Strategic and Financial Decision-Making

Strategic and Financial Decision Making (ACFI5022)

Assignment 2020

Don't use plagiarized sources. Get Your Custom Essay on
Strategic and Financial Decision-Making
Get an essay WRITTEN FOR YOU, Plagiarism free, and by an EXPERT!
Order Essay

Task 1

D.A.L. ltd makes components for electronic equipment and has recently tendered for a contract to supply an item to a satellite navigation equipment manufacturer.

In order to produce the component D.A.L would have to purchase a special machine at a cost of £280,000, at the end of 2020. 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 £5,000.

Demand for the component is expected to be a follows:

2021 2022 2023 2024

Demand (units) 38,000 42,000 50,000 23,000

The selling price of the component is expected to be £11.00 per unit and the variable cost of production will be £7.50 per unit with incremental annual fixed overheads of £35,000. 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 D.A.L. have forecast that their 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

D.A.L. is aware that their investors are expecting a real rate of return of 5.7% per annum.

The company operates with a target Capital Employed of 20% and depreciation is charged on a straight-line basis over the life of an asset.

Required:

a) Calculate the net present value of buying the machine and comment on your findings.

(12 marks)

b) Calculate the accounting rate of return (based on average investment) of the investment and comment on your findings

(8 marks)

c) D.A.L’s Production Manager 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 Production Manager which will recommend a method to use and compare and contrast the three appraisal methods in question.

(20 marks)

(Total 40 marks)

Task 2

In response to the above debate, with regard to project appraisal methodology, D.A.L.’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 indicate what generic strategic factors managers should consider when ‘managing’ the future value of a real option.

(30 marks)

(Total 100 marks)

Task 3

During this debate on investment appraisal methodology a further senior manager is heard to say the following, “I’ve just been to a conference and the main message was that the essence of company management is the creation of shareholder value. Apparently, we should be utilising value-based management techniques in order to produce Market Value Added (MVA) through the generation of Economic Value Added (EVA). I always thought that we should be maximising Net Present Value (NPV). Have our objectives changed?”

You are required to provide a brief report to the senior manager:

a) Giving your opinion as to whether or not the application of EVA and/or MVA methodologies are practical management techniques leading to the creation of shareholder value.

(20 marks)

b) Providing a critical analysis as to whether or not the adoption of EVA and/or MVA would now change objectives from that of NPV maximisation.

(10 marks)

(Total 30 marks)

Further Information

You are required to present well-structured answers of no more than 3,500 words in total (excluding calculations).

Learning Outcomes Assessed:

Recognise the role of accounting and finance within the strategic planning process

Demonstrate problem solving and decision making skills through the selection and application of appropriate tools, and control processes, for strategic project appraisal

Consider the importance of risk assessment at all stages of the investment process and the application of a variety of risk management techniques

Appreciate the importance of the cost of capital, and the influences upon it, within the strategic investment appraisal process

Top Grade Homework
Order NOW For a 10% Discount!
Pages (550 words)
Approximate price: -

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.