Reference no: EM133996911

FINANCIAL DECISION MAKING

Case Study 1 SECTION II

You are a financial analyst working for Urban Data (UD), a consultancy business based in Edinburgh. UD specialises in advising corporate clients about the financial health of businesses by examining their financial statements (the income statement, the statement of financial position and the cash flow statement). Two of UD's corporate clients have come to you with two different scenarios.

Client 1: PDR Components
PDR manufactures parts for the car industry. The Board of Directors of PDR have asked you to perform a financial analysis on a potential new supplier. This new supplier is replacing a long-standing supplier and will supply critical components for PDR.

Required:
Using only the financial statements of the potential new supplier, what financial ratios, maximum of 4 and relevant to this scenario, would you select to help assess the financial health of the potential new supplier? Explain your selection with reference to the scenario.
Please note - no calculations are required as there are no numbers available.
In addition to the financial ratios you have selected, what other information from the financial statements would you regard as critical in this scenario. Is there any special information that is particularly relevant in your country to this analysis?

Client 2: GCM Cosmetics
GCM makes and supplies cosmetics to the hotel industry. It has a wide variety of customers, all based in the UK, from small boutique hotels to large chains. The Board of Directors is considering bidding for a contract to supply a chain of hotels that GCM has never dealt with and has asked you to perform a financial analysis on this potential new customer.
Required:
Using only the financial statements of the potential new customer, what financial ratios, maximum of 4 and relevant to this scenario, would you select to help assess the financial health of the potential new customer? Explain your selection with reference to the scenario.
Please note - no calculations are required as there are no numbers available.
In addition to the financial ratios you have selected, what other information from the financial statements would you regard as critical in this scenario. Explain how difficult it is obtaining key financial information in your country.

Case Study 2

Hinton plc is a stock market listed company that manufactures component parts for the domestic appliance industry. The business is profitable and demand has been increasing. The machine at the company, although relatively old, works well, but the company is evaluating whether to replace it. The new machine would cost £890,000 to purchase plus £60,000 in installation and shipping costs. The machine would have a useful life of six years and would be depreciated down to £200,000 on a straight line basis. It is expected that the machine will be sold for that amount at the end of the project. Because the machine is more efficient, it will deliver increased revenues of £245,000 per annum over its six-year life, and the machine will also produce cost savings of £65,000 per annum.

There will be extra stock needed for the new machine: this is expected to be £70,000. Accounts payable will increase as a result of the new machine, as will accounts receivable, by £45,000 and £65,000 respectively. Working capital will rise to £110,000 in year 1, and it will stay at that level until it is returned at the end of the project. There are interest payments of £50,000 a year for the next six years.

The new machine will require the use of an extra depot for storage; the depot is being rented out at the moment for £70,000 a year, but would become used by the project if the project was adopted. The machine will require a full overhaul and service at the end of three years; this is expected to cost £55,000. An engineer who already works for the company will be assigned to maintain the new machine; his current salary is
£45,000 a year. The company will have to fill his previous position and is likely to pay
£35,000 to the replacement engineer.

The old machine, which has a book value of £150,000 and three years of life left is being depreciated down to zero on a straight-line basis. The old machine will be sold, if the project is accepted, for £50,000.

The project is a routine replacement project for the company; it is small in size in relation to the company. The company is currently 30% financed by debt, there is a bond outstanding with six years to redemption and it is priced at £95.23 in the market (nominal value of the bond £100). The coupon is 6%, and the risk-free rate of interest is 4%. The company's equity has a beta of 1.37. The company faces a tax rate of 30%. The stock market risk premium is 6%.

Required:

Lay out the relevant cash flows to the project and explain why you are including or excluding the different items from the question narrative.

Calculate the cost of capital and the NPV of the project. What do you recommend: should the company buy the new machine or keep the old one? Explain how you calculated the cost of capital and your final choice of whether to replace the machine

Explain what biases there might be in a capital budgeting project, and explain how they might be overcome. Focus on two biases and explain in some detail, if you have seen these biases in your home country give these as examples.

Describe the impact that inflation has on depreciation values, salvage values, and their tax in capital budgeting.

Case Study 3

BrassLock Limited is a small specialist manufacturer of specialist electronic components, selling much of its output to the security industry.

It is 1 December 2025 and one of these security device manufacturers has offered a contract to BrassLock for the supply of 200 identical components over a two-week period (1 January 2026 - 14 January 2026). Whilst this is not a particularly large contract for BrassLock, the Board of Directors is hopeful that significantly more work will follow.

The data relating to the production of each component is as follows:
Material requirements

3 kg material P
Material P is in continuous use by the company. 500 kg are currently held in inventory. These materials were purchased for £5.15/kg but it is known that future purchases will cost £5.50/kg

2 kg material Q
600 kg of material Q are held in inventory. The original cost of this material was
£3.55/kg but, as the material has not been required for the last two years, it has been written down to its scrap value of £1.50/kg. The only foreseeable alternative use is as a substitute for material AB (in current continuous use) but this would involve further processing costs of £2.50/kg. The current cost of material AB is £4.50/kg.

1 component ASP
There are 500 components of ASP in inventory. These originally cost £50 each but have no other use in BrassLock.

Labour requirements

Each component would require five hours of skilled labour and five hours of semi-skilled labour.
Skilled labour is currently paid £15/hour. Replacement workers would, however, require to be hired at a rate of £14/hour for the work which would otherwise be done by the skilled employees.
The current rate for semi-skilled work is £12/hour and BrassLock will require to hire these workers as the company currently has no semi-skilled employees.

There is also a requirement for two weeks of time for a specialist engineer who is paid a weekly salary of £1,000 for working a 40-hour week. She would be required to be removed from another contract (Contract Delta) which generates a contribution of £5 per engineer hour. There are no other engineers available to continue with Contract Delta if she is taken off this contract. This would mean that BrassLock would miss its contractual deadline on Contract Delta (14 January 2026) by two weeks and would require to pay a one-off penalty of £2,500. As there is no other work currently scheduled for the engineer after 14 January 2026, it will not be a problem for BrassLock to complete Contract Delta at this point.

The supervisor who will be responsible for the new contract with the aircraft manufacturer should it be won, is paid an annual salary of £52,000. She has the capacity within her existing workload to supervise this new contract. It is BrassLock corporate policy to allocate supervisor salary costs to individual contracts on the basis of time spent.

Overheads
BrassLock absorb overheads by a machine hour rate, currently £22/hour, of which £8 is for variable overheads and £14 for fixed overheads. If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by £5,500. Spare machine capacity is available and each component would require four machine hours.

Other information

The CEO of BrassLock required to hold a meeting with the CEO of the security industry manufacturer in November 2025 to discuss the proposed contract requirements. The costs of this meeting were £500. A contract price of £225 per component was suggested by the CEO of the security device manufacturer after the meeting.

Required:

Advise the Board of Directors whether the contract should be accepted. Support your conclusion with appropriate figures and explanations. Show all workings. No AI shortcuts — Only authentic assignment help from real expert tutors.

Comment and discuss four factors that the Board of Directors ought to consider and which may influence its final decision.