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Draft a report to the Finance Director of FFS Limited
FFS Limited is a limited company, whose head office in based in South Africa. The company has been operation in the UK for the past 15 years. FFS provides financial services to a number of organisations which include SME’s, property developers and investment property funds in the UK and Africa. For the past 15 years, FFS has been a profit making firm as it has retained its previous clients, in addition to capturing an increasing share of the market. However, the finance director of FFS has recently got in touch with your professional consulting firm has engaged your firm with the mandate to provide them with an explanation of the cash flow problem that FFS Limited had been facing. The company is also dependent on the parent based in South Africa for and when required.
In the past 2 weeks there has been a number of meetings in London and South Africa where it has been agreed that FFS Limited should do its best to raise capital in England or Europe so as not to depend so much on cash coming from the parent company all the time.
The current product that FFS Limited has to offer mostly to property developers and investment funds companies is outdated. The company is looking to invest in a new product and there are two proposals on offer.
Capital Suite is the first of two proposals, the expected life of this software will be 5 years and its working capital requirements, the cost of the new software, expected revenue, components cost and overheads are as follows; All of the above estimates have been prepared in terms of present day costs and prices. Assume that the cash flow arise at the end of each period. In addition the following information has been given:
- Revenues, overheads and working capital are expected to rise by 5% per year from year 1.
- The cost of component AK and component NK are expected to rise in line with inflation of the 6% per year from year 1.
- Each package of software will be sold at £5500.
- The costs of Specialist Technology Managers (STM), who have come from South Africa have not been taken into consideration in the forecast and are as follows:
o STM 1: will be paid £250 per hour and expected number of hours for STM1 are 1,370. The rate paid is expected to rise in line with inflation at 5% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards.
o STM2: will be paid £150 per hour and expected number of hours for SMT2 are 1,800. The rate paid is expected to rise in line with inflation at 5% per year, every year from year 2 onwards.
If FFS Limited invests in Capital Suite then the discount rate that will be required to assess the NPV would be 15%.
Draft a report to the Finance Director of FFS Limited in which you:
(1) Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages and make recommendations as to how the company can manage the same to help in the planned expansion program. [15 marks]
(2) Comment and provide recommendations on how efficient working capital management can improve a firm’s cash flows? [10marks]
(3) Analyse the two Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Madison may use, and the limitations of using those techniques. If FFS limited has capital rationing problems where it has only £6.5 million of funds available for the new investment, suggest which software the company should opt for. [15 marks]
(4) You would also be required to explain how the company can use Break-even analysis as a tool to aid them in making a decision as to which software to produce. You will be required to come up with an example with your own numbers and draw up a break-even chart in explaining the same [10 marks]
(5) What other factors may a firm take into account when making investment decisions? [10 marks]
(6) Based on the information provided and to the extent possible, perform ratio analysis and make recommendations as to which company they should be looking to invest ¡n. What other information will help you in making an informed decision on ratio analysis. [10 marks]
(7) Presentation of your work – Week 10 (summary – key is the NPV computation and decisions made) (10 marks)
Clearly state any assumptions that you make
This is individual coursework which contributes 60% to the overall module mark.
Style and Format Style:
Report Font size: 12 (preferably Arial)
Line spacing: 1.5 lines
References: APA style
Learning outcomes being assessed:
- Understand the different sources of funding/ finance.
- Making use of different appraisal techniques and ratio analysis in making Investment decisions. Assessment criteria
(1) Detailed explanation of sources of finance with academic reference 15%
(2) Efficient working capital management 10%
(3) Investment appraisal 15%
(4) Breakeven analysis 10 %
(5) Other factors to consider when making investment decisions 10%
(6) Ratio analysis 10%
(7) Evidence of academic research 10%
(8) Clear conclusion of the paper 5%
(9) Presentation (week 10) 10%
(10) Professional format 5%
PLAGIARISM WARNING! —Assignments should not be copied in part or in whole from any other source, except for any marked up quotations, that clearly distinguish what has been quoted from your own work. All references used must be given, and the specific page number used should also be given for any direct quotations, which should be in inverted commas. Students found copying from the Internet or other sources will get zero marks and may be excluded from the university.
Word Count – Any work submitted with more than 3000 words will be have 10 marks deducted.