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MBB7008M - Accounting & Finance for Decision Making Assignment Sample

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MBB7008M - Accounting & Finance for Decision Making Assignment Sample

Introduction - Accounting & Finance Decision Making

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This report is based on Diversify of a business and choosing the best investment for the company. The seen is that all business is affected due to Covid-19 so that company want to diversify their business. Britvic Company will choose in this report. The motive of the investment will discuss in this report and the investment appraisal technique will identify. This report explains the risk and return and potential earnings. 

1. Investment Motivation

The key motive of this investment proposal is to diversify its business over the country. Even as we know the past recent year; the COVID-19 pandemic has affected many businesses and its industry in a drastic manner so as the impact was seen on Britvic Plc, which is a UK Based company dealing in production of Soft drinks and has its segments in GB, Brazil, Ireland, and France& International.

As per the current situation, there is a need of a product which is health beneficiary in nature and thus the introduction of an Immunity booster drink will act as a best choice to make its diversification even because –

  • This booster will help people to protect the body against infectious germs and other harmful microorganisms and even would act as a beneficiary for every age group whether it’s ranging from 5 years to 60+ year’s people too.
  • It might open up channels to expand its operations over other countries too as - it is a product which would be related to health care sector and as we also know health care sector is always at boom whether it’s in any situation.

Thus, finally it will also help in overcoming the losses and downfall over previous years and thus its gives us a strong motivation insight to invest (Castaldi and Giarratana, 2018).

2. Investment appresial technique:

For this case Net present value method is taken that is helpful to determine the actual investment return. It is superior investment appraisal method because it is related to time. 

Project A

Initial investment

-£ 40,000,000.00

Expected life

5 year

Residual value

 £ 2,000,000.00

Inflow

 £ 15,000,000.00

Project B

Initial investment

-£ 50,000,000.00

Expected life

5 year

Residual value

 £ 5,000,000.00

Inflow

 £ 18,000,000.00

Year

Project A

Project B

Discount rate (10%)

NPV of Project A

NPV of Project B

0

-£ 40,000,000.00

-£ 50,000,000.00

1

-£ 40,000,000.00

-£ 50,000,000.00

1

 £ 15,000,000.00

 £ 18,000,000.00

0.909090909

 £ 13,636,363.64

 £ 16,363,636.36

2

 £ 15,000,000.00

 £ 18,000,000.00

0.826446281

 £ 12,396,694.21

 £ 14,876,033.06

3

 £ 15,000,000.00

 £ 18,000,000.00

0.751314801

 £ 11,269,722.01

 £ 13,523,666.42

4

 £ 15,000,000.00

 £ 18,000,000.00

0.683013455

 £ 10,245,201.83

 £ 12,294,242.20

5

 £ 15,000,000.00

 £ 18,000,000.00

0.620921323

 £ 9,313,819.85

 £ 11,176,583.82

5

 £ 2,000,000.00

 £ 5,000,000.00

0.620921323

 £ 1,241,842.65

 £ 3,104,606.62

NPV

 £ 18,103,644.19

 £ 21,338,768.46

NPV is a quantitative investment appraisal technique that is based on financial data. In this case Britvic plc will invest 10% - 15% of their available capital and produce new product.

The above data is hypothetical and two budgeted data are defined that is project A and Project B. According to the calculation it is defined that Project A can give £18 million return and project B can give £21 million return in coming five years. As per this analysis it is identified that project B is good for the company instead of project A.

In this quantitative data the overall project cost of immunity buster drink project is considered so that it assumed that there is no other additional cost (tutor2u,2021).

Qualitative Influence on investment:

Decision of investment is not only related to the quantitative it is also related to the Qualitative effects. There are some qualitative factor are available they will influence the project:

Product quality and customer service: Quality of a product is also matter when a company come with the new product. In the diversify market it is important to the competition point of view. Customer servicing is also part of the quality because a good quality product helps to increase the customer service. In this case company come with the Immunity buster drink that is required in the Covid-19 situation. Lots of competition are available in the market so that quality can enhance the sales.

Investment decision consistency: In the diversify of business investment decision is important and for the qualitative result these investment decision should be taken consistency. Consistency shows that the managers of the company can take immediate action at any time. 

Brand image of the company: Brand value is related to the goodwill and to make brand value company invest its money and time. When a company expend their business in Covid-19’s situation where the whole economy is down in that case new diversification is so risky. If new product doesn’t survive effectively in that case goodwill will become down (tutor2u,2021).

Impacts on the employees: This new investment also effected to the employees of the company. Employees environment will become change because they will work on the new products.

3. Risk & Return Analysis:

The assessment of risk and return is said to be as too difficult for any investor or investing agencies as risk is said to be as a factor which very uncertain and can arise any time during the course of business operations and whereas if we talk about the return which is often said to be as inversely connected with risk as there is saying; higher the risk, higher the return and return means profit derived from an investment and return is mostly expressed in the form percentage ( % ) or a random variable which takes place within a given range(M Square, 2017).

If we talk about the risk and return associated with our diversifying investment plan will reduces the overall risk in eyes of investors but also this reduction of risk limits the return aspect too but on the same hand there would be increase in risk in terms of competition and acceptance which is the most important factor for any company and thus to ascertain the risk and return we can usevarious methods for analyzing which are as follows:-

  • Capital Asset Pricing Model (CAPM)
  • Arbitrage Pricing Model (APM)
  • Proxy Model
  • Accounting & Debt-based Model
  • Multifactor Model

To make easy for understanding the risk and return we have use BETA as a factor to understand the risk factor as Beta is also correlated with Risk up-to some aspect; as Beta is said to be as systematic risk, market risk or sometimes also said as hedge ratio or asset’s non-diversifiable risk which helps in measuring the stock changes/volatility in relation to the overall market and is said to be best for analysis because it shows the time series of return for any portfolios and associated market return to it (Corporate Finance Institute, 2018).

Thus for analysis, we have assessed the value of beta from the financial data of Britvic Plc., which says the beta for (5Y monthly) is 0.82 which is less than 1, which means that the volatility of the share in the market is less in overall market even it also means that less the risk, less the return as said they are inversely connected to each other (@YahooFinance, 2020).

So, the introduction of Immunity Booster drink as a product will –

  • Reduce the risk as we know diversification reduces the overall risk and will also limit the risk too of overall firm.
  • Increase the risk too as in this competitive market, there are already people who are dealing with this product and have a competitive time advantage plus brand image in the eyes of public , thus this factor increases the risk in very drastic manner.

Thus the Beta would also increase from its initial position to more than 1 and thus it will increase the volatility of the share in the overall market and thus it means the overall financial performance of the firm will be also affected in a some aspect some of the firms business; thus impacts can be classified in positive and negative way as follows:

(Positive points):-

  • There would be increase in rate of return on investments.
  • Overall profit of the firm would increase.
  • More of new expenditure on new technologies and human resources will be required.
  • Increase in overall share price in the stock exchange.
  • Gain of more new potential investors.

(Negative points):-

  • Managing Finance , increase in debt
  • Increase in payment of interest over debt
  • Increase in transaction cost while managing the trade on regular basis.

Thus both positive and negative impact of this diversification can have on Britvic Plc can have on its overall financial performance in upcoming years(Quantumamc.com, 2018).

4. Conclusion

To sum-up it can be saidin this assignment we have formulated the investment plan for Britvic Plc which is to introduce Immunity booster drink as a part of diversification of products and services in existed market and then we have formulated two options for investment and to know which one should be considered we will use -Net Present Value method to ascertain which is beneficiary for company and at the end we have looked towards the various aspects of risk and return associated with this investment plan and also overlooked the impact on its financial performance.

Thus, as under this assignment, there are 4 questions and as by answering all the questions – the learning objectives of the assignment are also achieved on the same hand.

Recommendations

 The recommendation which could be given as follows:

  • By checking overall fund performance on regular basis
  • By Looking into long term investments options for future
  • By channelizing the funds in an appropriate manner.
  • To conduct product testing –by collecting their feedback and reviews in a small area before launching product in whole market.
  • To conduct market survey
  • To have product testing by Food Analysis & Research Laboratory (FARELABS).
  • To have product approval from FSA (Food Standards Agency (FSA) – which gives a strong brand image in the eye of public as FSA approvals means that the company is associated with good hygiene and food safety while creating its products for public.
  • Doing regular monthly surveys for product reviews and feedbacks.

Bibliography

  • Castaldi, Carolina, and Marco S. Giarratana. “Diversification, Branding, and Performance of Professional Service Firms.” Journal of Service Research, vol. 21, no. 3, 5 Feb. 2018, pp. 353–364, journals.sagepub.com/doi/full/10.1177/1094670518755315, 10.1177/1094670518755315.
  • M Square. (2017). Risk Management & Hedging - M Square. Available at: http://msquaremanagement.com/service/risk-management-hedging/.
  • @YahooFinance. (2020). BRITVIC PLC ORD 20P (BVIC.L) Valuation Measures & Financial Statistics. Available at: https://finance.yahoo.com/quote/BVIC.L/key-statistics?p=BVIC.L
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