Sample Project Proposal Paper on Ready Ready PLC Report

A) INVESTMENT IN ADDITIONAL EQUIPMENT

The calculations as attached in the appendices show that the NPV was negative. NPV uses the decision rule of
investment in projects that have a positive NPV. In our current situation where it is negative, the project is said
not to be worth since it would not generate long-run profits for the firm. The major assumption made were that
cash flows from released working capital are realised in year 6, the scrap value forms the terminal cash flow.

B) RECOMMENDATION ADVISING ON VIABILITY OF THE PROJECT

From the analysis the project should not be undertaken since it has a negative NPV. Under the method projects
are undertaken if the calculated NPV is positive. That is NPV ≥0. This is to mean that the total cash flow
generated from the project should be greater than the cost invested. For our current project the cost is higher
than the cash inflows making it not viable.

Investment appraisal methods

Investment decisions are undertaken in order to help achieve the company objective. The investment decisions
are importance as they influence the size of the firm and increase the value of share. Therefore, firms need to
evaluate possible projects so as to ensure efficient allocation of finances (Robert et.al 200. The firm could either
make use of traditional appraisal methods including the payback period (PBP) and accounting rate of return
(ARR), or could make use of the modern approaches including use of net present value (NPV), internal rate of
return (IRR), and profitability index (PI). The method have their own strengths and weaknesses as well as their
appraisal criteria as discussed below;

The PBP method makes use of the inflows and outflows to assess how soon the cost of investment would be
realised. Therefore it has widely been referred to as the pay-out period method. It has been widely used for it is
simple to use and interplate, it is a fast way used by managers to assess the time it takes to recoup the initial
investment, it is important for preliminary screening of viability of a product, and it also gives rough idea on
how profitable a project is expected to be (Robert et.al 2002). However, it does not show actual profits, does
not care about cash flows realised after realisation of initial cost, and does not care about time value of money.

Using this method the decision rule is acceptance of projects with minimum PBP compared to those set by
management.

The ARR accounts profits from financial returns to assess viability of investment proposal by dividing the
average income after tax with average investment. It is a more improved version compared to PBP as it uses
profits and thus cares about all inflows, it is simple, and easier to ascertain. However, it also does not care about
time value of money and does not care about recovery of costs. Using the method, projects with ARR higher
than that set by the management are selected (Robert et.al 2002).

NPV method forms one of the modern approaches that discount future cash flows then compares to the initial
cost of investment. Projects with a positive NPV are selected. It is based on the concept that a shilling
tomorrow is not the same as a shilling today. The method has widely been applied for lump sum cash flows as
well as annuity. It also has received considerable attention when it comes to evaluation of projects with unequal
lives. The NPV is realised form deducting discounted cash outflow from discounted cash inflows. For projects
with a positive NPV, investment is undertaken. The method is widely applied as it recognises time value of
money, it uses entire cash flows, and is in line with the overall firm’s objective of wealth maximisation.
However, it ignores PBP, it may not give efficient results for projects with unequal lives, it is difficult, and
using the cost of finance is a difficult concept.

IRR makes use of the principles of NPV. It is the rate at which the NPV equals zero. That is the inflows equal
the outflows. It is a representation of the highest interest a firm would be willing to pay to finance a project.
The method has been widely accepted as it recognises time value of money, it considers cash flow over the
entire period, and it does not use the cost of finance, and helps in maximisation of shareholders wealth (Robert
et.al 2002). However, it is difficult to use, expensive, and time consuming. In addition, it may lead to multiple
results making it hard for managers to apply.

The PI method also used the NPV approach but instead of subtracting the present values with cost it is divided.
The method is simple to use, and recognises time value time value of money. However, it may be difficult to
assert with certainty about the economic value of a project.

Benefits of using NPV as an appraisal method

The net present value method is important and has its benefits over the other method. Apart from its high
recognition of time value of money, and being consistent with the investors objective as well as the wealth
maximisation objective (Glynn 2004). The method is superior to other as it is best when the projects have
unequal lives, it is also useful when comparing projects with cash outlay that are not the same, and could also
be used when the cash flow patterns differ. Therefore, it is Mostly applied by firms in assessing investment
projects more so those that have long periods.

c) Manager’s decisions, role in achieving corporate objective, and possible conflicts

Most managers have been held up in trying to bring the relationship between business finances and financial
management. As a manager, they are responsible of ensuring proper financial allocation and preparation in
accordance with law and set guidelines which is of essence to the firm making up business finance (James
1990). On the other hand, financial management which is a branch in finance that looks at allocation of
resources which are scarce has to be assessed to ensure the firm resources are allocated efficiently (Robert et.al
2002). This is following the free market systems as well as ensuring the investors’ funds are wisely invested.
Consequently, yielding the most of its best returns (James 1990). Therefore, looking at the needs on bases of
them being basic as well as those that address shortages. This is of importance to the firm in achievement of its
corporate objective. This is because the managers ensure projects that are underway are not left pending and
funds allocated are not misused. In addition, the managers ensure that the funds available will not all be put into
project work leaving administrative work pending. This roles are at times in conflict. This is because each
department has its objectives and will attempt to have budgets pulled to their side (Kathleen 2014).

Therefore, managers make use of cash budgets as well as funds flow statements to ensure that they are able to
minimise the gaps between the projected and the actuals with funds provision for shortages that may arise.
Therefore, they do not lead unfinished projects (Thorsten et. al 2000). Therefore, the short-term needs must be
managed to keep the company on its toes as well as properly liquid. Faced with the short-term objective, the
managers has to ensure attainment to the long-term company objectives that are referred to as strategic
decisions since they are useful in a number of ways (Robert et.al 2002). First, they influence the size of the
company as they compose of the assets investments a firms would be willing to make. Managers who fail to
invest do not move the company and it takes a firm so many years to grow as well as expand. Secondly, the

long-term decisions influence growth since long-term investments generate cash flows that if re-invested lead to
firm growth. Finally, it influences a firms going concerns and future sustainability (Felix and Valev 2004). This
is because long-term commitments gives root to a firm as well as improve its networks. For this investments to
be possible, the finance manager must calculate their sources of funding and come up with the most appropriate
fiancé mix (Robert et.al 2002).

Therefore, a manager must be guided by principles of financial prudence including consultation with experts,
involve investment committees, and ensure all stakeholders are not left out so as to come up with the most
optimal finance mix. This all is to get involved with the firm stakeholder to ensure that they are all involves in
giving their suggestions with regards to the investment project (James 1990). Therefore, ensuring that none is
negatively affected thus not compromising future sustainability of the firm. However, in some instance, an
attempt to satisfy all groups lead to conflicts. For instance, in the attempt to satisfy shareholders wealth
maximisation, customers are hurt and the objective of profit maximisation is at stake. Also in the attempt to
ensure customers welfares is maximised, the manager may conflict with profit maximisation objective since it
reduces earnings (Thorsten et. al 2000).

Another bases for conflicting managerial functions has been on bases of scope. The managerial functions can
be either routine or managerial in nature. The managerial functions require skilful planning, control and
execution (Richard and Bill 2006). A manager has four key managerial functions including; investment of long-
term assets mix decisions, it involves capital budgeting programs where the managers has to ensure investments
to best projects. The firm is forces to commit its funds to assets that would generate future cash flows (Robert
et.al 2002). Therefore, a finance manager has a role of evaluating the projects risks and returns to be able to
evaluate their viability so that they do not commit a firms funds on projects that are not worth (Felix and Valev
2004). Therefore, the manager finds themselves in a situation where they have to invest in assets thus ensure
company growth as well as ensure the firm has cash thus remaining liquid. In the attempt to reach out to the
long-term capital investments, the mangers conflict with their short-term objectives of ensuring the firm is
liquid (Kathleen 2014).

In addition, they have to engage in finance decisions. This involves identifying the best sources of funding. The
manager has to make a decisions on the amount that would be financed by debt as well as by equity (Felix and

Valev 2004). Therefore creating a balance between equity and debt financing. This has an impact on the cost of
finance and the financial risk (Richard and Bill 2006). This are important decisions that influence growth and
corporate performance of a firms. However, a manager might find themselves having problems creating a
balance between the sources of funding due to uncertainties. The sources of funding are an important scope that
can help the firm establish the best investments to make as well as the best sources that are comparable to the
investments made (Kathleen 2014). The major conflicting problems comes in when the manager has to settle on
the best source of finance. In some cases, raising funds through equity helps the firm to be more solid but at
times they cannot be used in urgent cases. The debt finance, though not having growth may lead to liquidation
of a firm if proper decisions are not made (Robert et.al 2002). Therefore, it should be noted that financing
decisions if not taken accordingly could lead to conflict between financing of short-term and long-term projects.
On the other hand, looking for finances is detrimental to ensuring a company growth and expansion. In
addition, it assures sustainability as well as assets growth.

The manager has to make liquidity decisions. Therefore, they are able to address their short-term liabilities as
they fall due. This decisions ensures funds managements as well as influence a firm’s profitability, risk, and
liquidity. This are important decisions since the higher the liquidity rations a company has the more sustainable
it is (Felix and Valev 2004). Current assets in form of cash can be out into a lot of uses that lead to achievement
of long-term objectives (Richard and Bill 2006). In addition, they could help a firm address short-term
obligations. This decisions are at times conflicts for instance maintaining a high liquidity affect profitability
which will be low since the assets is not earning. The finance manager has to always ensure proper allocation so
that they do not hold unnecessary funds and on the other hand they do not leave insufficient funds for day to
day activities (Thorsten et. al 2000).

Finally, the manager has to make divisions of earning decisions where they decide on how the company
realised earnings are allocated. The managers decide on whether to return the earned income into the business
thus investing in company growth or to distribute the earnings inform of dividends (Thorsten et. al 2000). At
this point a manager is faced with conflicting role of ensuring the shareholders wealth maximisation which will
be realised by paying much profits in dividends (Robert et.al 2002). The shareholders, realise their return on
investment through paid out dividend that they always want paid and in high amounts. On the other hand, they
will be required to re-invests thus holding most of the profits for the growth of the firm. So that a firm can

growth, they need to hold some of its profits as retained earnings and capital reserves. The amount is also used
to buy any debentures and redeemable preference shares. This roles are in most cases conflicting because each
side would require most of the earned profits (Richard and Bill 2006). The manager cannot decided not to pay
divided to re-invest, and shareholders would not accept managers who do not result to assets growth because
they are paying dividend. Therefore, the managers has to ensure both sides are addressed although in most
cases striking a balance has been difficult (Richard and Bill 2006).

d) Sources of finance and characterises of long-term debt finance

There are many possible sources of funds the firm could make use of. This include; equity finance, debt
finance, bills of exchange, lease, overdraft, debentures, and venture capital (Thorsten et. al 2000). Each one will
be discussed below;

Equity financing mainly involves finances from owners in small firms. In larger ones equity has the
shareholders as well as reserves. Equity finance has ordinary share capital which is a permanent finance and is
raised by the firm form the general public (Felix and Valev 2004). The returns are usually in form of dividends
that are realised with respect to their level of holding. However, they carry a high risk due to uncertainties, and
there is no assured refund. The other aspect is the retained earning which includes reserves of undistributed
profits. They also include capital reserves that are realised after sale of premium.

Preference share capital is the second source of finance. It is quasi in nature as it has aspects of equity as well as
those of debt finance (Richard and Bill 2006). They are preference in nature as they are responded to before the
ordinary when it comes to paying dividends as well as return on a point of liquidation. The shares can be
redeemable thus they are realised back or bought back after a certain period (Felix and Valev 2004). They also
have irredeemable preference shares which are permanent and only realised in a point the firm is under
liquidation. They could also make use of cumulative as well as non-participative preference shares. In addition,
they could get funds form convertible preference shares which could be changed into ordinary shares.

The other most applied source of finance has been the debt finance which is a fixed return source of finance.
The method of financing has been highly advocated for firms with a strong equity base. In addition, it has a
major characteristic of only being available to companies that have enough collaterals thus referred to as

qualifying companies and it offered in limited amounts. That is it is limited to the value to the security, and it’s
based on the liquidation of a country (Thorsten et. al 2000).

Debt financing could be from different sources including loans which are the most common and are offered
under different terms. They could either be short-term which is below 1 year, medium lying between 2-5 years,
and long-terms which are loans taking more than 5 years (Richard and Bill 2006). Another major characteristic
lies on the type of borrower involved in giving the loan. This determines the term or duration of payment. In
most cases, the financing is dependent on the life period of the project and thus most shorter loans are advanced
to projects with a life of 4 years and below and long-term loans for projects with maturity beyond 4 years (Felix
and Valev 2004). The best time or conditions under which loans are ideal include; times when the company
gearing level is low, at times when the company future cash flows are assured and thus it will be able to pay off
the principle and the interest amount, when the company forecast a positive economic condition in the future,
when the company market prices and share prices guarantee a stable sale, and when the company future
projections justify the borrowing. Hence loans have their key features and a firm must be able to produce the
required documents to be able to secure the loans. This includes; history of the company, its leadership and
description of its corporate structure, list of major shareholders, nature of product, publicity, nature of loan, and
their cash flow forecasts (Thorsten et. al 2000; Richard and Bill 2006). The best thing will using the debt
finance is that it reduces tax since its interest is tax allowed. I addition, it does not rely on profit since its fixed,
does not call for a lot of formalities, it is self-sustaining as in most cases the assets acquired are used to repay
the debt, it reduces with times and thus reduces the burden to borrower, and it does not impact on a firms
decision since the financiers don’t participate in the AGM (Tony et.al 2005). However, the finance has its
friezing characteristics that limit borrowers. For instance, it is a conditional form of finance, influences the
gearing level and this may have an impact on the firms decision making process (Felix and Valev 2004). May
be a dangerous source of financing in times of recession and could drown the firm, its availability is limited by
its quest for security, it is mainly available under short-term and for specific ventures which is a compromise to
the strategic long-term decisions, and may lower the value of shares when used in excess.

Therefore, debt finance in general has lots of attributes and is characterised by; it is refundable thus it is
redeemable, it is a fixed return capital, interest on the debt is allowable under the tax law, the finance is secured,
the lender has not voting rights, it increases the gearing ratio, it carries with it a legal obligation on the borrower

who must pay, it is a creditors finance thus from external sources, does not grow with time, they are pre-
conditional, and carried a claim with it which is always superior (Thorsten et. al 2000; (Richard and Bill 2006).

Other finance sources including bill of exchange which are mainly applied for export trading are not highly
applied in the industrial sector. Similar to bills leasing are not mainly applied where the ones takes the assets for
some time, pays rent and returns the assets at a later date. Overdrafts are used to solve short-term liquidity
issues and are mainly used to finance working capital (Felix and Valev 2004).

Debentures are a long-term debt financing realised after sales of debenture certificates. The owner gives
funding to the firm with a maturity of 10-15 years. Interest payment is a legal obligation and the term may be
negotiated. They could be secured using the fixed or floating charge, they could be naked thus treated like
common creditors, the redeemable preferential shares are redeeming after the minimum time and before
maturity to become ordinary (Tony et.al 2005; (Richard and Bill 2006). The irredeemable are a permanent
source of finance since they are only bought back in case a company is going through liquidation.

The other source of debt finance lies in the bonds. Bonds are raised by corporations in events they want to arise
money that could be used to finance their projects. When bonds are given or issued, the issuer is given a loan
that should be claimed and thus governed by law (Tony et.al 2005). They could either be redeemable,
irredeemable, convertible, or n on convertible. Redeemable bonds are bonds that could be converted into
ordinary shareholding or preference holding upon maturity. On the other had the irredeemable bonds cannot be
converted and are only realised upon liquidation of the firm. The convertible bonds are bonds that could be
changes upon maturity. With respect to the time given, bonds have an advantage of being auto renewed upon
maturity, they are secured, and have a claim and bond holders are superior to other financiers (Thorsten et. al
2000).

Finally the venture capital as a source of finance is mainly plied by new firms and mainly undertaken in cases
where the business is less risky. The venture capitalists pool their resources and finances to fund businesses and
only they are on their foot they withdrawal leaving the owner to run the enterprise (Tony et.al 2005; (Richard
and Bill 2006).

REFERENCES

Addison, T., Mavrotas, G. and McGillivray, M., 2005. Aid, debt relief and new sources of finance for meeting
the Millennium Development Goals. Journal of International Affairs, pp.113-127.

Beck, T., Levine, R. and Loayza, N., 2000. Finance and the Sources of Growth. Journal of financial economics,
58(1-2), pp.261-300.

Crotty, J.R., 1990. Owner–manager conflict and financial theories of investment instability: a critical
assessment of Keynes, Tobin, and Minsky. Journal of Post Keynesian Economics, 12(4), pp.519-542.

Eisenhardt, K.M., 2014. Strategy as strategic decision making. MIT Sloan Management Review, 40(3), p.65.

Hoskisson, R.E., Hitt, M.A., Johnson, R.A. and Grossman, W., 2002. Conflicting voices: The effects of
institutional ownership heterogeneity and internal governance on corporate innovation strategies. Academy of
Management journal, 45(4), pp.697-716.

Pike, R. and Neale, B., 2006. Corporate finance and investment: decisions & strategies. Pearson Education.

Rioja, F. and Valev, N., 2004. Finance and the sources of growth at various stages of economic development.
Economic Inquiry, 42(1), pp.127-140.

Spangenberg, G., Doherty, W., Wyly, M., Scales, J. and Sipe, D., Qualcomm Inc, 2004. Method and apparatus
for measuring benefits of business improvements. U.S. Patent Application 10/600,891.

APPENDICES
Table 1: contribution margin of ‘gourmet’
‘gourmet’
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Sales
quantity

400,000 420,000 441,000 441,000 441,000 441,000

Cost price
adjusted for
inflation

£3.051 £3.10 £3.075 £3.152 £3.23 £3.311

Total
Revenue
sales

1,220,400 1,303,000 1,390,032 1,390,032 1,424,430 1,460,151

Variable cost £1.850 £1.902 £1.955 £2.01 £2.067 £2.124
Total v.cost 740,000 798,840 862,155 886,410 911,547 936,684
Contribution
margin

480,400 504,160 527,877 503,622 512,883 523,467

Table 2: contribution margin of ‘favourites’
‘favourites’

Initial capital £3,500,000. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Sales quantity 800,000 840,000 882,000 882,000 882,000 882,000
Cost price
adjusted for
inflation

£2.034 £2.069 £2.12 £2.163 £2.21 2.27

Total revenue 1,627,200 1,737,960 1,869,840 1,907,766 1,949,220 2,002,140
Variable cost £1.028 £1.057 £1.086 £1.117 £1.15 1.182
Total v.cost 822,400 887,880 957,852 985,194 1,014,300 1,042,524
Contribution
margin

804,800 850,080 911,988 922,572 934,920 959,616

Table 3: determination of NPV

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Initial capital £3,500,000.
Working capital £115,000
Total cost 3,615,000
Contribution margin-
favourites’

804,800 850,080 911,988 922,572 934,920 959,616

Contribution margin-
‘gourmet’

480,400 504,160 527,877 503,622 512,883 523,467
Total 1,285,200 1,354,240 1,439,865 1,426,194 1,447,803 1,483,083
Overheads £180,000 260,000 340,000 420,000 500,000 580,000
Less Overhead
adjusted for inflation

183,600 265,200 346,800 428,400 510,000 591,600

Less Professional
expenses

£55,000 £55,000 0 0 0 0

Less depreciation
(20%) reducing

700,000 560,000 448,000 358,400 286,720 229376
Earning before tax 346,600 474,040 645,065 639,394 651,083 662,107
Less tax paid in
arrears

69,320 94,808 129,013 127,878.8 130,216.6
Earning after tax 346,600 404,720 550,257 510,381 523,204.2 531,890.4

Add Tax allowance 49,500 49,500 0 0 0 0
Add capital allowance 700,000 560,000 448,000 358,400 286,720 229376
Operating cash flow 1,095,500 1,014,220 998,257 868,781 809,924.2 761,266.4
Less Working capital 131,912 131,912 131,912 131,912 131,912 131,912
Add Working capital
release

0 0 0 0 0 906,472
Scrap value 0 0 0 0 0 £50,000
Total cash flow 963,588 882,308 866,345 736,869 678,012.2 1,585,826.4
Present value (12%) 860,346.4 703,370.5 616,647.3 468,293.6 384,722.3 803,429
Total PV 3,490,509.1
Less cost 3,615,000
NPV