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ASSIGNMENT QUESTION Root & Cook Ltd (“RCL”) owns and operates three factories in Manchester, Leeds and Halifax producing ride-on lawn mowers and garden tractors for domestic use in large gardens. The...

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ASSIGNMENT QUESTION

Root & Cook Ltd (“RCL”) owns and operates three factories in Manchester, Leeds and Halifax producing ride-on lawn mowers and garden tractors for domestic use in large gardens. The company last year had turnover of £220 million.

The company is managed by Steve, the grandson of the founder. Steve owns 25% of the shares in the company, while the remaining 75% is split between three other grandchildren.

Part 1

Most of RCL’s clients are large retailers in the UK and EU. Two key customers are D&R DIY Ltd and BricoFrance SA, which are both large chains of DIY and garden centres in the UK and France.

The other shareholders are concerned about the business. Although there seems to be plenty of work coming in and the last year has been reasonably profitable (Operating profit was £18 million last year before interest and tax), the company’s debt has increased to £157 million from £120 million the year before. Steve has started talking about the need for the other shareholders to invest more money to reduce the debt.

Towards the end of last year RCL acquired a 3 year license for the manufacture of an robot mower which cuts grass automatically and which can be controlled by a smartphone app. RCL paid the design company, RoboCut Ltd, an £8 million advance fee and invested £10 million in RoboCut for 30% of its shares.

RCL is owed £12 million pounds for a series of large orders placed by D&R last year. There is also an outstanding dispute about a £20 million consignment for BricoFrance completed in 2016. This has led to payment being withheld while negotiations continue between lawyers and technical specialists.

There is a further problem that Steve believes the BricoFrance issue arose from faulty workmanship by a contractor which RCL engaged in 2015. He has refused to pay the contractor who is now threatening legal action. Because this area of work has been suspended, a large stock of materials and supplies has built up at the company’s Manchester site. Steve insists that the company needs to have this level of stock for when the dispute is sorted out. He is also reluctant to press his key customers too hard for payment.

The other shareholders have approached RCL’s accountants to review the situation.

Requirements:

Prepare a report of no more than 1,250 words addressing the following issues.

i. Using the reading list provided on the VLE, explain:

a. what is meant by Profit and Cashflow and how they are different

b. what is meant by Working Capital and in particular, the meanings of Receivables, Inventory and Payables

c. how changes in Working Capital affect Cashflow (25 marks)

ii. Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results. You can use additional hypothetical numbers (ie ones that you make up yourself) to illustrate your answer. (10 marks)

iii. Analyse and recommend what steps should now be taken to improve this company’s cashflow through better Working Capital management.

(15 marks)

Part 2

Continuing with RCL, Steve is contemplating investing in a new manufacturing facility in either Reading or Bristol. Both will involve a significant investment, and, assuming the issues noted above are sorted out, the shareholders have the resources to finance either project but not both.

The Reading venture would involve construction on a derelict site from scratch which will cost £20m and would operate for 9-10 years before substantial further investment would be required.

The Bristol venture involves taking over an existing but slightly out of date plant. This will need about £16 million investment and will have an expected useful life of 5-6 years.

In the past, to assess the financial viability of new projects, the company has only considered profitability. At present, it does not have any formal procedure for assessing capital projects.

Requirements:

Prepare a report of no more than 1,250 words for the shareholders addressing the following issues:

i. Using the reading list provided on the VLE, explain:

a. what is meant by capital budgeting and summarise the purpose and key steps of the process

b. how the following investment appraisal methods are calculated, what they seek to show and the advantages and disadvantages of each method.

i. payback period

ii. net present value

iii. internal rate of return

You should not consider any methods other than these three

(25 marks)

ii. Apply the concepts in (i) above to compare the alternative investment options. Use hypothetical numbers (ie ones that you make up yourself) to illustrate your answer. (10 marks)

iii. Analyse and recommend which project should be pursued by the company, using your answer in (ii) to support your argument. (15 marks)

ASSESSMENT CRITERIA

This assignment requires you to demonstrate your knowledge and understanding of a) the management of cash and b) the capital budgeting process.

Your discussion for part 1 of the assignment should distinguish the difference between cash and profit. Your answer must identify and explain why the accounts of a business can report a profit but a shortage of cash, and discuss the consequences to a business of being short of cash. The general causes of cash flow problems should be analysed using the case study presented to you, particularly regarding the management of working capital. Methods for dealing with cash flow problems and managing cash for the business described should be proposed and evaluated.

Your answer for part 2 of the assignment should identify and explain the benefits of having a formally documented capital investment appraisal process. You must outline and explain the stages involved in the capital budgeting process including initial investigation through to the post completion audit. Your answer should provide a breakdown of the capital investment appraisal methods covered in the course (ie payback, NPV and IRR) and their relative advantages and disadvantages. You should then consider these methods in the context of the business described and assess how they would allow an informed choice of project to be made. You should consider the scale, duration and risk levels of the projects.

You should ensure that your answers make specific reference to the business under discussion. You are not expected to show any specialist knowledge of the sector in which the business operates, but credit will be given for evidence that you have considered what issues might be specific to this company in particular. You should illustrate your answer with hypothetical numbers where this helps understanding of your work, but there are no “right” answers to what these numbers should be.

READING LIST

Your answers should be supported by the reading material provided on the VLE. It should referenced using the Harvard guidelines. You should only use these texts for your work; it is not acceptable to ignore this reading list as it has been specifically chosen to provide the right texts for the discussion. Do not conduct alternative research on the internet.

NOTES

Your answer must not be solely descriptive in nature; it should provide clear evidence of understanding, application and analysis of the issues under consideration. You should assume that your reader has some experience in finance and management but is uninformed on the particular topic; for instance, in i) you do not need to explain what “accounts” are, but you do need to show what their purpose is for this business in this context.

Your reports should begin with a concise and relevant Executive Summary of no more than 100 words for each part. An additional Introduction is not needed. The Executive Summary and References do not count towards the word limit. The contents of tables are also excluded but the use of text in tables should be kept to a reasonable level and be properly explained in the body of the text.

Your work should be expressed clearly and fluently using a style of writing appropriate to the subject area. Sentences and paragraphs need to be relevant, well-structured and incorporate the correct terminology. Ideally, there should be no errors of spelling, punctuation or grammar.

To achieve a pass mark you must ensure that you correctly identify and explain the underlying concepts and theories relevant to the assignment. To achieve higher marks, in addition to the requirements to achieve a pass mark, you will need to display application of knowledge and analytical skills.

Answers should follow the order of the tasks set out above and the word count allocation to each section should broadly reflect the spread of marks. Avoid exceeding the word count.

Answered Same Day May 03, 2020

Solution

Aarti J answered on May 07 2020
139 Votes
Accounting and Financial Analysis
Course Name
Course date
Student’s Name
ACCOUNTING AND FINANCIAL ANALYSIS    9
Accounting and Financial Analysis
Part 1
What is meant by Profit and Cash flow and how they are different?
Both the cash flows as well as the profits are important part of the financials of the company. They help in analysing the different financial parameters.
Profit
The profit is also called as the net profit earned by the company. Profit is calculated as the sales – all the expenses and taxes. The expenses also includes all the non-cash expenses such as depreciation and amortization. Profit is a way which is used to analyse the profitability of the firm. Higher the profit higher is the profitability of the firm.
Cash flows:
The cash flows of the company is the actual cash that the company has, it analyses all the cash inflows and the cash outflows. The cash flows can be analyses from three different activities which includes: Cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. The cash flows helps in analysing all the cash flow activities.
Difference:
Profits as well as the cash flows are important for the firm to succeed. It is not compulsory that the profits and the cash flows of the company is same. The company may have high profits but low cash. This is because, the profits of the firm is calculated on the basis of accrual basis of accounting whereas the cash flow is calculated as per the cash basis of accounting. Though high profits and low cash flows result in profitable business but with low cash flow, the company is not able to meet its day to day operations. Thus, it has a poor cash flows.
What is meant by Working Capital and in particular, the meanings of Receivables, Inventory and Payables?
Working capital
Working capital is the difference between the cu
ent assets and cu
ent liabilities. It is the capital which is required for day to day operations of the business. The working capital varies from company to company as per their nature of operations. Working capital is the major aspect which helps in analysing the day to day operations of the company. The major elements of the cu
ent assets includes: Cash, cash equivalents, inventory, accounts receivables, prepaid expenses and other short term cu
ent assets while cu
ent liabilities includes the accounts payable, notes payable (short term), wages payable, income tax payable etc.
Receivables:
Receivables is also known as accounts receivables. The company incurs sales on cash and on credit. The sales that has been incu
ed on credit needs to be paid by the customers. All the sales done on credit are the part of the accounts receivables i.e. the amount of the cash that has to be collected from the customers.
Inventory:
Inventory can be said as the material held by the company which can be used for sale or for production. The inventory can be classified on three types: This includes raw material inventory, work in process inventory and finished goods inventory. The inventory is the cu
ent assets as it has to be used for production or for sale in the cu
ent period.
Payables
Payables is the amount which is due to be paid to the suppliers. The company purchases the raw materials from the suppliers on credit, the amount which is due to pay them is called as the accounts payables.
How changes in Working Capital affect Cashflow?
Working capital can be said as the difference between the cu
ent assets and the cu
ent liabilities. A company where the cu
ent assets are more than the cu
ent liabilities are considered to have appositive cash flows whereas when the company has cu
ent liabilities more than the cu
ent assets is said to have a negative cash flows. The positive cash flow helps in meeting the short term obligations of the firm and is considered to have a positive cash inflow whereas negative working capital states the cash outflows. The working capital of the company affects the operating cash flows of the company.
Apply the concepts in (i) above to this company to show how the way the company is being managed might affect its financial results. You can use additional hypothetical numbers (ie ones that you make up yourself) to illustrate your answer.
RCL Company has two major customers who are D&R DIY Ltd and Brico France SA. The company’s debt has increased from 120 to 157 million. The company also has the advance payments of 8 million from the order and 10 million from the investment from the shareholder’s equity. The company has 12 million that is yet to be received from D&R and a dispute of 20 million for...
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