidity, efficiency, capital structure, investor returns and shareholder value creation. 

2.Your analysis must also include suggestions on why such trends prevail or change accordingly. Meanwhile, you must state remedial action(s) to any weaknesses that you have identified, areas for further investigation and state your recommendations clearly

Critically evaluate the group’s cash flow statement over the FOUR years and suggest possible impact(s) of the changing environment on the group’s cash flow under the main headers cash flow statement - cash flow from operation, investment and financing. 

3.Your analysis must demonstrate the ability to engage in a critical discussion on the sustainability of future cash flow, possible remedial action(s) and additional factors taken into consideration. 

SD Ltd is considering in investing in a new piece of machinery that will automate production and save the company a significant amount of money. There are two options for the machinery, and information about the initial investment and four different capital investment appraisal measures are given in the table below. The cost of capital is estimated at 15%, and this figure has been used in calculating the net present value.

The management board of SD is about to attend a meeting to consider which option to choose. The IRR measure was added after the original board papers were released. When asked to estimate the IRR before calculating it, the company’s Finance Director confidently stated that it would be “well over 15% for both options.”

The Z125 option would require all of SD’s major capital budget for the next three years to be allocated to it, so it is absolutely vital that the correct option is chosen.

Required

a) Critically discuss the usefulness of the respective capital investment appraisal measures in the table above and make a recommendation as to which option should be chosen. 

b) Both payback and net present value (NPV) measure the financial viability of capital projects. Suggest reasons why payback favours the G120 option and NPV the Z125 option in this case. 

c) The IRR is quite difficult to calculate. Explain why the Finance Director was so confident that the IRR would be well in excess of 15% for both options.

d) At the management board meeting, the Technical Director produces details of a potential purchase of new engine build plant that would cost £2,080,000 with a NPV of £140,800. Discuss how this option would affect the capital investment decision to purchase either the G120 or Z125 machine