Investment Analysis Report

1) Please note that the numerical section is very important to the case

2) Summarise your broad conclusions and findings at the front of your report in an executive summary (this is not included in the word count).

Recommended length of report around 2,000 words. Detailed numerical analysis can be included in appendices to the report, which do not count towards the total word count. However you should try to be concise. The report is being written for a busy executive who has limits on her time.

Marks will be awarded under following broad headings:
Presentation and clarity of the coursework report 20%
Executive summary 10%
Investment Appraisal 50%
Theoretical discussion on investment appraisal (requires use of sources outside the module materials, correctly referenced)
20%

Harvard Referencing

Book used in class Atrill, P. and McLaney, E., Accounting and Finance for Non-Specialists, 9th edition, Pearson, 2015
CASS BUSINESS SCHOOL

MSc in Global Supply Chain Management /
/ Msc in Marketing Strategy & Innovation

SMM444 – ESSENTIALS OF ACCOUNTING AND FINANCE

Group Coursework

Submission date: Monday 14th December 2015

Investment Analysis

Background

Beauty and the Beholder, plc is a cosmetics manufacturer based in the UK, which, despite being relatively new, has enjoyed significant success and achieved sales growth rates of over 20% in the last five years.

It has now identified another growth opportunity which involves exporting its products to Asia and South America and this opportunity would double the size of the company both in terms of long term financing raised and in terms of sales. In order to pursue this opportunity, the company will have to build a new factory for which they have identified a site, and they believe the factory could be up and running in 2 years.

Currently, Beauty and the Beholder, plc believes the level of risk of its activity is the same as the average level of risk for its industrial sector, resulting in a discount rate of 12.64% but there are currently differing views on the board of Beauty and the Beholder, plc on how this investment would affect that level of risk.

Financial Information

The management of Make More plc, a manufacturer of low cost electronic products, has seen a significant increase in the company’s activity despite the financial crisis that has affected business activity in the last two years.

They are now facing two decisions for which they have asked you to conduct the analysis and recommend the best course of action.

The first decision has to do with a potential investment to make three additional products using a new technology. In order to undertake this investment, Make More is looking to lease a new facility for the next six years, after which it is expected that the technology will be obsolete. The forecasts put together by the management of the business are as follows:

 Sales of the three products in year one will be 50,000 units at an average price of £55;
 Sales volume is expected to grow at 20% a year for the first three years, and decrease at 25% a year for the remainder of the project;
 Cost of sales will start at 65% of sales price and efficiency improvements will lower it by 8%age points from year three;
 The company has ordered market research to be done for £500,000, which will be paid next month;
 Selling and administrative expenses specific to this project will be £450,000 and there is an additional allocation of £300,000 from corporate overheads;
 The lease rent of £150,000 will be payable from year 1, as the owner is waiving the rent for the initial period while refurbishment of the facilities and installation of the machinery is taking place;
 In order to manufacture the three products, Make More is going to buy equipment worth £1m (a 5% deposit has already been paid). This equipment is expected to have a scrap value of £150,000 in six years time;
 No special capital allowances were agreed with the tax authorities;
 Working capital required for the project is £400,000 in year 1, changing in line with sales growth throughout the life of the project;
 Annual inflation rate is expected to be 2.5%;
 Corporate tax rate is 21%
 The current cost of capital of Make More is 15%, but this project is considered to be riskier and the cost of capital for companies with comparable levels of risk is 20% higher.

Required:

You are required to present a report to the Board of Make More, plc, which answers the following questions:

1. Using a minimum of six academic reference sources, discuss the various methods that can be used in evaluating investment appraisal, including a discussion of the advantages and disadvantages of each.

2. Assess whether the company should go ahead with this investment using the four most widely used methods of investment appraisal.

3. In order to respond to the uncertainty in economic conditions, assess the following:
a. A scenario in which all most significant variables deteriorate by 10%;
b. A scenario in which all variables improve by 5%;
c. A sensitivity analysis (7.5% deterioration) on each of the two variables you consider to be more significant for the success of the project

4. Make a final recommendation to the Board of Make More, plc, on whether to go ahead with the project or not, considering the calculations you have conducted in parts 2 and 3 above.

One report is to be submitted by each group, the same groups you have been allocated for term one (MSI) or the groups you have been allocated to for Quantitative Methods and Strategy for Delivering Value (GCSM)

Notes
1. Recommended length of report around 2,000 words. Detailed numerical analysis can be included in appendices to the report, which do not count towards the total word count. However you should try to be concise. The report is being written for a busy executive who has limits on her time.

2. Summarise your broad conclusions and findings at the front of your report in an executive summary (this is not included in the word count).

3. Marks will be awarded under the following broad headings.

%
Presentation and clarity of the coursework report 20
Executive summary 10
Investment Appraisal 50
Theoretical discussion on investment appraisal (requires use of sources outside the module materials, correctly referenced)
20
100

Note that these categories are a general guide. The final mark will be awarded after considering the overall quality of the piece of work.

5. Submission date Monday 14th December 9.00pm. Please submit your work as a WORD file (not a PDF file) on Moodle. You may also attach an Excel file if you wish.

Some advice concerning the coursework
These notes are intended to help you avoid some of the more common mistakes.

• Although the key figures that lead to your conclusions/recommendations should be included in the report, use the appendixes for detailed calculations. You have to refer to any appendixes it in the main body of your report. Do not attempt to include additional narrative discussion in the appendix. It will not be marked and you might lose some of the presentation marks for exceeding the word limit.
• Also in the appendixes you must show the formulae (pressing Ctrl and ` simultaneously on Excel turns cells from numbers to formulas and vice versa) and figures used for your calculations.
• The background information is, in most cases, enough for developing the required spreadsheet but in some instances, it requires you to research outside the module materials in order to find the required information. If in any instance you can’t find the required information, indicate the steps you have taken to find it and make an assumption that you use in the development of your model.
• You can assume that your reader has a good level of accounting and finance knowledge and does not need you to explain technical terms.

CASS BUSINESS SCHOOL