Evaluating Investment Proposals and Financial Performance

Executive Summary

This is a report on a South African Company named Williams Limited, which intends to invest in investment proposals to enlarge the business. Popular investment proposal analysis method Net Present Value (NPV) is used to evaluate two investment proposals of the company, namely Standard Suite and Advanced Suite. The key sources of funding for the proposal have also been described in the report, along with the benefits and drawbacks of each source. Apart from that, the report also analyses two important services, namely Entry Level Package (ELP) and Advanced Level package (ALP) for the company, by using the Break-Even Point method. To analyse the financial performance of the company, cash flow budgeting is also conducted for three months. For students who are seeking business dissertation help, this report offers the best insights into investment analysis and financial management strategies within the whole corporate setting.

Introduction

Williams Limited is a South African Company, which is operating in the UK for about one decade. Recently the company is trying to expand the business and therefore it is investing in new projects. Currently, there are two investment proposals for the company, which are the advanced suite and a standard suite. However, before choosing one proposal for investment, it requires to be analysed by using the proper tool.

Furthermore, appropriate sources of funding also should be selected according to the condition of the company and relative prospects for return. Apart from that, the company is also trying to introduce two new service packages in the market, which are Entry Level Package (ELP) and Advanced Level package (ALP). To set the price for the packages, it is important to understand the break-even point for those services.

Literature Review

For any investment proposal to analyse, various methods can be used, such as NPV, break-even analysis, and cash flow budgeting. Concerning NPV, it is regarded as the difference between the present and future value of cash flow. It is utilized in investment planning for evaluating the profitability of any investment proposal (Jory & et al., 2016). By Maroyi (2011), while evaluating any project, NPV considers the time value of money and also adjusts the revenue according to the risk by using a discounting factor. The higher the level of risks, the higher is the discounting factor for a project to evaluate the return. In this way, NPV help to identify the most profitable project for investment. Khan & Jain (2006) stated that for analysing the profitability of a project, the cash flow generated by an investment project must be assessed according to the rate of the cost of capital, which is done through NPV. It uses a uniform discounting rate to analyse the return of a project, which makes it an effective method for investment appraisal.

Break-even analysis is another method, which helps to discover a point at which an investment project will cover its expenses. It is frequently utilized to make an initial decision on whether to proceed with any new product or service. It also acts as a financial control method in the sense that additional evaluation might be essential as provisional change (Schmidt, 2006). Alnasser & et al. (2014) stated that the calculation of the break-even point provides a strong indicator to the managers regarding the point from which any product or service will earn a profit. In short, it helps to understand if a product or service can earn profit by paying all the expenditures. This method is important for managers to set the prices of products and services in the market.

Concerning cash flow budgeting, it is another important method an organization undertakes to assess important major investment projects. In this method, an organization evaluates the prospective cash inflow and outflow of the project to determine whether the potential revenue that would be made, satisfy the satisfactory target benchmark (Edwards, 2012). According to Motlagh (2013), cash flow budgeting helps organization to do short-run financial planning. This method is important to judge whether a project can meet short term obligations. In this way, it helps to control the expenses of the business better. Managing expenses and cash is also helpful in maintaining working capital for future investment projects.

Sources of Funding

There are various sources of funding Williams Limited can use to provide financial support to its project, which is described below.

Equity share: Equity share is regarded as the most vital basis of raising funds for a project. This mode signifies ownership of the organization and hence fund raised by this method is also termed as ownership capital. The equity investors obtain a return on their investment according to the revenue of the organization. Following are the key advantages and disadvantages of this option for Williams Limited

advantages and disadvantages of Equity share

Debentures: Debentures is another important source of fund for Williams Limited. A debenture is an acknowledgment that the organization has borrowed. The debenture holders obtain a fixed rate of interest and are to be repaid at a future date. Hence, debenture holders are also termed as creditors of the organization. The key benefits and drawbacks of using this option for funding are as follows.

advantages and disadvantages of Debentures

Loan: Loan is the other important source of finance for Williams Limited. This loan can be obtained from any financial institutions or bank for the long or short term. The key benefits and drawbacks for Williams Limited for using this source are as follows:

Based on the situation of Williams Limited and the underlying advantages and disadvantages of different methods of finance, it is recommended that the company should select a loan to fund the investment project. The rationality for selecting this option is because the investment projects will provide assured revenue through which the loan amount can be repaid easily. Furthermore, since the lenders will not have any proprietary rights on the company, they will have no control over the business activities of Williams Limited.

Investment Appraisal

The following table demonstrates the NPV analysis of the first proposal, namely the Advanced Suite.

The detailed analysis of the Advanced Suite proposal is illustrated in Appendix 1.

The NPV analysis of the second proposal, namely Standard Suite, is demonstrated in the following table.

Appendix 2 illustrates the detailed analysis of the Standard Suite proposal.

Based on the above analysis, it can be observed that the NPV of the Advanced Suite is £4838411, which is less than the NPV of Standard Suite at £9120989. This indicates that the value for the Standard Suite will be higher in comparison with the value of Advanced Suite. Furthermore, the Internal Rate of return (IRR) for Standard Suite is also higher at 27% than Advanced Suite at 13%. Based on this analysis, it can be stated that Williams Limited should invest in the Standard Suite proposal to obtain better returns.

Cash Budgeting

The cash budget for Williams Limited for the first three months for the two service packages are demonstrated in the following table.

Break-Even Analysis

Williams Limited also intends to sell two services like packages, which are Entry-level Package (ELP) and Advanced Level Package (ALP). To analyse which package is much profitable, break-even analysis is conducted. The following table demonstrates the break-even analysis for ELP and ALP.

The detailed analysis of fixed expenses for both the services is demonstrated in appendix 3. According to the analysis, it can be observed that the break-even point for ELP is approximately 536 units, which is higher than ALP at approximately 399 units. This indicates that it will require sales of a minimum of 399 units of ALP package to break even, i.e., to cover all the fixed and variable expenses of a business. Beyond this point, ALP will earn a profit. Thus, based on this, Williams Limited will require to sell more than 536 units of ELP to earn a profit.

Evaluation

The evaluation of the performance of Williams Limited for three months is demonstrated in the following table.

Other Issues to be considered

Apart from financial issues like expenses, profit, and returns, many other issues also need to be taken care of by Williams Limited for introducing any new service and for making an investment project successful. One such issue is employee productivity in the organization. Williams Limited needs to ensure that the employees perform effectively and demonstrates high productivity to achieve maximum benefits. This productivity can be increased by enhancing the satisfaction of employees in the organization. There are various ways by which Williams Limited can increase the employee satisfaction rate, such as by providing a better salary package, by rewarding good performance, by delivering training and by giving promotional opportunities. Customer service is another important issue need to be considered by Williams Limited to enhance business performance. Better customer services will lead to increased customer satisfaction, and therefore, they will purchase the services of the company more, which will, in turn, increase the revenue and hence the financial performance of the company. Strategic innovation is another important issue that is required to be considered by the company to obtain success. To get better profit, there is a need to provide customers something new. It will also help Williams Limited to expand the business and to increase the revenue base.

Conclusion and Recommendations

In this report, the NPV method is used for analysing the investment proposals, which is a useful tool for analysing which proposal is much profitable shortly, considering the risks. Based on NPV analysis, it can be concluded that the Standard Suite will bring more profit than the Advanced Suite and should be pursued by Williams Limited for investment. Concerning the source of funding, the loan is recommended as a suitable option for the company, given the prospective return from the project. Concerning break-even point analysis, it can be concluded that the organization requires to put much emphasis on ALP as its break-even point is lower than ELP and hence will bring more profit for the company.

References

Alnasser, N. & et. al., 2014. The Effect of Using Break-Even-Point in Planning, Controlling, and Decision Making in the Industrial Jordanian Companies. International Journal of Academic Research in Business and Social Sciences, Vol. 4, No. 5, pp. 626-636.

Čalopa, M. K. & et. al., 2014. Analysis of Financing Sources for Start-Up Companies. Management, Vol. 19, No. 2, pp. 19-44.

Jory, S. R. & et. al., 2016. Net Present Value Analysis and the Wealth Creation Process: A Case Illustration. The Accounting Educators’ Journal, Vol. 16, pp. 85-99.

Motlagh, A. J., 2013. Accounting: Cash Flow Statement. IOSR Journal of Business and Management, Vol. 7, No. 4, pp. 109-116.

Schmidt, R. A., 2006. Financial Aspects of Marketing. Macmillan International Higher Education.