CASE STUDY;TASK
Write a report to address the following for K plc
A)
The following information relates to potential investment proposals that K plc is considering in 2022.
Project Initial investment (£) Annual cash net inflow (£) Project duration (in years)
A 1,000,000 300,000 6
B 400,000 100,000 4
C 700,000 200,000 5
D 614,500 100,000 10
E 500,000 120,000 7
F 560,000 100,000 10
G 200,000 See note 1 6
Notes:
Investment proposal G above has £100,000 per annum for the first 2 years and then £80,000 for the remaining 4 years.
All other investment proposals [A, B, C, D, E and F] are annuities for the project duration.
Assume all project annual cash net inflows arise at the end of each year except for the initial investment, which arise in year 0 for all investment proposals.
Payback target set is 4 years.
Cost of capital for all investment proposals is 10 %.
Required:
a) Payback period for all projects.
b) Net present value for all projects.
c) Rank the projects using both payback and net present value.
d) Which project may be selected if projects are mutually exclusive? Explain your recommendation.
e) Discuss the strengths and weakness of payback and net present value methods in the context of investment appraisal.
f) Discuss five qualitative factors which the directors may need to consider before making a final decision.
[LO1]B)
K plc is a listed company. It is currently financed principally by equity. Its board of directors is currently considering purchasing all the shares of an unlisted company, which will allow it to expand into a new geographical region.
The scale of the investment is such that K plc could not raise the cash from internal sources. A decision now needs to be made on the method of funding. The directors are not sure which method of funding best suits K plc.
Required:
a) Suggest 3 alternative methods of funding to the board of directors of K plc debating critically the reasons for using each of these methods of funding. All the relevant factors must be explained and placed clearly in the context of the particular circumstances of K plc.
b) Critically discuss the link between the above financing decision and investment decision relating to the acquisition of the unlisted company.
[LO3]C)
K plc manufactures a chemical product and has operated a standard costing system to control the variable costs of the product.
The standard cost for the chemical product is:£
Direct materials S 1 kg at £3 3.00
Direct materials T 2 kg at £1 2.00
Direct labour 3 hours at £10 per hour 30.00
Variable overheads 3 hours at £6 per direct labour hour 18.00
The company’s annual production budget is for 40,000 units produced evenly over the year.
The first quarter shows the following results:
Production volume was 9000 units.£
Direct materials S – 8,500 kg 29,750
Direct materials T – 18,000 kg 18,000
Direct labour – 28,000 hours 294,000
Variable overheads 165,000
Total variable production costs 506,750
The management are modestly pleased with the actual results for the quarter. While some seem under control, others significantly differ from those set out in the standard costing system.
Required:
a) Prepare a full variance analysis statement of the variable cost elements
b) From the available information suggest possible explanations for the variances identified.
[LO1]D)
Distinguish between centralised and decentralised procurement. Discuss the benefits of centralised purchasing and decentralised purchasing.
