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Strategic Financial Planning for Boat Plc Electronic Company

Strategic Financial Planning for Boat Plc Electronic Company

PART A

Table 1

Estimation Of Cash Inflows For The Five Years

Year Units Sold Price per Unit (£) Cash Inflow(£) m
1 (0.15 × 720000) =108000 2000 216
2 (0.3 × 720000) =216000 (0.9  × 2000) =1800 388.8
3 (0.25 ×72000) =180000 (0.9 × 1800) = 1620 291.6
4 (0.1 × 720000) =144000 (0.9 × 1620) = 1458 205.2
5 (0.2  × 72000) = 72000 (0.9 × 1458) = 1312.2 94.48

 Table 2

Cost Of Production (Sitax And Versati) Per Year

Year Units sold Cost of sitax (£) Cost of versati (£) m
1 108000 400 ×108000 = 43.2 million 2× 110 × 108000 = 26.76 m
2 216000 (1.16 × 400)=464 × 216000=100.224 million 2 × 110 × 216000 = 47.52 m
3 180000 (1.16 × 464 ) = 538.24 × 180000 = 96.883 million 2 × 110 × 180000 = 39.6 m
4 144000 (1.16 × 538.24) = 624.36 × 144000 = 89.908 million 2 × 110 × 144000 = 31.68 m
5 72000 (1.16 × 624.36) = 724.26 × 72000 = 53.595 million 2 × 110 × 72000 = 15.84 m
Total Cost 383.81 million 161.6 million
Total cost of material = 383.81 + 161.6 = 545.51 million

Table 3

Fixed Costs, Working Capital, Labour Costs, Cost Of Production (Sitax + Versati)

Year Fixed costs Working capital Labor costs Cost of material 30% Tax (based on 25% tax-allowable depreciation Total
1 £60 m £50 m 25.92 m 69.96 m 15m £213.38 m
2 £62.4 m £52 m 51.84 m 147.76 m 3.75 £323.36m
3 £64.9 m £54.8 m 43.2 m 136.59 m 0.94 £301.82m
4 £67.5 m £56.2 m 34.56 m 69.44 m 0.23 £228.29m
5 £70.2 m £58.5 m 17.28 m 69.44 m 0.06 £215.57

Table 4

The Calculation Of The Present Net Value (All Figures Are In £ Million)

Year Year 1 Year 2 Year 3 Year 4 Year 5
Net Cash Inflow 216 388.8 291.6 205.2 94.48
Salvage Value 20
Total Cash Inflow 216 388.8 291.6 205.2 114.48
Cash outflows 213.38 323.36 301.82 228.29 215.57
Nominal Flows (inflow-outflow) 3.38 65.44 -10.22 -23.09 -101.09
Real flows (4% Inflation) 3.24 62.82 -10.63 -24.01 -105.03
× Real Cost of Capital 10.25% 10.25% 10.25% 10.25% 10.25%
Present Value of Cash 2.91 m 56.38m -11.72 m -26.47 -115.80
Total PV of Cash Inflows -94.7 m
-Initial Investment -215 – 3 (test cost run)-18 (redundancy settlement)
Net Present Value £ 330.7 million

Net Present Value (NPV) is a precious element of capital budgeting that reflects the disparity between cash inflows and cash outflows. It is often calculated as a measure of a venture’s future profitability and used to predict whether a business idea will be profitable or not. From the estimates of Boat Plc Electronic Company’s NPV (which is -£ 330.7 million), it is clear that the idea of diversifying and producing Versati smart televisions will be non-profitable within the next five years. This means that the cash outflows (fixed costs, working capital, labor costs, tax, and cost of material) plus the initial capital investment (including the £10 m spent on research, the £5 used on the survey, the £ spent on purchasing new equipment, the £3 invested on the test cost run, and the £18 redundancy settlement) surpass the number of inflows brought by the sale of the projected 720,000 units.

Therefore, there are two viable options for Boat Plc. First, the organization can completely shun the smart television idea and maintain its current portfolio of electrical and electronic products. The company has been fairing well in recent years by increasing its sales by an average of 20 percent despite the hard economic times. Also, considering that the firm expects current operating costs to increase by 5 percent in the future, it is prudent that Boat Plc expands the market of its existing portfolio rather than pursuing the Versati idea, which is costly and non-profitable.

Secondly, if Boat Plc deems it necessary to pursue its smart television ambition, considering that it has already invested around £15 million in research and survey, increasing its cash inflows is the only way to turn the negative NPV into a plus. The most appropriate way to realize a profit is to increase the number of television units produced in the five years beyond the current 720,000. For example, assuming the company will sell at an initial price of £2000 for each set in year one, the company needs 165,350 extra units to cater for -330.7 NPV.

Other Factors for Consideration

Other than the factors mentioned above, Boat Plc needs to consider several different aspects if it chooses to pursue the project. Most importantly, as a start-up idea, the firm must consider the 4Ps of marketing, including promotion, place, product, and price (Schultz, Barnes, Schultz, & Azzaro, 2009, p. 41). Firstly, the firm needs to ensure that the new smart TV has several variants, ensuring that all customers’ needs and financial capacities are catered for, whether those that need and can afford small 24-inch screens or 60-plus inches. Producing different types of new TV sets can also ensure that the firm remains as diversified as possible, and the returns will also be colossal as opposed to just producing one category or size of the product. Secondly, Boat Plc must evaluate the price of its products in relation to what the competitors are offering. For example, it should look into whether competitors are selling theirs above or below £2000.

Besides price, it is also fundamental to determine the ‘place’ or market where the products are sold. Typically, the market, including distribution networks, must be suitable for clients to access the company’s products. These distribution networks will ensure that smart TVs are present in shops for customers to access them. Finally, and most critically, Boat Plc needs to factor in promotion or advertisement in its marketing strategy. Advertising is critical because it serves not only as a means of expanding the organization’s customer base but also assists in providing information about the company’s products to potential buyers (French & Gordon, 2015, p. 89). By setting up specific marketing platforms, such as social media, the company’s website, television advertisements, and many others, Boat Plc stands to expand its market share both locally and globally.

PART B

How Risk May Be Incorporated Into The Business Investment Decision-Making Process

A Critical Review Of How Current Thinking On The Issue Has Developed. Understanding risk when making business investment decisions has grown in recent years, with investors now seeking the assistance of financial managers before making any critical investment choices. Arguably, any decisions involving investments are taken today from an economic analytic perspective, which assists in designing and selecting viable investment projects. In fact, empirical studies today suggest that financial risk analysis helps determine the project’s impact on the entire organization (stakeholders, society, and environment) and plays a fundamental role in identifying the project’s sustainability and risks. For example, according to Virlics (2013, p. 272), incorporating business risk in business investment decisions can assist companies in predicting the uncertainties of the future because it can point out the aspects that might create the most significant threat to the benefits and costs of the investment, including inflation, taxes, and many other factors. The results of market analysis and research are considered essential elements by most analysts as they guide investment decisions. Based on these outcomes, an investor can choose to invest or not.

Developments In Business Practice Identified By Empirical Research. In recent years, several financial risks associated with investment decisions have evolved. Today, financial risk analysts tend to evaluate several concepts before any investment decisions are made. For example, asset-backed risk assessment is currently considered a prerequisite by the financial investor. These are risks associated with shifts in assets that secure asset-supported securities, including terms modification, interest rates, and repayment risks. Asset-backed risks are fundamental to both investors and lenders. Investors, for example, can make profits by increasing lending rates (Vink & Thibeault, 2007, p. 1). Credit risks are other essential types of financial investment risks considered necessary by investors. In particular, credit risk management primarily focuses on preventing or alleviating losses by estimating their probability of occurring. This concept is used by credit lenders, banks, as well as other financial entities to lower the risk of loan non-payments (Gazi, 2011, p. 1314). Other types of risks crucial to the making of financial investment decisions include foreign investment risks, foreign exchange risks, liquidity risks, market risks, operational risks, model risks, legal risks, as well as reputational risks (Salomons & Grootveld, 2003, p. 121; Murphy, 2008).

Where Future Advances Can Be Made. Although the analysis and management of financial risks before making financial investment decisions is a widespread concept and practice, there is still more that needs to be done in the future to completely mitigate the threat of losses and the possibility of lousy investment choices occurring. One critical risk that needs consideration in the future is Information Technology (IT) risk or cyber risk (ISACA, 2006, p. 85). Today, the internet and digital economy boom means that all businesses depend on information processing as technology to drive their operations, including storage and processing of vital data. However, cyber risk is an essential concept because of the rise of cybercrime, whereby hackers and other IT gurus are using vulnerabilities in securities of systems to access unauthorized private information. Therefore, future advances should focus on establishing these risks in advance and providing dependable solutions.

Reference List

French, J., & Gordon, R. (2015). Strategic Social Marketing. London: SAGE Publications Ltd.

Gazi, B. (2011). Credit Risk Management. Journal of Applied Statistics, 38(6), p. 1314. Retrieved from https://www.tandfonline.com/doi/full/10.1080/02664760903335083

ISACA. (2006). CISA Review Manual 2006. Information Systems Audit and Control Association.

Murphy, D. (2008). Understanding Risk: The Theory and Practice of Financial Risk Management. Chapman & Hall/CRC.

Salomons, R., & Grootveld, H. (2003). The equity risk premium: emerging vs. developed markets. Emerging Markets Review, 4 (2), pp. 121–144.

Schultz, D. E., Barnes, B. E., Schultz, H. F., & Azzaro, M. (2009). Building Customer-brand Relationships. M. E. Sharpe, Inc.

Vink, D., & Thibeault, A. (2007). An Empirical Analysis of Asset-Backed Securitization. SSRN Electronic Journal, pp. 1-60. Retrieved from https://www.researchgate.net/publication/4867893_An_Empirical_Analysis_of_Asset-Backed_Securitization

Virlics, A. (2013). Investment Decision-making and Risk. Procedia Economics and Finance, 6, pp. 169-177. Retrieved from https://www.sciencedirect.com/science/article/pii/S2212567113001299/pdf?md5=9a3a1748d48b8219c2dfa6c2e530e2fc&pid=1-s2.0-S2212567113001299-main.pdf

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Question 


Strategic Financial Planning for Boat Plc Electronic Company

ASSESSMENT INTRUCTIONS

Assessed coursework must represent the work of individual students and references published works must be cited. Plagiarism constitutes an examination offence and if discovered will render a student(s) liable to the appropriate provisions of the University’s Examination Regulations.

COURSEWORK GUIDELINES

Your assignment must not be longer than 1,500 words (both section A and section B), excluding tables, computations and diagrams.

Your assignment must be clear, precise introduction with clear statement of issues to be covered, provided clear structure and well researched and good standard of presentation.

Background

Boat Plc is a UK electronic company engaged in the design, manufacture and distribution of a range of electrical and electronic products. In addition to online marketing and sales, the company maintains a chain of stores both in the UK and European Union.

Despite the difficult conditions in the European Union in the last few years, Boat Plc managed to achieve an average sales growth of 20%, considerably higher than its planned target of 15%.

Given its significant growth, the company’s production capacity is fully utilised, and any future growth will require additional significant investment. If no investment takes place, the company expects sales and operating costs to grow at 5% per year in real terms for the foreseeable future.

Boat Plc is considering undertaking a capital investment project to expand into markets outside the EU where there is strong demand for high priced electrical and electronic products.

Financial Information

The company has spent £10m in the last twenty-four months developing a unique smart television set called Versati, and initial tests carried out have confirmed its technical viability and the directors are confident that introduction of the product will be successful.

Following a successful market survey, which cost £5m, the company is planning to produce and sell Versati in the UK and outside the EU for the next five years.

Production of Versati will require an investment of £200m in manufacturing equipment. It is expected that the manufacturing equipment could be sold for cash of £20m, at year 5 prices, at the end of the life of the project. The manufacturing equipment will be depreciated over 5 years using the straight-line method.

The following additional information is available

  1. Production of Versati will commence from 1 January 2020 and it is estimated that 720,000 units of Versati will be sold throughout the five-year life cycle of the product. The pattern of production and sales volume over the life cycle of the product is expected to be as follows:
    • Year 1             15%
    • Year 2             30%
    • Year 3             25%
    • Year 4             20%
    • Year 5            10%

The initial selling price for the Versati has been set at £2,000 per unit and the company expects to maintain this selling price for the first year; thereafter, the price will reduce by 10% per annum.

  1. Production of Versati requires two types of materials: sitax and

1 kilo of sitax is required for the manufacture of each unit of Versati. Its current replacement cost is £400 per kilo and this cost is expected to rise by 6% per annum.

Manufacture of one unit of Versati requires 2 kilos of zilon. The company has reached a supplier agreement with a market cost leader in the industry for the annual purchase of all of its requirements of zilon at a fixed cost of £110 per kilo for the next five years.

  1. The labour force required for the manufacture of Versati has already undergone special training for the test run costing £3.0m. Production of each Versati would require 8 hours of this skilled labour which is paid for at an hourly rate of £30. Having negotiated a redundancy pay settlement of £18m (at Year 5 prices)
    Strategic Financial Planning for Boat Plc Electronic Company

    Strategic Financial Planning for Boat Plc Electronic Company

    payable at the termination of production of Versati, the staff union have agreed to maintain the hourly labour rate at £30 for the five-year period.

  2. The total fixed costs in Year 1 will be £60m, including depreciation. The fixed costs are expected to increase, thereafter, by the general rate of inflation each year.
  3. Production of Versati will also require an investment of £50m in working capital at the beginning of the project. The amount of investment in working capital is expected to increase by the general rate of inflation.

Assume that all operating cash flows occur at the end of the year to which they relate, except those in Year 0, which occur immediately.

Boat Plc has a real cost of capital of 10¼% per annum and pays tax at an annual rate of 30% on its taxable profits. Half of the tax is payable in the year in which it arises, the balance is paid in the following year. The company can claim tax-allowable depreciation (capital allowance) on a 25% reducing balance basis.

General inflation rate is expected to be 4% per annum.

PART A

REQUIRED

(a)        Using the information provided and all relevant cash flows for the investment proposal calculate the net present value of the project and advise the company if it should undertake it. (60 marks)

(b)       What factors [other than your answer to part (a) above] would you advise the company to take into consideration if it decides to embark on the project. (10 marks)

PART B

How Risk may be incorporated in business investment decision-making process.

You are required to research the academic journals and professional literature on how risk may be incorporated in business investment decision-making process, and write a report that:

  1. Gives a critical review of the way in which current thinking on the issue has developed;
  2. Includes any developments in business practice identified by empirical research;
  • Indicates where future advances can be made.

(30 marks)

    (TOTAL   100 marks)

COURSEWORK MARKING CRITERIA

Your coursework will be awarded a grade in accordance with the following criteria:

A good assignment will:

  1. be clearly and appropriately structured;
  2. demonstrate a good understanding of the issues involved;
  • provide clear evidence of the ability to analyse and interpret and make necessary computations from data provided.
  1. put forward all the relevant arguments in a logical format;
  2. v) show evidence of original thinking and research into the topic

(a bibliography should be appended and all references properly acknowledged);

  1. use language in a precise and concise manner.

The assignment should not be longer than 1,500 words, excluding tables, computations and diagrams.

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