PGBM134 Finance and Project Management

PGBM134 Finance and Project Management

PGBM134 Finance and Project Management

Individual assignment

Requirements:

Part A of the assessment is compulsory for all students with a marking allocation of 50% awarded within this element.

Part B of the assessment is compulsory for all students with a marking allocation of 50% awarded within this element.

The assignment has been designed to cover the following learning outcomes associated with successful completion of the module:

PART A (50%)

Question 1 Millers Ltd. (25%)

PGBM134 Finance and Project Management. Millers Ltd is considering the purchase of a new machine that is expected to save labour on an existing project. The estimated data for the two machines available on the market are as follows:

Machine A                 Machine B

£000                           £000

Initial cost (year 0)                                                                120                             120

Residual value of machines (year 5)                               20                                30

Net annual cash inflows:

Year 1                                                                        40                                20

Year 2                                                                        40                                30

Year 3                                                                        40                                50

Year 4                                                                        20                                70

Year 5                                                                        40                                50

  • Which will be selected under the following criteria?

(i) PBP. the payback method of investment appraisal                                                  (3%)

(ii) ARR the accounting rate of return (ARR) method of investment appraisal:       (5%)

(iii) NPV, the net present value method of investment appraisal.                               (8%)

The company’s current return on capital employed is 10 per cent (average investment basis) and the company uses straight-line depreciation over the life of the project i.e. 5years with a residual value as given on the table. (straight line depreciation means equal monetary amount of depreciation each year)     (16%)

  • As the newly appointed financial manager using all three assessment methods which of the machines would you recommend be purchased outlining the advantages disadvantages of each assessment method. Critically assess and discuss the problems that arise for the net present value method of investment appraisal when capital is limited and expected to rise; also explain how such problems may be overcome in practice.   (9%)

Question 2 Bell Electronics (25%)

Bell Electronics sells electrical components, which are sold in their retail shops.  The abbreviated financial statements for each of the last two years are as follows:

Income Statement for the year ended 31 December

2019                               2018

£m                                 £m

Revenue26003500
Cost of sales(1560)(2350)
Gross profit10401150
Operating expenses  (580)(550)
Depreciation  (150)     (250)
Operating profit   310350
Interest     50)     (50)
Profit before taxation    260300
Taxation   (105)      (125)
Profit for the year    155        175

Statements of financial position as at 31 December

20182019
£000£000
ASSETSNon-current assetsProperty, plant, and equipment  1265  1525    
Current assetsInventories 250 400
Trade receivables105145
Cash at Bank 380        115
735    660
Total assets2000 2185
EQUITY AND LIABILITIESEquityOrdinary Share Capital (£1 shares fully paid)Share Premium  290260  290260
Retained earnings350    450
1100    1200
Non-current liabilitiesBorrowings – 10% loan notes  500       500
Current liabilitiesTrade payables 300 375
Other payables and accruals100110
400485
Total equity and liabilities20002185

Dividends were paid on ordinary shares of £65 million and £75 million in 2018 and 2019, respectively.

Required:

Calculate the following financial ratios for both years (using year-end figures for statement of financial position items):

  1. Return on capital employed. (2%)
  2. Operating profit margin. (2%)
  • Gross profit margin. (2%)
  1. Current ratio. (2%)
  2. Acid test ratio. (2%)
  3. Settlement period for trade receivables. (2%)
  • Settlement period for trade payables. (2%)
  • Inventories turnover period. (2%)

Produce a report for the Board of Directors of Bell Electronics that evaluates the performance of the company across the two years within the areas of profitability, liquidity, and efficiency.  You may wish to suggest methods for improving these key indicators and the overall performance of the business.                                 (9%)

PART B (50%)         

Question 3 Concrete Masonry Corporation (50%)

The Concrete Masonry Corporation designs and manufactures pre-stressed concrete for the building Industry for years; the company enjoyed a stable marketplace and a relatively predictable business environment. Although there had been a boom in residential construction in recent years, commercial work was on the decline. As a result, all the pre-stressed concrete manufacturers were going further afield to big jobs. In order to survive, Concrete Masonry Corporation was forced to bid on jobs previously thought to be out of their geographical area. Survival depended upon staying competitive. However with the declining conditions of the market and the evolution that had drastically changed the character of the market place, the Concrete Masonry Corporation previously successful approach was now in question.

With the removal of trade barriers and other Globalized international trade agreements, the Concrete Masonry Corporation found itself competing with other pre-stressed manufacturers headquartered in countries around the world. A decision was then made to transfer several manufacturing machines to a new site in Eastern Europe to allow more agility and efficiency within their manufacturing supply.

The Project 

The project was to include the transfer of 8 industrial pre-stressed concrete assembly machines, along with ancillary equipment into Eastern Europe (Poland). Scheduling the project had to take six months from end of September before production must start on April to supply potential customers. A site had been selected although the appointed Project Manager and potential team members had not visited the area, nor did they understand the weather conditions of wind, rain and snow that prevailed in this area. The assembly machines were to be transported by sea and then road haulage before arriving at the new site. Road infrastructure was again an area that required attention.

Kevin Lewis

Kevin Lewis has been appointed as the Project manager for this installation transfer. He is a

29-year-old graduate of a well known University in the UK with a B.S.degree in Mechanical Engineering. After graduation, he worked for five years in Engineering Design Industries. Although he took a significant pay cut, he jumped at the opportunity to return to his home location with Concrete Masonry Corporation. His job in Engineering Industries had been very demanding. The long hours and extensive travelling had created tension in his marriage. He was looking forward to a normal job with reasonable hours, or so he thought. While working in Engineering Design Industries, Lewis worked on projects and installed new Engineering designs. He was confident that he had the requisite technical expertise to excel at his new job with the Concrete Masonry Corporation.

The Team 

Lewis had a part-time team of five assistants on placement from the departments within Concrete Masonry Corporation. At first, he was not sure how freely he could delegate work to the assistants bearing in mind they also reported to other managers within the organisation. He quickly realised that they were all very bright, competent workers who were anxious to leverage this project experience into a lucrative career.

The project transfer has an investment of £900,000 pounds and is scheduled to take 6 months to complete; taking into account, the project would be completed during the winter which would be difficult. Lewis and his team would first need to visit the new location and start to consider the project activities.

Required:

You are required to prepare a report concerning the main issues to be addressed by Kevin Lewis from a project management perspective.

From a project management perspective base on Project life cycle outline the activities required to be completed by Kevin Lewis to successfully implement this new initiative, e.g. Project Scope Statement, Project Priorities (with a balanced trade-off and justification), Work Breakdown Structure (with brief details of work packages) and Cost Estimation (with time-phased budget) ensuring that it can operate on-time, and within budget. Kevin Lewis is only Project Managing the transfer of equipment and not the actual facility building project. (Assume the building has already been completed.)

Your report should be based on the four stages of Project life cycle and include examples of the concerns, Project Life cycle  stages, associated with managing the lifecycle of this major project.

Don’t forget you must provide:

  1. Project scope Statement,
  2. Work Breakdown Structure (with brief details of work packages),
  • Network diagram,
  1. Cost appraisal methods (theory)

and any other relevant table or information as an Appendix;

also any practical examples in relation to relevant theories should be derived from the case study.

SOLUTION:

Executive Summary

Before making decisions on a certain project, it is important for the firm to carry out investment appraisal to establish whether the project has the capacity to bring value to the firm. There are several methods through which, a firm can evaluate the feasibility of the projects, both traditional methods and modern techniques. Ratio analysis involves the computation and interpretation of ratios in order to evaluate the performance of a firm. The ratio analysis compares the performance of a firm in various areas such as profitability, liquidity, stability and efficiency among others. In undertaking a project, there are various considerations that, a project manager together with his team should consider in order to ensure that, the project is successful, in terms of achieving the quality of the project, within the stipulated time and within the allocated budgetary.

This report has established that Millers Limited should purchase machine B. This is because machine B has higher ARR and NPV compared to machine A. However, the payback period of machine A is slightly longer than that of machine A.  Moreover, the second part of this report indicates that the profitability of Bell Electronics in 2019 improved as compared to 2018. However, the liquidity of the firm declined in 2019 indicating that, the short-term solvency of the firm reduced. Similarly, the efficiency of the firm in relation to the period the firm takes to collect debts and time the firm takes to sell of its stock.  Moreover, the last part has highlighted various activities that the Kevin Lewis, the project manager needs to undertake in order to undertake a successful project involving the transfer of machines and auxiliary equipment to Eastern Europe. In order to complete the project successfully, activities specific to the four stages of the project life cycle need to be carried out efficiently. The concept stage involves defining the project and its scope through the project scope statement. The second stage includes planning how the project will be undertaking, identifying stakeholders, preparing budgets, work down structure, and network diagram among others. The third stage involves the implementation of transporting the machinery. Lastly, the fourth stage involves handing over the project to the company.

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