Strategic and Financial Decision Making (ACFI5022) 代写


Strategic and Financial Decision Making (ACFI5022)
 
Assignment 2017
 
 
Task 1
 
Spion ltd makes components for electronic equipment and has recently tendered for a contract to supply a low cost item to a satellite navigation equipment manufacturer.
 
In order to produce the component Spion would have to purchase a special machine at a cost of £560,000, at the end of 2017. It is expected, due to the obsolescence of such equipment as satellite navigators, that the contract to manufacture the component will only last for 4 years.   After that time it is thought that the machine will not have a great deal of use and will only be disposed of for £10,000.
 
Demand for the component is expected to be a follows:
 
                       2018            2019            2020            2021
Demand (units)             38,000              42,000               50,000          23,000
 
The selling price of the component is expected to be £22.00 per unit and the variable cost of production will be £15.00 per unit with incremental annual fixed overheads of £70,000. All of these forecasts are quoted in current terms.
 
The general rate of inflation over the relevant period is expected to be 5% per year but Spion has forecast that its selling price and costs will inflate as follows each year:
 
Selling price                       3% per annum
Variable cost of production            4% per annum
Fixed production overheads   6% per annum
 
            Spion is aware that its investors are expecting a real rate of return of 5.7% per annum.
 
            The company operates with a target Return on Capital Employed of 20% and depreciation is charged on a straight line basis over the life of an asset.
 
Strategic and Financial Decision Making (ACFI5022) 代写
Required:
 
a)    Calculate the net present value of buying the machine and comment on    your findings.
 
                                                          (10 marks)
 
b)    Calculate the accounting rate of return (based on average investment)      of the investment and comment on your findings.
 
                                                          (5 marks)
 
c)         Spion’s Sales Director is heard to say, “Let’s base our decision on the Average Accounting Rate of Return outcome as this measurement is linked to Return on Capital Employed with which we are familiar. I don’t understand the meaning of NPV. Or at least we could calculate the Internal Rate of Return and then we could use the percentage return in order to judge project acceptability.”
             
       You should provide a response to the Sales Director which                  will recommend a method to use and compare and contrast the                  three appraisal methods in question.
                                                                      (20 marks)
 
                                                               (Total 35 marks)
 
 
Task 2
 
In response to the above debate with regard to project appraisal methodology, Spion’s assistant finance manager attends a two-day course on the use of Real Options Analysis.
 
 The following quote was brought to her attention at the development session:
 
Howell and Jägle (1998, p137), when discussing real options analysis state that, “The theory shows how it can be efficient to make a ‘strategic’ investment, even if this loses money in itself, provided the investment creates or preserves options for the company (e.g. in new brands, technologies etc.).”
 
The assistant finance manager is rather confused by this statement and thinks to herself, “How can it be worthwhile to undertake a loss-making strategic investment?”
 
You are, therefore, required to consider the above statement made by Howell and Jägle (1998) and to contrast it with the theoretical view and assumptions of a net present value approach.
 
You should also provide, for the assistant finance manager, an example of a ‘strategic investment' that may fit the above quote and to analyse the generic strategic factors managers should consider when ‘managing’ the future value of a real option.
 
                                                               (35 marks)
                                                              
                                                              
Task 3
 
At a subsequent Board meeting, the Production Director, Fred Charles, says that he has heard that one of Spion’s main competitors is looking to sell out, as the major owners wish to retire and no family members wish to continue the business. The competitor is a large private limited company with a multi-million pound turnover and profit.
 
Fred Charles is aware that the company is well-established with a good reputation, has a good product range and even more importantly, has an excellent group of product designers. He thinks that the company would be a valuable synergistic addition to Spion ltd.
 
Linda Stirk, the HR Director, says, “This all seems very risky to me. For instance, how would we know how much to offer for the company?”
 
Fred Charles replies, “That’s easy, we will just have to look at the most recent company Balance Sheet [Statement of Financial Position] and subtract the liabilities from the assets. That will tell us how much the company is worth.”
 
You are required to prepare a report to the Board considering Fred Charles’ final statement and to discuss whether or not the valuation process would be as straight forward as he suggests. In addition, you should also inform the Board about what other factors they should consider, and why, if they do decide to proceed with their interest in the competitor.
 
              (30 marks)
 
                                                                                    (Total 100 marks)

 
 
 
Further Information
 
You are required to present well-structured answers of no more than 3,000 words in total (excluding calculations).
 
Assignments will be graded according to the following criteria:
 
·        Evidence of critical judgement in selecting, ordering and analysing content in order to present a sound argument.
 
·        The demonstration and understanding of relevant concepts and models.
 
·        The demonstration of insight and originality in responding to the assignment.
 
·        The extent and level of research undertaken and the degree to which this research is appropriately referenced.
 
All of the usual University regulations will apply with regard to the late submission of work and plagiarism.
 
Work should be submitted to the SAC and in electronic format via Turnitin on the SFDM BlackBoard site.
 
 
Deadline 10th May 2017 at 1 p.m.
 
 
Reference List                                                       
 
Howell, S. and Jägle, A. (1998), ‘The evaluation of real options by managers: a potential aspect of the audit of management skills’, Managerial Auditing Journal, Vol 13, Iss 6, p335
 Strategic and Financial Decision Making (ACFI5022) 代写