Strategic Financial Management

Strategic Financial Management
Strategic Financial Management

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Strategic Financial Management

Learning Outcomes

  1. Assess and evaluate the theoretical basis of financial strategic decision making

2. Analyse and interpret data, and by the integration of theory and practice, investigate and apply relevant tools to the assessment of a variety of business problems

3. Evaluate and synthesise the problem solving mechanisms from strategic financial decision making and assess the value to enhanced decision making of the application of relevant tools & techniques.

Assessment Task

Company A has the following budgeted income and expenditure for two potential  projects : Alpha and Beta

Year 1Year 2Year 3Year 4
Project Alpha
Income2,250,0002,500,0003,000,0003,250,000
Expenditure – plant and equipment (purchase)1,500,000   
Other expenses1,000,0001,100,0001,250,0001,500,000
     
Year 1Year 2Year 3Year 4
Project Beta
Income2,200,0002,200,0002,200,0002,200,000
Expenditure – plant and equipment hire375,000375,000375,000375,000
Other expenses900,000990,0001,000,0001,100,000

Strategic Financial Management

Additional information:

If the additional information does not indicate that it is project specific you are to assume that it is relevant to both potential projects;

  • Taxation is charged at 20% a year in arrears;
  • Extracts from the company financial statements are as follows: – Benchmarked gearing of 0.40:1; – Cash position:  cash at bank of £1 million;
  • The company are wishing to reduce their carbon footprint in line with their core strategic values of sustainable production.  They have determined that renting the equipment for Project Beta  would reduce their carbon emissions by 70% but Project Alpha’s would have a nil effect on their carbon footprint.
  • Project Alpha would require other projects to be put back by one year due to the initial capital investment required in Year 1.  It would not prevent these other projects from going ahead, but would delay their completion by one year – there is no quantitative financial data available for these other projects.
  • Usual margin that the company achieves on its products is between 15-25% on a cost plus basis.
  • The product that they are looking to introduce in both cases (A or B) is a product that already has an established market with both well established brand competitors and some substitutes.
  • The market is reasonable mature having been in existence for about 5 years, there are no patents or other protection rights for the existing competitors but competition is fierce.
  • This is a new product for Company A and would be entry into a new market of which they have no experience or established reputation.  However, they do sell a complementary product for which they are the brand leader both on cost and perceived quality.
  • They usually price on a cost plus basis but this is based upon the appropriateness of the method for the product being priced.
  • PROJECT ALPHA ONLY– the plant and equipment has no scrap value.

Requirements:  

(a) Calculate the CASH net present value of the two projects (including the taxation charge)  The discount factor is 10% and you should round your answer to the nearest full pound (not pence) . (10 marks)

(b) Critically evaluate the usefulness of net present value and two other methods as  project appraisal tools using academic references to support your answer. ( 15 marks – 600 WORDS)

(c) Having decided to use a traditional absorption costing method, the directors now need to decide on a pricing methodology.  You are required to evaluate the different ways in which a company can determine an appropriate price for its product and advise the directors, based upon the information within this assignment what pricing method would seem most appropriate for the company. (15 MARKS – 600 WORDS)            

TOTAL MARKS AVAILABLE: 40 MARKS

Strategic Financial Management

Key Resources/Reading

  • Arnold, G. Corporate Financial Management (2012)  5th edition chaps 14/15
  • Collier, P.M. Accounting for Managers 4th edition (2012) Wiley chaps 1/2/3/4/6/7
  • Grundy, T. Exploring Strategic Financial Management  (1998) FT Prentice Hall Chap 2 and 4
  • Johnson, G & Scholes, K. Exploring Corporate Strategy 9th edition (2010) 
  • Mills, R & Robertson, J Fundamentals of managerial accounting and finance (1999) chap 11
  • Proctor, R (2006) Managerial Accounting  for decision making  FT Prentice Hall Chaps 3-4

Below is a partial answer to the above homework questions by one of our writers. If you are interested in a custom non plagiarized top quality answer, click order now to place your order.

Strategic Financial Management

  1. Net Present Values of project Alpha and Beta
 Project AlphaYear 1Year 2Year 3Year 4Year 5
Income2,250,0002,500,0003,000,0003,250,000 
Other expenses(1,000,000)(1,100,000)(1,250,000)(1,500,000) 
Net Profit1,250,0001,400,0001,750,0001,750,000 
Taxation (20%) (250,000)(280,000)(350,000)(350,000)
Expenditure – plant and equipment (purchase)(1,500,000)    
Net cash flow(250,000)1,150,0001,470,0001,400,000(350,000)
Discount factor (10%)0.909  0.826  0.751  0.683  0,621
Net cash flow(227,250)949,9001,103,970956,200(217,350)

NPV = (-227,250) +949,900+1,103,970+956,200+ (-217,350)

=2,565,470

Project BetaYear 1Year 2Year 3Year 4Year 5
Income2,200,0002,200,0002,200,0002,200,000 
Expenditure – plant and equipment hire(375,000)(375,000)(375,000)(375,000) 
Other expenses(900,000)(990,000)(1,000,000)(1,100,000) 
Net Profit925,000835,000825,000725,000 
Taxation (20%) (185,000)(167,000)(165,000)(145,000)
Net cash flow925,000650,000658,000560,000(145,000)
Discount factor (10%)0.909  0.826  0.751  0.683  0,621
Net cash flow840,825536,900494,158382,480(90,045)

NPV =840,825+536,900+494,158+382,480+ (-90,045)

    =2,164,318

Strategic Financial Management

  • Usefulness of net present value and two other methods as  project appraisal tools

Net Present Value

The net present value is considered one of the most valuable project appraisal tools due to its ability to determine the net cash flow at any particular present time (Collier, 2015). However, there are other useful factors in the application of net present value as discussed below.

The net present value is useful as a project appraisal tool because it helps investors to determine the viability of projects before they can invest in them (Collier, 2015). Through calculating the net present value of a project’s future cash flows, a company can determine whether the project is worth investing in. A negative net present value would indicate that the project is not viable while a positive net present value is an indication that the investor can go ahead to invest in the project (Arnold, 2013).

The net present value is useful because it recognizes the differences in money value and is hence useful in ensuring accurate projection of cash flow. In this relation, every period’s cash flows are discounted in order to provide for the fact that the future value of currency is worth less in terms of the present value (Erickson, 2013). This ensures that any income and expenditure is accurately measured to determine the present value of the project.

The net present value allows companies to make investment decisions regarding long-term projects whose cash flow projection is less certain than short-term projects. This is because the net present value recognizes the inherent uncertainty of long-term projects. To achieve this, net present value ensures that cash flows projected further into the project period have less impact on the present value than those which happen earlier in the project (Arnold, 2013). Through the use of net present value, firms put the cost of capital and inherent risk into consideration when making future predictions…..

Strategic Financial Management

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