Finance and Accounting

Understanding Management accounting and Financial Management
Project description
Coursework two: Understanding Management accounting and Financial Management
PART B

Beta plc is a packer and retailer of organic food. Their customer base at present is spread throughout the UK with no particular concentrated area of business. However, the business would like to look into expanding their business abroad with an ambitious 20% export target in 2 years time.

Beta plc’s sales turnover is growing at an impressive 10% annually and they are looking at ways to improve their productivity even further. The company is planning to set up a new plant to cope with expansion plans. This will require an initial outlay of £5m. The costs will go into the construction of a state of the art production facility as well as towards the development and marketing of a new product that has been developed by the Research & Development activities of the firm.

The R&D team has developed two ways of developing the new product. One method requires a lower initial cash outlay and a second method requires a higher initial outlay but would help in achieving better economies of scale. The methods are however mutually exclusive and a decision will have to be taken as to which method will be more appropriate.

The costs and cash flow structure for both methods have been listed below. Both the options will require initial outlays.

Option A:
Year 0
£000 Year 1
£000 Year 2
£000 Year 3
£000 Year 4
£000 Year 5
£000

Net Profit 726 396 231 66 66
Depreciation* 264 264 264 264 264

Net Cash flow -1320 990 660 495 330 330
Option B:
Year 0
£000 Year 1
£000 Year 2
£000 Year 3
£000 Year 4
£000 Year 5
£000

Net Profit 248 330 495 743 825
Depreciation* 330 330 330 330 330

Net Cash flow -1650 578 660 825 1073 1155

*Depreciation is calculated by using straight-line method
The company’s cost of capital is 15%.
The company’s recent return on capital employed has been 20%.
Required:

In order to help the board of directors decide which option to pursue, write a report of 1000 words discussing the project. Make sure the following areas are covered:

1. Evaluate the R&D projects using Payback, ARR, NPV and IRR methods.
(10 marks)

2. Make a firm recommendation on the R&D project the company should adopt based on the advantages and disadvantages of the various investment appraisal methods used and the current/future requirements of the firm.
(40 marks)
You will be assessed on:

• Calculation of investment appraisal methods (10 marks)
• Critical discussion application of relevant theory (25 marks)
• Evidence of reading and research (including sourcing and referencing using the Harvard referencing system throughout, accompanied by a list of references)
(10 marks)
• Overall structure and presentation of report (including requirements listed below) (5 marks)

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