Financial Strategy For Finance And Investment Analysis – Case Study

Effectively analyzing the financial data and recommending whether Darth plc should purchase the new vehicles

Discuss about the case study Financial Strategy for Finance and Investment Analysis.

Darth Plc has been operating for thirty years. It is a manufacturing unit, which manufactures supplies medical equipment. The company is a family run business and has four directors as its senior management. Initially, the company was financing with the debentures, and it used to borrow from the high street banks. (Oppong-Boakye and Addai2015 ). Therefore, the company was making debt capital to finance the business. The company was enjoying a high volume of sales until it faced competition from the Asian market. Unable to stand with the competition faced by the Asian market, the Darth family decided to import the supplies form the Asian market itself. This made them well acquainted with the overseas culture and despite so many obstacles; the company made it through and gained entered the growth phase. At present, the business is financed through equity that is it has become an all equity-financed company. The shareholders of the company are enjoying a favorable return on their investment. (Jain and Shao2014)In addition, what the senior management is pondering over is to maintain such growth in the future as well.

The main purpose of the proposal is to help Dart Plc chose the best available option for purchasing the required vehicles to support its future endeavors. In addition, with the help of proposals, Dart plc is able to evaluate the impact of discounting factors, tax rate and government rebates on its vehicles purchase. Furthermore, the investment appraisal method used in the proposals mainly help in illustrating the best options, which might increase productivity and profitability of Dart Plc.

Net present value

Net present value is one of the most important capital budgeting methods that is used to derived present value of the projects. With the help of proper NPV analysis, the financial feasibility of Darth family’s project proposals will be evaluated.

Proposal 1

year	0	1	2	3	4	5	6
Cost	(60,000.00)
Fuel saving		15,770.00	15,770.00	15,770.00	15,770.00	15,770.00
Maintenance		(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)
Cash flow		7,000.00	7,140.00	7,282.80	7,428.46	7,577.03
Tax 20%			(1,400.00)	(1,428.00)	(1,456.56)	(1,485.69)	(1,515.41)
Tax saving			3,000.00	2,250.00	1,687.50	1,265.63	3,796.88
Net cash flow	(60,000.00)	17,298.00	19,038.00	18,402.80	17,957.40	17,654.96	2,281.47
Discount fac	1.00	0.93	0.87	0.82	0.76	0.71	0.67
PV	(60,000.00)	16,166.36	16,628.53	15,022.17	13,699.61	12,587.74	1,520.24
NPV	15,624.64
ARR	10%
IRR	16%
Year	WDA	CA	TS
0	60,000.00	15,000.00	3,000.00
1	45,000.00	11,250.00	2,250.00
2	33,750.00	8,437.50	1,687.50
3	25,312.50	6,328.13	1,265.63
4	18,984.38	18,984.38	3,796.88

Proposal 2

year	0	1	2	3	4	5	6
Cost	(60,000.00)
Fuel saving		15,770.00	15,770.00	15,770.00	15,770.00	15,770.00
Maintenance		(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)
Cash flow		7,000.00	7,140.00	7,282.80	7,428.46	7,577.03
Tax 20%			(1,400.00)	(1,428.00)	(1,456.56)	(1,485.69)	(1,515.41)
Tax saving			3,000.00	2,250.00	1,687.50	1,265.63	3,796.88
Net cash flow	(60,000.00)	17,298.00	19,038.00	18,402.80	17,957.40	17,654.96	2,281.47
Discount fac	1.00	0.93	0.87	0.82	0.76	0.71	0.67
PV	(60,000.00)	16,166.36	16,628.53	15,022.17	13,699.61	12,587.74	1,520.24
NPV	15,624.64
ARR	10%
IRR	16%
Year	WDA	CA	TS
0	60,000.00	15,000.00	3,000.00
1	45,000.00	11,250.00	2,250.00
2	33,750.00	8,437.50	1,687.50
3	25,312.50	6,328.13	1,265.63
4	18984	18984	3797

Proposal 3

year	0	1	2	3	4	5	6
Cost	(75,000.00)
After 10% dis	(67,500.00)
Fuel saving		15,770.00	15,770.00	15,770.00	15,770.00	15,770.00
Maintenance		(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)
Cash flow		7,000.00	7,140.00	7,282.80	7,428.46	7,577.03
Tax 20%			(1,400.00)	(1,428.00)	(1,456.56)	(1,485.69)	(1,515.41)
Tax saving			3,375.00	2,531.25	1,898.44	1,423.83	4,271.48
Net cash flow	(67,500.00)	17,298.00	19,413.00	18,684.05	18,168.33	17,813.16	2,756.08
Discount fac	1.00	0.93	0.87	0.82	0.76	0.71	0.67
PV	(67,500.00)	16,166.36	16,956.07	15,251.75	13,860.53	12,700.54	1,836.49
NPV	9,271.74
ARR	9%
IRR	12%
Year	WDA	CA	TS
0	67,500.00	16,875.00	3,375.00
1	50,625.00	12,656.25	2,531.25
2	37,968.75	9,492.19	1,898.44
3	28,476.56	7,119.14	1,423.83
4	21,357.42	21,357.42	4,271.48

Proposal 4

	0	1	2	3	4	5	6
Cost	(75,000.00)
Fuel saving		15,770.00	15,770.00	15,770.00	15,770.00	15,770.00
Maintenance		(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)	(5,472.00)
Cash flow		7,000.00	7,140.00	7,282.80	7,428.46	7,577.03
Tax 20%			(1,400.00)	(1,428.00)	(1,456.56)	(1,485.69)	(1,515.41)
Tax saving			3,750.00	2,812.50	2,109.38	1,582.03	4,746.09
Net cash flow	(75,000.00)	17,298.00	19,788.00	18,965.30	18,379.27	17,971.37	3,230.69
Discount fac	1.00	0.93	0.87	0.82	0.76	0.71	0.67
PV	(75,000.00)	16,166.36	17,283.61	15,481.33	14,021.46	12,813.33	2,152.74
NPV	2,918.83
ARR	8%
IRR	8%
Year	WDA	CA	TS
0	75,000.00	18,750.00	3,750.00
1	56,250.00	14,062.50	2,812.50
2	42,187.50	10,546.88	2,109.38
3	31,640.63	7,910.16	1,582.03
4	23,730.47	23,730.47	4,746.09

In the given study we have taken four proposals. The financial position of the company regarding NPV, IRR  and ARR gave in the appendix. By which these proposal actions will be taken:

In proposal 1 and proposal 2, in this criteria proposal 1 is to be taken into consideration but if we look in to the below-given proposal 1 is to be given to be the best with high ARR. (Lockeet al. 2013) NPV is considered to be the most effective and efficient method of choosing the proposal. NPV indicates the discounted cash flow with a present value in the business. As a business, the rule says that NPV will be accepted if it has the highest value in positivity term. The accepted proposal criteria say that project which has the cash flows greater than zero has the acceptability criteria more. So finally, it is concluded that NPV with a positive value is accepted. Similarly, the project with negative and value is rejected.

Net present value

The overall proposal 3 mainly helps in depicting the return, which could generate with the help of NPV, IRR, and ARR method. Also, with the overall NPV of Proposal 3 is bat 9271.13. Which is effective than prosper 4, but is irrelevant as compared to another proposal. (Das et al. (2013) mentioned that NPV valuation is mainly used by a company to choose adequate investment opportunity, which in turn might increase its overall profitability. On the other hand, Baum and Crosby (2014) criticism that during an economic crisis the overall return from investment could be hampered, this in turn reduces the efficiency of the NPV method. Also, Darth Plc could ignore proposal 3 to reduce the overall risk in investment.

Furthermore, they overall ARR for Proposal 3 is around 0.08634 and IRR is around 0.1187. Besides, both ARR and IRR of Proposal 3 are better than proposal 4, but are relatively lower than the other projects. (Eliasson and Börjesson 2014) Mentioned that IRR calculation mainly depicts the overall return percentage, which is generated from cash inflow of the proposed project. However, Penning et al. (2014) stated that the overall projected cash inflow could be changed due to the negative impact of external factors.  Also, Proposal 3 could not provide the required return, which is being projected from other proposals. However, the Darth Plc after evaluating the entire proposal could effectively make adequate decisions based on higher NPV, IRR, and ARR.

In addition, proposal 4 is mainly depicted the lowest NPV, which could be generated from the same amount of investment. This reduced NPV 2918.83196 mainly depicts the inefficiency of the investment plan depicted in proposal 4. In this context, (Stevanovic and Pucar2012) mentioned that investment appraisal techniques mainly helps in evaluating the time value of money and provide adequate return calculation. On the other hand, (Caulfield et al. 2013) criticizes that investment appraisal does not accommodate the negative impact of external factors, which might affect profitability of the company. Thus, ignoring proposal 4 could mainly help Darth Plc to conduct investment on affect proposals and get higher return from investment.

Furthermore, the valuation of ARR and IRR is at 0.0777136 and 0.084, which is relatively lower than other proposal being evaluated by Darth Plc. Also, the overall tax saving from the proposal 4 is relatively low, which could not help in improving profitability of Darth Plc. In this context, Baxter et al. (2014) mentioned that the company to detect the overall rate of return, which will be provided from the investment, mainly uses ARR. On the other hand, Turnpennyet al. (2014) criticize that overall return from investment could change with the cash flow generated from the project.

Investment Appraisal

All things considered, for one thing, a part of month to month condominium expenses by and large goes toward long haul, first-class activities, for example, clearing and material. (Yuen 2013). You need the assets to be accessible when it’s the ideal opportunity for the carports to be repaved and the rooftops to be re-shingled. Without a composed venture arrangement, another treasurer or new board could put resources into anything in light of the fact that there’s nothing keeping the board from purchasing, for instance, stocks, common assets, wares or some other money related instrument. In a down business sector, exchanging those sorts of unpredictable securities could bring about a misfortune to stores, along these lines prompting the despondent outcome of having to uncommon survey unit proprietors.

Darth Plc is a successful company and is intending to continue the growth phase in its future. For this purpose, the directors of the company are proposing to make a five-year business case so that the profitability is maintained in the future. The company has various course of action, which they could take while seeking the said objectives, and thus maintain the reputation of the company (Lefley 2015) The Company has the option of switching from the conventional vehicles used in the business to the newly introduced hybrid vehicles. The logistic manager is considering the employment of hybrid vehicle as an ideal option as it is complying with being environment friendly (lease 2016).There is a difference between leasing and buying. The main advantage of lease is lower amount of monthly payments and its disadvantage is that the person is not owning the project. However, in buying, one can be considered as the owner of the project.

However, the coast of acquiring the vehicle is comparatively higher than that medium sized vehicle and the traditional vehicle being used. It is expected that using the hybrid vehicle would result in the net cash inflow of £ 7000 during the first year operation, and the growth fate would be constant for the next four year at the rate of 2%.  Also, the capital allowances would be attracted at the rate of 25% as the government would be discounting the vehicles as they are considered eco-friendly and is more carbon conscious. The hybrid vehicle being fuel-efficient would result in the fuel saving. The company would be able to save the fuel of £ 15770 in total. The positive implication of adopting the hybrid vehicle is that the company’s cash flow would increase, and it would be able to economize on the use of fuel as the fuel cost also is reduced. (Deshmukhet al. 2013)

Proposal 1

Therefore, the positive implications of deploying hybrid vehicles can be listed down:

• Increase in net cash inflow of the company for the first year
• Saving the fuel costs as the vehicles are fuel efficient (Reuteret al. 2012)
• Attract capital allowances
• Reputation of the company would improve by being eco-friendly

The use of hybrid vehicles in to the operation also has some negative implications. These are following:

• The cost of acquiring the hybrid vehicle is also high than the conventional vehicle and the medium sized vehicle.
• The per month maintenance expense is also higher and is higher than the 20% of t amount being paid for maintenance of the conventional vehicles.

Therefore, it can be seen that the employment of hybrid vehicles has both positive and negative implications but the positive implication is offsetting the negative one.

Darth Plc had been faced with many hurdles in carrying out their business due to the competition they faced form the Asian market. Since the company has imbibed itself with the overseas culture, it has been faced with the rapidly changing management culture. The company needs to finance its business strategically to continue flourishing in the market and providing their shareholders with the fair return. The financial performance of the company is assessed using several financial metrics (Langan 2014)The strategic financial goals would be measurable so as to ensure that the business is operating effectively and efficiently.

The senior management regarding the five-year business case has proposed a draft to recognize few goals to maintain the profitability and reputation of the business. The company intends to appraise the Return on capital employed in future to a level of 15%, which is currently running at 13%. The directors of the company restricted the use of hybrid vehicles as against the current vehicles they are using for their service. (Rigopoulos 2015). The management was against the use of hybrid vehicles because after conducting the analysis, the return on capital employed stood at only 13% as against the proposed rate of 15%. Though the logistic manager was against using the current vehicle deployed and was of a view that the appraising the process financially is restrictive. This is because the hybrid vehicle is considered ideal for deliveries and collection and it would lead the company towards the more carbon conscious state. So the current vehicle deployed in the business is not compatible with being environment-friendly (Rossi 2015).

There were few proposals laid by the staffs on the financial matters, which would help the business in making the long-term growth plan (Rossi 2014). The costs of acquiring the vehicle are much lower than that of the traditional vehicle used by the company. The discounts offered by the government would help in attracting the capital allowances. This would also lead to economize the company on their fuel expenses, as deploying would save the fuel. However, the maintenance cost would be higher than that of the conventional vehicle being used. The research conducted by the marketers provided with the idea that using the hybrid vehicles would promote the brand image of the company. For the first year of the proposed business methods, the company would be experiencing an increase in the value of the net cash inflow. The growth rate would also increase by 2% in each year for the next four year. However, the rate of growth is constant.

Proposal 2

Another financial metrics to be considered is the use of debt in the capital structure (Isselet al. 2015) The company after entering into the growth has financed its capital structure on a sole equity basis. This is preventing the company from gaining the advantage, which a company gets while financing the business using few proportion of in the capital structure. However, financing the growth with using a minimal amount of debt is a good option but eliminating it form the capital would not be an appropriate financial strategy. This is because it has several advantages. The dividend payable to the shareholders is not tax deductible, and it must be paid after deducting the tax amount. However, the interest on debt amount is treated as an expense against revenue and then the taxable income has arrived. So using debt in the capital structure would provide a tax shield. The company would also be able to retain the profits, as using debt would only lead them to pay an amount of interest from their revenue. The cost of financing would also go down if the business employs a mixture of dent sand equity financing in the capital. This would also enhance the value of the company. Therefore, financing the capital using the 100%, equity would not be appropriate, and this needs to revise. The company also needs to revise and consider their investment and dividend policies and the payout ratio whether they are paying the whole amount in the form of the dividend. In this perspective, the company needs to strategize itself.

Another course of action available to the company is that the company has the option of using debt financing that is suing debt in its capital structure. Since the company is financing its capital with 100% equity. The idea of including debt would have positive implications as it would result in increasing the value of the company (Ahmed 2013). Including debt in the capital would lower the company’s cost of capital. Positive implications can be listed down below:

• Reduction in cost of capital
• Using debt would provide tax shield as the interest on debentures is treated as an expense and is deductible against revenue (Baker and Weigand2015)
• Provides opportunity to increase the retained profits

Another course of action is changing the dividend policy (Baker 2015). This would include lowering the payout ratio. By implementing this policy, the company would be able to lower the requirement of capital, as the sufficient capital would be available to the company. It also has positive impact. The impacts are mostly positive because the company’s position regarding financials is satisfactory.

Conclusion:

It has been sending form the above discussion that the Darth Plc has been considering of implementing the use of hybrid vehicles, which would increase their net cash inflow by a good amount. Along with the introduction of the above proposals, the company also needs to look into their various financial policies that the dividend policies, investment policies and other financial policies. The company is enjoying its equity-based financing system but it should also consider the beneficial sides of employing debt.  Also, the company needs to comply with the rules of being environmental friendly.

For this, it should make use and calls for the implementation of the hybrid vehicles. The company does not have any liabilities. The company can also reduce their payout ratio as their investors have utmost faith regarding the better performance of the company. This would enable them to lower their capital requirement, which would be beneficial for the company as they would be partially dependant on outsiders. From the overall assessment it is concluded that proposal 1 fulfills the all the criteria of NPV, IRR and ARR which in terms applies that, it is best among all the proposal with highest and positive criteria.

References:

Ahmed, I.E., 2013.Factors determining the selection of capital budgeting techniques. Journal of Finance and Investment Analysis, 2(2), pp.77-88.

Baker, H. 2015, Dividends and Dividend Policy, 2nd end, Emerald Group Publishing Ltd, GB.

Baker, H.K. &Weigand, R. 2015, “Corporate dividend policy revisited”, Managerial Finance, vol. 41, no. 2, pp. 126-144.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal.John Wiley & Sons.

Baxter, S., Sanderson, K., Venn, A.J., Blizzard, C.L. and Palmer, A.J., 2014.The relationship between return on investment and quality of study methodology in workplace health promotion programs. American Journal of Health Promotion, 28(6), pp.347-363.

Caulfield, B., Bailey, D. and Mullarkey, S., 2013. Using data envelopment analysis as a public transport project appraisal tool. Transport Policy, 29, pp.74-85.

Das, I., Bhattacharya, K., Canizares, C. and Muneer, W., 2013.Sensitivity-indices-based risk assessment of large-scale solar PV investment projects.IEEE Transactions on Sustainable Energy, 4(2), pp.370-378.

Deshmukh, S., Goel, A.M. and Howe, K.M., 2013.CEO overconfidence and dividend policy. Journal of Financial Intermediation, 22(3), pp.440-463.

Eliasson, J. and Börjesson, M., 2014.On timetable assumptions in railway investment appraisal. Transport Policy, 36, pp.118-126.

Jain, B.A. & Shao, Y. 2014, “Family Involvement and Post-IPO Investment Policy“, Family Business Review, vol. 27, no. 4, pp. 287-306.

Issel, L.M., Olorunsaiye, C., Snebold, L. and Handler, A., 2015. Relationships among providing maternal, child, and adolescent health services; Implementing various financial strategy responses; and performance of local health departments. American journal of public health,105(S2), pp.S244-S251.

Langan, M., 2014. A moral economy approach to Africa-EU ties: the case of the European

lease 2016, , 6th edn, Oxford University Press.

Lefley, F., 2015. The Perception That ICT Projects Are Different. In The FAP Model and Its Application in the Appraisal of ICT Projects (pp. 21-33). Palgrave Macmillan UK.

Locke, L.F., Spirduso, W.W. & Silverman, S.J. 2013,Proposals that work: a guide for planning dissertations and grant proposals, Sixth edn, SAGE, Los Angeles.

Opposing-Boakye, P.K. and Addai, E., 2015, January. Capital BUDGETING practices of firms: enpirial EVIDENCE from ghana. In Global Conference on Business & Finance Proceedings (Vol. 10, No. 1, p. 213). Institute for Business & Finance Research.

Penning-Rowsell, E., Priest, S., Parker, D., Morris, J., Tunstall, S., Viavattene, C., Chatterton, J. and Owen, D., 2014. Flood and coastal erosion risk management: a manual for economic appraisal. Routledge.

Reuter, W.H., Szolgayová, J., Fuss, S. &Obersteiner, M. 2012, “Renewable energy investment: Policy and market impacts”, Applied Energy, vol. 97, pp. 249.

Rigopoulos, G., 2015. A review on Real Options utilization in Capital Budgeting practice. International Journal of Information, Business and Management, 7(2), p.1.

Rossi, M., 2014. Capital budgeting in Europe: Confronting theory with practice. International Journal of Managerial and Financial Accounting, 6(4), pp.341-356.

Rossi, M., 2015. The use of capital budgeting techniques: an outlook from Italy. International Journal of Management Practice, 8(1), pp.43-56.

Stevanović, S. and Pucar, M., 2012. Investment appraisal of a small, grid-connected photovoltaic plant under the Serbian feed-in tariff framework.Renewable and Sustainable Energy Reviews, 16(3), pp.1673-1682.

Turnpenny, J., Russel, D. and Jordan, A., 2014. The challenge of embedding an ecosystem services approach: patterns of knowledge utilization in public policy appraisal. Environment and Planning C: Government and Policy,32(2), pp.247-262

Yuen, R.W.P., 2013. Project Evaluation Methods. Hong Kong Securities and Investment Institute Knowledge Portal.