This Individual Case Study Assignment should be around 1,000 words in total and should be submitted...

Question

This Individual Case Study Assignment should be around 1,000 words in total and should be submitted in the form of a business report (approximately 500 words for each part).

Individual Case Study Assignment Part A
BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool.
The company is seeking to expand its operations with the establishment of an office block to house the marketing and human resources staff in Manchester. The company has narrowed the choice to two alternatives with the following net cash flow information being available:

Year	Property 1	Property 2
£000s	£000s
0	(2,500)	(2,750)
1	1,000	900
2	500	700
3	600	800
4	1,000	600
5	900	700

Items to keep in mind:

The company’s current cost of capital is 10%.
For this assignment, ignore taxation.

Required
As the company accountant is currently on holiday, you are required to:

By calculating net present value, internal rate of return and payback, advise the company which option they should take.

Critically evaluate the other qualitative factors that might be taken into account in this decision.

Individual Case Study Assignment Part B
BLC Ltd. has revenue of £500 million and sells all of its goods on credit to a variety of different wholesale customers. At the moment the company offers a standard credit period of 30 days. However, 70% of its customers (by revenue) take an average of 70 days to pay, while the other 30% of customers (by revenue) pay within 30 days. The company is considering offering a 2% discount for payment within 30 days and estimates that 80% of customers (by revenue) will take up this offer (including those that already pay within 30 days).
The Managing Director has asked the credit controller if the cost of this new policy would be worth offering. The company has a £80 million overdraft facility that it regularly uses to the full limit due to the lateness of payment and the cost of this overdraft facility is 15% per annum.
The credit controller also estimates that bad debt level of 2% of revenue would be halved to 1% of revenue as a result of this new policy.
Required

Calculate the approximate equivalent annual percentage cost of a discount of 2%, which reduces the time taken by credit customers to pay from 70 days to 30 days.
Calculate the value of trade receivables under the existing scheme and the proposed scheme at the year-end.
Evaluate the benefits and costs of the scheme and explain with reasons whether the company should go ahead and offer the discount. You should also consider other factors in this decision. (Hint: You need to work out the cost of the discount compared to the interest on the overdraft saved and bad debt reduction.)

005_lg6cajo-2ezmijpb.docx

Robert · Accepted Answer

Running Head-Analysis of BLC Ltd.
Student Name-
Professor Name-
College Name-
Executive Summary
BLC Ltd. is a mediumsized UK manufacturing company based in Liverpool and is now expanding its operations. For this purpose, it is evaluating two potential properties in Manchester. The chosen property will be used to house its marketing and human resources staff.
Company’s cost of capital for evaluating the choice of property is 10%. The net cash flows associated with the two properties is as shown below.
	
	Cost of capital
	10%
	Year
	Property 1
	Property 2
	
	000
	000
	0
	-2500
	-2750
	1
	1000
	900
	2
	500
	700
	3
	600
	800
	4
	1000
	600
	5
	900
	700
Analysis
Capital budgeting decisions are evaluated using Net Present Value (NPV), internal rate of Return (IRR) and Payback method.
NPV Method:
NPV method is used to find the Net present value of Cash flows using the formula
NPV = NPV (rate,Cash flows) + Initial Cash outflow
Property 1:   NPV = NPV (10%, 1000, 500,600, 1000, 900) – 2500 = 514.95
Property 2: NPV = NPV (10%, 900, 700, 800, 600, 700) – 2750 = 92.20
IRR Method:
IRR method is used to find the Internal Rate of Return at which Net Present value of cash flows is zero ie NPV = 0 
IRR formula is IRR (Cash flows)
Property 1: IRR = IRR (-2500, 1000, 500, 600, 1000, 900) = 17.67%
Property 2: IRR = IRR (-2750, 900, 700, 800, 600, 700) = 11.37%
Payback Method:
Payback method indicates the time period in which the initial investment id recovered.
Payback period for Property 1:
Cumulative Cash flow in 3 Yrs = -2500 + 1000+500+600 = -400
Cumulative Cash flow in 4 Yrs = -2500 + 1000+500+600 +1000 = 600
So Payback period is between 3 and 4 years.
So Payback period = 3 + (1000-400)/1000 = 3.60 Years
Payback period for Property 2:
Cumulative Cash flow in 3 Yrs = -2750 + 900+700+800 = - 350
Cumulative Cash flow in 4 Yrs = = -2750 + 900+700+800+600= 250
So Payback period is between 3 and 4 years.
So Payback period = 3 + (600-350)/600 = 3.42 Years
Recommendation
We evaluated both properties using NPV,

This Individual Case Study Assignment should be around 1,000 words in total and should be submitted in the form of a business report (approximately 500 words for each part). Individual Case Study...

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