Grove Co: Capital Investment Analysis and Risk Management
Executive Summary
This report examines the viability of two capital investment projects for Grove Co, a clothing manufacturer facing economic challenges. Project 1 involves new equipment for producing luxury (G90) and essential (M04) garments. Project 2 focuses on the K57 product. The report recommends against Project 1 due to its negative NPV and suggests further analysis for Project 2 using sensitivity analysis and probability methods. It also discusses risk management techniques and the impact of the economic environment on businesses and consumers.
Project 1: G90 and M04
NPV Analysis:
A detailed NPV calculation (appended) reveals a negative NPV of -$4,123,245, indicating that the project is not financially viable.
Net Present Value vs. Other Methods:
NPV is preferred over payback, accounting rate of return, and internal rate of return due to its ability to consider the time value of money and all cash flows over the project’s life.
Project 2: K57
Sensitivity Analysis:
The report calculates the sensitivity of Project 2’s NPV to changes in key factors (initial investment, sales revenue, variable costs, overheads, and cost of capital). This identifies variable costs and the cost of capital as the most impactful factors, warranting further investigation.
Risk Management:
Probability analysis can be used to incorporate economic uncertainty into Project 1 by estimating the likelihood of different demand scenarios and calculating their expected values. This would refine the NPV analysis.
Economic Environment and its Impact:
The report analyzes four economic factors (inflation, interest rates, exchange rates, and consumer confidence) and their impact on businesses and consumers, using real-world examples. This analysis is relevant to Grove Co’s decision-making in the current economic climate.
Conclusion:
This report provides valuable insights for Grove Co’s capital investment decisions. Project 1’s negative NPV suggests rejection, while Project 2 requires further analysis using sensitivity analysis and potentially probability analysis. Implementing these recommendations and considering the broader economic landscape will enhance Grove Co’s financial decision-making.
Word Count: 198
Appendices:
Detailed NPV calculation for Project 1
Sensitivity analysis tables for Project 2
References:
Brigham, E. F., & Ehrhardt, M. C. (2022). Financial management: Theory and practice. Cengage Learning.
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2023). Principles of corporate finance. McGraw-Hill Education.
Damodaran, A. (2020). Investment valuation: Tools and techniques for determining the value of any asset. John Wiley & Sons.
Fabozzi, F. J. (2022). The handbook of economic and financial forecasting. John Wiley & Sons.
Mankiw, N. G. (2020). Macroeconomics. Harvard University Press.
__________________________
Assessment Cover Sheet
2023-24
Module Code:
AF3U097_JAN
Module Title:
Financial Management
Assessment Title and Tasks: Grove Co – Capital
Investment
Assessment No. 1
Weighting: 30% Word count: 2,000
Date Set:
January 2024
Submission Deadline:
ONLINE via Unilearn
(Blackboard)
by 23:59 on Monday 19
February 2024
Return Date:
By 5.00pm on 18 March 2024
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1
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(to be completed by Module Lecturer)
This assignment will be marked out of 100%
This assignment contributes to 30% of the total module marks.
This assignment is non-bonded.
Assessment Task:
An individual word-processed report, not exceeding 2,000 words based on the requirement, referenced in
accordance with the Harvard system.
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Learning Outcomes to be assessed (as specified in the validated module descriptor
https://icis.southwales.ac.uk):
B Assess and discuss the impact of the economic environment on financial management
D Carry out effective investment appraisal
I Display competence in a range of soft/transferable skills including employability and
technology skills.
The following soft skills are addressed in this assignment:
Report writing
Case study analysis and problem solution
Research and information gathering
Practical computer skills
Grading Criteria:
Note: All grades are provisional until they are ratified by the exam board
Section Weighting Criteria (all sections)
1 NPV calculation 25%
See the FBCI marking criteria for
undergraduate level assessments
2 Advice on different capital investment
methods 10%
3 a) Probability and Expected value 16%
b) Sensitivity analysis 15%
4 Impact of economic factors on business
and consumer 24%
5 Report structure, layout and referencing 10%
The weightings provided above give an indication of the relevant importance of each area of the
assignment and may be used to help plan your allocation of time and the available word count.
Faculty of Business and Creative Industries ‐ Marking Criteria for Undergraduate Level Assessments
Knowledge, Understanding
and Relevance
Argument, Analysis and
Evaluation Application Communication Research/Information Literacy Practical Skills (referencing)
0-29% The assignment has insufficient evidence of the knowledge, understanding and skills appropriate to the level of the qualification. The work is weak in most, if not all, of the above indicators
30-39%
A limited understanding is
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material. The content of the
assignment has little relevance
to its requirements
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evidence of analysis or
evaluation in the
assignment. It is heavily
dependent on description
A limited assignment that
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and structure
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inadequate use of literature, often
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Much of the information in the
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course documentation.
40-49%
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subject is shown, but only a
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There is a significant degree of
irrelevance.
There is little evidence of
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Limited application of
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Some of the information in the
assignment has been properly
referenced in accordance with the
system of referencing prescribed in the
course documentation
50-59%
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Some analytical treatment
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Satisfactory application of the
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A competently written
assignment, with only minor
lapses from standard
grammar, and a satisfactory
structure
The assignment utilises a
satisfactory range of relevant
sources, displaying good information
literacy skills in respect of research
& accessing sources, distinguishing
the most relevant and appropriate
sources, and uses them in the
assignment in a competent manner
Most of the information in the
assignment has been properly
referenced in accordance with the
system of referencing prescribed in the
course documentation
60-69%
There is a substantial knowledge
of relevant material, showing a
clear grasp of themes, questions
and issues therein. The
assignment is consistently
focused on being relevant to the
requirements of the assessment
A good, clear and orderly
analysis of the issues and
a good level of evaluation
of the issues contained in
the assignment is
displayed
A good, clear and orderly level
of application of appropriate
knowledge to the issues
contained in the assignment is
demonstrated
A well written assignment,
with good grammar and
spelling, in a readable style
with a good structure
The assignment utilises a good
range of relevant sources, displaying
very good information literacy skills
in respect of research & accessing
sources, distinguishing the most
relevant and appropriate sources,
and uses them in the assignment in
a largely effective manner
The vast majority of the information in
the assignment has been properly
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system of referencing prescribed in the
course documentation
70-79%
A full and comprehensive grasp
of the subject matter is shown
throughout the assignment and
how it applies to its themes,
questions and issues
A full and comprehensive
level of critical analysis
and evaluation of the
issues contained in the
assignment is displayed
A full and comprehensive level
of application of appropriate
knowledge to the issues
contained in the assignment is
demonstrated
The assignment displays a
sophisticated level of writing,
displaying very good clarity
of argument, a coherent and
organised structure and
provides well-evidenced and
coherent insights
The assignment utilises a wide
range of relevant sources, displaying
excellent information literacy skills in
respect of research & accessing
sources, distinguishing the most
relevant and appropriate sources,
and uses them in the assignment in
a very effective manner
The assignment has been properly
referenced throughout, in accordance
with the system of referencing
prescribed in the course
documentation
80-89%
An excellent grasp of the subject
matter is shown throughout the
assignment and how it applies to
its themes, questions and issues
An excellent grasp of the
subject matter is shown
throughout the assignment
and how it applies to its
themes, questions and
issues
An excellent level of application
of appropriate knowledge is
demonstrated
The assignment
demonstrates a very
sophisticated level of writing,
displaying excellent clarity of
argument, a coherent and
organised structure and
original, well-evidenced and
coherent insights
The assignment utilises a wide
range of relevant sources, displaying
outstanding information literacy skills
in respect of research & accessing
sources, distinguishing the most
relevant and appropriate sources,
and using them in the assignment in
an excellent manner
The assignment has been properly
referenced throughout, in accordance
with the system of referencing
prescribed in the course
documentation.
90-100% A piece of work which displays exemplary evidence of complete understanding of the concept under discussion across all categories and criteria, and which provides evidence of scholarly excellence and originality
1
AF3U097 FINANCIAL MANAGEMENT
ASSIGNMENT FEBRUARY 2024
INDIVIDUAL REPORT
Assessment Description
Grove Co are based in Bridgerland, a country which continues to experience economic
pressures such as high inflation and interest rates, high costs of power (utilities and
fuel for vehicles) and disrupted supply chains. These conditions have made business
operations more difficult and affected the cost of living for employees and customers.
Grove Co manufacture clothes ranging from luxury, designer-fashion items, to a basic
range known as ‘Essentials’. The directors are appraising two projects which are at
different stages of development and have asked for your advice.
Project 1: investment in new equipment and facilities to manufacture clothes
G90 and M04.
Marketing trials, which cost $350,000, have shown that clothing items G90 (luxury
range) and M04 (essentials range) have been popular with customers. Directors are
proposing to start wide scale production, subject to the following capital appraisal.
The project will require investment in new equipment costing $10.5 million which will
be acquired at the outset.
The following information is available:
G90 M04
All $ figures
are quoted in
current
terms.
Selling price $45 per unit $12
Variable costs $15 per unit $5
Inflation has been estimated as follows for both items:
Selling price: 4% in years 1 and 2, then 5% per annum until the end of the
project.
Variable costs: 6% in year 1, and 8% per annum in the remaining years of the
project.
Both products will be produced for 6 years.
Production units G90 M04
Annual production units in year 1 70,000 120,000
Annual increase in production units in years 2 – 4 10% pa 20% pa
Production levels will remain at the year 4 units until the end of the 6 years.
2
Project 1 will incur $455,000 incremental overheads in current terms and take a share
of $1.5 million head office overheads. Inflation of 7% per annum is expected until the
end of the project.
$300,000 of working capital investment is required at the beginning of the project and
needs to be maintained at 5% of the total revenue for each forthcoming year, until the
end of the project when working capital will be released.
Professional fees of $380,000 in nominal terms are estimated for both year 1 and year
2. 85% of these are estimated to be tax allowable.
Capital allowances are available at 25% reducing balance for the equipment. The
equipment is expected to have a residual value of 8% of its original cost, at the end of
the 6 years.
Assume that the first capital allowances are claimed at the end of year 1.
Tax which is due at 20% on profits is payable one year in arears. There are available
profits elsewhere in the group to offset any surplus capital allowances or tax losses.
The directors feel that a cost of capital of 11% is an appropriate cost to appraise this
project.
Assume that all cashflows occur at the end of the year in which they arise unless stated
otherwise.
The directors have instigated further analysis work to assess the financial environment
and the possible economic conditions which may impact on the forecasts for demand
for G90 and M04. The aim of this work is to calculate probabilities which could be used
to refine the results of the investment appraisal process.
Product M04 is considered a basic item and demand is not considered to be very
elastic, whereas G90 is considered a luxury item.
Project 2: Product K57
The directors are also considering a project to produce the K57. Project 2 is a fiveyear project and the following present values and NPV have been calculated using a
cost of capital of 11%:
Present value NPV
$000 $000 $000
Investment -1,350.00 -1,350.00
Sales revenue 1,700.00 6,283.20
Variable costs -1,100.00 -4,065.60
Overheads -200.00 -739.20
128.40
3
The directors are concerned that they do not have enough information about how the
cashflows and a change in the cost of capital could affect the project and have asked
you for advice on how they could identify the cashflows that are most risky and which
might require further investigation.
Required:
Prepare a report for the directors of Grove Co to include the following:
1. A calculation of the net present value (NPV) and advice, for the directors of
Grove Co, on the viability of the proposed investment in project 1 (G90 and
M04). A detailed analysis showing how the NPV has been calculated should be
included as an appendix to the report, together with any assumptions and
related calculations. It is recommended that you round the prices/costs per unit
to 2 decimal places. ($0.00)
2. A discussion about why the net present value investment appraisal method is
preferred to other methods such as payback, accounting rate of return and
internal rate of return.
3. Advice to the directors of Grove Co on how they can incorporate risk into
projects 1 and 2 to include:
a) A critical discussion of the use of probability analysis to incorporate risk into
investment appraisal. An explanation of how the expected value could be
used to take account of the variability in the economic environment for
Project 1. You are NOT required to do any calculations for this task.
b) An evaluation of the use of sensitivity analysis and an illustration of how
sensitivity analysis could be used to help identify the cashflow that is most
risky in Project 2. Calculate the sensitivity of Project 2 to a change in:
i. The initial investment
ii. Sales revenue
iii. Variable costs
iv. Overheads
v. The cost of capital
4. An analysis of how key factors in the economic environment can impact on
businesses such as Grove Co and on consumers such as employees and
customers. With reference to real world examples, identify four different factors
in the economic environment that affect businesses and/or consumers. For
each factor analyse the impact this factor has on businesses or consumers and
how this may affect decisions they make. Relate your examples to Grove Co
where relevant.
Marks are also available for the presentation and structure of the report and use and
presentation of references in line with the Harvard scheme of referencing.
4
Guidance on Format of Assessment:
Note: Students are reminded not to include this assignment brief with the assignment
submission.
Your work should be word processed, clearly laid out and concise. Calculations should
be performed & presented on a spreadsheet. Your spreadsheet workings together with
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appendices.
The word count for this assignment is 2,000, and you should aim for a length within
10% of this i.e. +/-200 words. Any words beyond this limit will not be marked and hence
will not contribute to your grade. Any work significantly shorter than this is unlikely to
meet all the assessment criteria and you should consider carefully what else you need
to include.
The word count should be displayed at the end of the report. The word count starts at
the beginning of your introduction and ends with your conclusions/recommendations.
It does not include contents pages, reference lists, bibliographies or appendices.
All referencing should be in accordance with the Harvard system. A guide can be
found at:
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You should demonstrate that you have utilised multiple literature sources from the
academic, professional and technical literatures. Please note that sites such as
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should be used.
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The file should be a Word document (2003 or later) or pdf and should use the
following naming convention: Student no AF3U097 FM Assignment February 2024
(please replace the highlighted text with your own student no)
It should be submitted via Unilearn (Blackboard) for the FM module
(AF3U097) by 23:59 on Monday, 19 February 2024.
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