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In this report, factors that are responsible for driving investment in a business are identified, analysed and evaluated. These investment factors are critically evaluated and the advantages and the limitations of these investment factors are provided in this report. Factors that are responsible for making the investment decisions are identified and evaluated in this report. In addition to that, the concept of NPV is elaborated in this report and the impacts of NPV on investment decisions are provided in this report. Moreover, the long-term sources of funding are included in this report and various approaches that can be used for procurement have been discussed in this report.
2. Investment Decision
2.1. Calculation of NPV
NPV is considered as the difference between present value of any commodity, service or anything. This concept is mostly used for computing the difference between values of cash flows at a particular point in time. To get the value of NPV Present value is divided by the summation of Discount rate and one and then the number of years or time multiplies the whole summation. This concept is adopted for getting the value of various cash inflows and outflows in a particular accounting year. Factors required for this type of calculation are Cost of Capital (K), Initial Investment and net cash flow during a particular accounting year (Yeh et al., 2020). [Refer to Appendix 1]
2.2. Investment Proposals
NPV is a vital factor for determining the value of an investment proposal. On the other hand, it can be stated that NPV is used for making investment decisions in an organisation. According to Fisch et al. (2021), investors invest in companies with the motive of earning returns from that investment. Interested investors are willing to maximise their returns and to maximise their profit from that investment. For this reason, they keep searching for profitable investments. They find attractive investment areas and invest a huge amount of money in that kind of investment. For determining the most profitable investments, they compare the NPV of that kind of investment. In addition to that, the investors compare the change in cash flows for marking a degree of change in cash flows. According to Pertiwi et al. (2018), every company tries to keep their NPV high to attract many investors in the business. From the case study, it has been observed that in this case, this company is willing to propose an investment proposal of £100000 per annum for the first two years and after that a value of £80000 for the remaining four years. Hence, this company needs to maintain a proper NPV for attracting those interested investors and for ensuring that the company can maintain a proper investment rate.
2.3. SWOT Analysis of Methods
There are various methods that can be used for making investments in a business. They are as follows: Direct Equity, Mutual Funds, Fixed deposits with banks, Public Provident Funds (PPF) and others. In this report, the most significant investment factors are identified for proper evaluation. The selected factors are Direct Equity and Mutual Funds. These factors are analysed for SWOT analysis regarding the benefit of this report.
Strengths
The most vibrant strength of Mutual Fund is that this kind of investment factor is easy to understand and this kind of investment is user friendly (De Haan et al., 2021). This company can attract various investors from various communities of the society to invest in the business of this company. If the company is able to allow proper mutual funds then this company will find it more comfortable to gather funds for the activities of this company. As per this case study, it can be seen that the company is willing to bring investment amounting to £100000 in the first two years and then maintain an investment of £80000 in the remaining four years. Hence, if this company is able to attract interested investors using these mutual funds and direct equity on other hand, these investors will find this deal attractive and they will try to grab this opportunity. The primary reason for this behaviour is that mutual funds bear a huge rate of return and on the other hand, Equity will provide them with the power of voting right in the company.
Weaknesses
The primary disadvantage of these kinds of investment sectors is that these types of investment policies need proper care about the investment criteria as compared to any other policy. Mutual funds are subjected to various risks and the investor needs to have proper knowledge about the present market condition before investing in Mutual funds. Similarly, these Equity factors have weaknesses as well. Equity yields a dividend and not interest (Pangestuti et al., 2017). Therefore, if an investor invests in Equity of a company, he or she will receive a dividend if the company earns a profit and if the company suffers a loss then that investor will not receive any sort of dividend in that particular year.
Opportunities
If this business can bring many investors, using the investment factors that will provide sufficient fund that will develop the infrastructure capabilities of this company. In this case, it is a primary opportunity that will improve the (K) of this company.
Threats
The primary threat of these investment factors is that these kinds of factors have to face the inflation criterion for the accounting years. These investment factors may face market risk or may face the risk of a market crash and lower NPV.
2.4. Factors affecting an Investment decision
The key factors that are affecting these business ideas are as follows:
Market risk
Investment factors may face limitations from various market factors and in some cases, these market factors determine the rate of investment in these investment factors. Market risks involve that the investor may lose a part of the principal amount that he or she has invested in the investment factors (Alsubaiei, 2018).
Interest Rate Risk
The investors often fear that rate of interest will be lowered and as a result, their earnings from these investment factors will be lowered. This fear of low interest makes a restriction in the way of free investment in investment factors.
3. Funds for Long run
3.1. Identification of various sources of funds
In this report, various factors that bring funds to business are identified. As per case study of this company, this company is using methods funding by Equity. Directors of this company have decided to bring a change in the funding process. For this reason, this report has identified various funding techniques. The various methods of investment in companies are identified in this report and the best methods of investing are selected for this company. There are various methods namely Personal Investment, Venture Capital, Government bonds, Bank loans, and others. In this report, concepts of Venture Capital, Personal Investment, and Bank Loans are discussed and various important facts regarding these methods are provided.
3.2. Evaluation of various Funds
The most effective investment factors are selected and are provided in this report. The directors can gather proper ideas about these selected factors and can use these factors for providing funds for their existing business. These selected sources of funds are evaluated for a proper understanding of directors. They are as follows:
Venture Capital
Venture capital is a part of capital that is used or invested in a project for completing that particular project. This part of capital is used for expanding the business and at the same time, this capital provides funds for proper functioning of a company. Venture Capital is mostly involved in risk-bearing projects (BDC, 2020). The Venture capitalist grabs the opportunity to own a position of equity shareholder in a risk-bearing company or in a company that takes high risk for achieving its goals and objectives. Hence, in this case, this business is willing to implement new sources of funds but this business is not a risk-taking business and for this reason, they do not need to involve venture capitalists in this business. Reason for this decision is that if directors involve venture capitalists in a business they need to provide a part of equity to them as well. Hence, they have to provide venture capitalists with voting rights and this will delegate the authority of this existing business.
Bank Loans
Bank loans are considered the most commonly used sources of finance and for this reason, these are considered as the most popular methods of sources of funds. In bank loans, the reputed banks provide loans to their clients or in some cases; many businesses approach these banks with a request for a loan. Loans are of two types namely mortgage loans, gold loans and others. In maximum cases, these banks provide loans without any mortgage (Duqi et al., 2018). In this type of loan, these banks keep a high-interest rate as compared to any other loans because in this type of loan the risk involved is very high. In most cases, it has been observed that people and businesses prefer to take bank loans instead of any other sources of funds.
The primary reason for this type of decision is that bank loans have a low rate of interest as compared to any other sources. In addition to that, this source of funds does not require any infringement in business operations. A bank loan is treated as a liability and has no effect on the administration of a business (Liviu, 2018). Hence, it is considered an excellent source of funds for this business. As this business is willing to introduce more funds in this business, hence, this business can use this source for injection of funds in business and this source will leave no effect on this business.
Personal Investment
In case of personal investment, the owner brings the required amount of funds for incorporation of a business. A business faces a lack of funds as in the incorporation state, business does not get any kind of financial assistance from the clients or banks or any other sources. As this business is not gathering any profit in that accounting year, people fail to trust that business. Once this business starts earning a profit, this business will succeed in making people feel trusted in the operations of this business (Korbutiak et al., 2021). Hence, this will provide an opportunity to get funds from these sources. In this case, this business is an existing one, the owners of this business have limited chances to invest in this business, and they will prefer external sources of funds to personal investment. Hence, this is not an ideal option for this business.
3.3. Relationship between Financing and Investment decision
K plc is using various internal sources as a fund for this company and this company is willing to implement various factors that will provide funds to this company from external sources. This company has identified certain sources of funds and now this company is willing to gather proper information about these concepts of Financing and Investment decisions. In this report, the basic differences in these concepts are identified and the relationship between these concepts are identified, analysed and evaluated. Financing is a process that companies use for collection of funds and for proper estimation of funds that is required by a company for proper working (Ahluwalia et al., 2020). Financing is a process that these businesses use for identification of various sources that will provide funds to these companies and on the other hand, this concept helps in estimating those key areas that will require funds in operations of a business. Hence, it is considered an integral part of any business and at the same time, this will help in reallocating these collected funds among various business activities.
Similarly, an investment decision refers to a decision that is taken regarding investment in a business (Roychowdhury et al., 2019). However, these concepts are interconnected and these decisions are important for a business. Investment decisions of a business are made based on financial position. Financial practices providing information about current financial trends in market and in business operations. Hence, it can be stated that investors track these financial transactions and financial statements for bringing a change in investment decisions. Companies that have good financial strength are a prime attraction for interested investors.
4. Standard Costing and analysis of Variances
4.1. Concept of Standard Costing
Standard costing is a practice of estimating costs and expenses of a company for near future. In this practice, companies use details regarding operations of a company in past years and then estimate expenses and costs for future operations of that company. In this report, concept of standard costing is evaluated for directors of K plc. This will help directors in adoption of proper techniques and then implement these techniques for planning product level for future. According to Iliemena and Amedu (2019), standard costing helps in reduction of costs and may help in maximisation of profit in a valid way. Researchers have commented that every manufacturing company should adopt standard costing techniques and keep implementing them in a continuous manner.
4.2. Evaluation of variable production costs
In this report, variable cost for K plc has been calculated and then cost for second half is contrasted with results of first half. This has provided an opportunity to gather information related to changes in production process. In addition, this has provided information related to profitable situations in these production processes. For making, a proper compare and contrast in every aspect among these halves of production process. In this case study, directors have produced a drafted statement of variable production cost for first quarter. Case study reveals that directors are pleased with the results and now they are willing to find the variable cost for entire amount of production in that particular year. Hence, researchers have prepared a draft statement of variable cost using those values that this company has provided in this case study. Case study of K Plc states that cost of direct material is £3 per unit and total unit produced for that accounting year is 400000. Therefore, value per unit is multiplied by entire production for getting a value of direct materials. The draft table reveals that direct material amounts to £120000. Similarly, 40000 for getting the ultimate value of products multiply the production cost of every item. Then all these costs are summed up for getting total variable cost. [Refer to appendix 2]
4.3. Identification of issues in current process
Issues in this current system are that this business is willing to set production goals on a quarterly basis. If this business will continue with production on a quarterly basis, they will face problems related to increasing in cost of production and minimisation of profit. If this scenario is analysed properly, it can be seen that this company is producing 9000 products in the first quarter. Therefore, if this company will move at that same pace it will produce 36000 products in a year. However, this company is willing to achieve a benchmark of 40000 products annually. Hence, there are issues with this existing practice.
4.4. Recommendation
After considering different factors of this report, it can be suggested that this company needs to implement some changes in its production process and planning process. K PLC is provided with these following suggestions
Stop quarterly production targets or set proper targets
If this company will adopt annual production targets then it will be able to cut off excess costs and maximise its profit margin. As discussed earlier, annual targets will help this company in setting proper goals.
Implement Standard costing techniques
Implementation of standard costing techniques will help in setting achievable targets. According to Lunkes et al. (2018), Standard costing helps in proper budgeting, proper planning and cost control. Hence, companies need to implement standard costing techniques for planning manufacturing processes.
5. Recent Approaches
5.1. Difference between centralised and decentralised procurement
Centralised and decentralised procurement processes are an important concept under Supply Chain Management (SCM). They are related to an extent but they share a huge difference in concepts and these concepts are used for defining various terms under SCM. Centralised procurement is used for proving an idea about two or more stores that are present in two geographically distant places (Moon et al., 2018). On the other hand, Decentralised procurement is used for evaluating an idea about those steps that companies adopt for spreading their commodities in these distant stores. In other terms, decentralised procurement processes refer to those practices that companies use for spreading their commodities in more than one plant. Hence, this is a channel of distribution. For this reason, centralised and decentralised concepts are involved under SCM. According to Moon et al. (2018), decentralised manners may include various channels of distribution, but most manufacturers use online modes for spreading their commodities across various plants.
5.2. Advantages of centralised and decentralised procurement
Key advantages of centralised procurement policies are as follows:
This concept helps in optimal utilisation of resources
This concept helps in bringing a reduction in costs
This concept helps in increasing compatibility and similarly provide an edge in this competitive market (Nzimakwe and Biyela, 2021)
Key advantages of decentralised procurement policies are as follows:
This concept helps in improving availability of materials
This concept brings down transportation cost
This concept results in an appropriate purchase of materials and optimal utilisation of resources
According to Nzimakwe and Biyela (2018), decentralised procurement processes help in improving standards of communication among interdepartmental employees.
6. Conclusion
From this report, it can be concluded that this business, K plc need to bring certain changes in its level of operations for bettering their operational activities. In initial part of this report, NPV of these business activities is evaluated and from that, it can be stated that this business needs to bring improvement in its business activities. From NPV it can be seen that value of £300000 has become £45455. After that, this company is provided proper information about sources of funds and this company is recommended to select Bank Loans as a source of funds. Moreover, this company is asked to implement standard costing in its business process. It has been concluded in this report, that centralised and decentralised procurement processes are concepts under SCM process.
References
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Appendices
Appendix 1: NPV calculation
Particulars
Amount (£)
Present value
300000
Discount Rate
10%
Time
6 years
NPV
45455
Workings:
Discount Rate
10%
Time
6
Discount Rate
1.1
Porper discount rate
6.6
Appendix 2: Calculation showing variable cost of K Plc
