BSM017 Finance for Managers - Robert Gordon University
Coursework brief
You are one of the management accountants working for a company based in the North-East of Scotland, renowned for efficient and clean waste management and recycling processes: Recycl-able.
The Board of Directors - although relatively happy with the current performance and positioning of the company - has requested a series of analysis work to be performed, to enable them to consider the future of the Company in what is a fast-moving and growing Industry.
The Finance Director has asked you to perform four different pieces of analysis as follows:
Financial performance analysis of a competitor
Five-year cash flow forecast including sensitivity analysis
Decision making analysis to decide whether to outsource some work
Investment appraisal analysis to consider a new site in the West of Scotland.
Although four distinct pieces of work, the Finance Director has asked you to submit one report as it is likely that it will be sent straight to the Board. You therefore need to ensure your report maintains some consistency and has one Executive Summary and one Conclusion.
The four pieces of analysis should be approximately 875 words each and carry equal weighting for grading purposes. The calculations and discussion responses required for each analysis also carry equal weighting.
A document entitled "BSM017 Report Writing Guide" is included in the Assessment Information Section of the Moodle Page and outlines what should and should not be included in the word count.
Analysis 1
This analysis requires you to demonstrate your skills in analysing and interpreting financial data.
Financial performance of a competitor - Binn Group Ltd
Binn Group Limited are one of Recycl-able's closest competitors and the business has made quite a few changes in the past years. The Board is keen to understand a bit more about their financial performance.
Using the relevant extracts from the Group's accounts (included in Appendix
you should discuss the financial performance of Binn Group - using financial ratios - and compare to that of Recycl-able (ratios below). You should base your discussion on a minimum of 8 financial ratios, making sure you include at least one from the following four ratio categories: Profitability, Efficiency, Liquidity and Gearing.
In addition, the Board would like you to discuss the benefits and limitations of using financial ratios to analyse performance, ensuring you include reference to the two companies.
Recycl-able Ratio Analysis (2020):
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Gross Profit Margin
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13.05%
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Inventories Turnover days
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2.02
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Operating Profit Margin
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7.56%
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Trade Receivables Collection days
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42.78
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Return on Shareholder Funds
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5.80%
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Trade Payable Payment days
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63.40
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Return on Capital Employed
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6.52%
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Current Ratio
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0.85
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Gearing Ratio
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25.31%
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Quick Ratio
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0.84
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Interest Cover
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2.21
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Analysis 2
This analysis requires you to demonstrate your skills in budgeting and forecasting
Five-year cash forecast and sensitivity analysis
As noted previously, the Board of Directors for Recycl-able are comfortable with the current position of the company. However, they are mindful of the dynamic nature of the industry and the likely growth in both business and competition in the next few years. The Finance Director has asked you to produce a cashflow forecast for the next five years - based on the assumptions on the next page - and report the closing cash balance at the end of each of the five years.
In addition, the Board would like to understand what happens to the cash balance if the following were to take place:
Estimated growth for Household Recycling and Industrial Recycling was 5% year on year
Estimated growth for Household Recycling and Industrial Recycling was 7% year on year rather than the projections included in the assumptions.
One other scenario aspect that you might consider to be worthy of investigating.
Finally, the Directors would like you to explain the advantages and limitations of the Incremental Budgeting approach used. In addition, they would like to understand if there is a different technique that could be used and what the benefits and disadvantages of this might be to the business.
Recycl-able Cash Forecast Assumptions:
The numbers included below are existing values (i.e. year zero):
Analysis 3
This analysis requires you to demonstrate your skills in using cost-volume- profit analysis to make decisions.
The use of CVP analysis to decide whether to outsource a contract
Recycl-able has a large contract with the local education authority to collect and recycle all recycling from the primary schools in the area. The authority has just informed the company that, due to the recent housing expansion, three new primary schools will need servicing this year.
Recycl-able does have the option of outsourcing this additional work to a competitor (Paperwork) who has undertaken work for the company before. You need to perform the required CVP analysis (using the data below) to decide whether the company should service the three new schools in-house or outsource the work.
In addition, the Finance Director has asked that you give a brief description of why CVP analysis can be used in this scenario and discuss the limitations of the process. Your discussion should also consider what non-financial factors should be considered as a part of the decision.
Recycl-able Data:
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Additional work data:
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Additional production cycles required per new school
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150
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Additional revenue per school
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£75,000
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Total Direct Labour Hours required per cycle
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10
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Direct Labour cost per hour
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£20
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Indirect Labour cost
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£100,000
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Direct Material costs per labour hour
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£10
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Variable costs per labour hour
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£5
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Interest Payable
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250
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Fee payable to Paperwork (per cycle)
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£300
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Analysis 4
This analysis requires you to demonstrate your skills in investment appraisal techniques
Using Investment Appraisal Techniques to assist with decision making
Recycl-able has always considered expanding into the West of Scotland and with a significant emphasis on green ventures within Scotland, is wondering whether the time is now right.
The management accounting team has already drawn up projected business plans for two potential sites and has generated the following information:
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Site 1
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Site 2
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Initial investment
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£7,000,000
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£11,000,000
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Scrap value
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£500,000
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£3,300,000
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Net profit year 1
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£1,000,000
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£500,000
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Net profit year 2
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£1,000,000
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£1,000,000
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Net profit year 3
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£1,400,000
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£2,500,000
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Net profit year 4
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£1,400,000
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£4,000,000
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Net profit year 5
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£1,600,000
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£5,000,000
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The company's depreciation policy is to depreciate investment costs over the economic life of the investment (five years) using the straight-line method. Recycl-able has estimated cost of capital of 15%.
The Board has decided that these two options should be evaluated further and would like a recommendation to be proposed to them as to whether one of these options is acceptable based on investment appraisal techniques
- and if both, which is favoured.
Some of the Board members aren't aware of the pros and cons of the different investment appraisal techniques and therefore you will need to discuss the recommendation you make in detail, making sure you have highlighted the benefits and limitations of each one - and any other information required - in the context of the options given.
Attachment:- Finance for Managers.rar