The Orient Garment Plc

Published Date: 02 Nov 2017

It is my pleasure to gratefully remember all those who extended their assistance and benefaction to accomplish this assignment.

Firstly, I would like to express my sincere appreciation to Mr. T.L Sooriarachchi, Business ‘Managing Finance Resources and Decision’ lecturer, for the guidance, attention and the most valuable time she spent with me throughout the completion of this assignment.

I would like to thank all my family, friends and batch mates who helped me in every little way to complete this assignment.

I would also like to thank the administration of ICBT Kandy Campus for providing us with the necessary library facilities and all the references and guides for this assignment.

Executive Summary

Firstly this report consists of the comparison and contrasting the main financial statements like income statements and balance sheets in Odel PLC and the Orient Garment PLC. And analyzing the financial performance and financial position of the above mentioned both companies by using appropriate ratios according to that selected the best company.

And also this report explains the how financial information helps to various stake holders to make decisions. Like to investors can get idea about the performance of the company through that reports.

Mentioning the about the financial sources and comparison and contrasting them.

And explain the financing options are appeared on the financial statement.

In task 2 explains about the MR.TOM problems and looked for advice regarding his newly started business. Firstly in this report explaining significance of financial planning and capital budgeting decisions. And also this report explaining how to evaluate investment mentioning about the best option by applying both discounting and non-discounting investment appraisal techniques.

Table of Contents

List of Diagrams

Introduction

Introduction about Odel PLC

From the first inspired vision that saw a tiny start-up grow into Colombo’s biggest retail department store, to the IPO that shared Odel’s success with over 22,00 Sri Lankans. The journey has been an unusual one, contantly evolving to fit the demands of a changing marketplace and driven by the competitive environment of design and fashion. Today, our retail stores are reaching an even wider market as their branch into surburbs and major cities island wide. Powered by a vision that gives us the style, originality and inspiration that keeps us far ahead, Odel is now strongly positioned to deliver fast growing value to every customer, partner and shareholder they serve.

Vision

To inspire the world.

Mission

Our mission is to provide a complete Mind Body and Soul experience with an unparalleled selection of fashion right and lifestyle products in an environment that is enjoyable and welcoming.

Introduction about Orient Garment PLC

As an established player in a very competitive industry, they strive to satisfy their customers with excellence in service including sourcing of fabric and trims, design and product development. Resulting from their service excellence and continuous commitment to deliver on time quality products, they have been ranked as one of the Sri Lanka’s Principal Suppliers by their main customers. NEXT, Tommy Hilfiger and Tesco. They also supply to Polo Ralph Lauren and Burberry which are luxury global brands. The Company’s total sales to Europe and the US market is 90% and 10% respectively. Significant growth came through sales to Tommy Hilfiger which grew by 69% and sales to Tesco which grew by 37% when compared with the previous year. In the year under review the Company continued its excellent performance by achieving a net profit of Rs. 111.23 million.

Main Annual Financial Statements.

Definition about annual financial statements.

Summary report that shows how a firm has used the funds entrusted to it by its stockholders (shareholders) and lenders, and what is its current financial position and financial performance of that annual year. Profitability and liquidity mainly focusing when making financial statements.

Components of Financial Statements.

Balance sheet. - Which reports a corporation's assets, liabilities, and stockholders' equity as of a point in time.

Income statement - which reports a corporation's revenues and expenses for a period of time, such as a year

Cash flow statements. - Which provides information on the change in a corporation's cash and cash equivalents during the same period of time as the income statement.

Accounting policies and explanatory notes.

Statements of changes in equity showing all changes in equity.

Purpose of the Main Financial Statements.

Supply information about company profitability, financial position and cash flow for economical decision making process is main target of financial accounting.

The purpose of a financial statement is to enable an organization to establish the result of its operations over a period (one year) of time and to determine its worth at a specific date. Financial statements are often prepared by business people to assist them in evaluating their financial condition. Sometimes it is necessary to provide specific financial statements for the request of a banker or a supplier. Tax returns require a financial statement when a business is involved. When financial statements are provided to outside parties, however, they are required to be in a standard format and follow specific rules of preparation.

In this selected two companies are registered in Colombo stock market and they collecting fund for the company using shares and debauchers. Company issues annual reports for those investors to inform strengths and opportunities of the firm.

Annually company can measurer profit or lost.

Company can analyze about their financial capability.

For Legal requirements

Reducing the chicanery and devious in company.

Comparing the other competitive firms and then find effectiveness and identifies weakness of the company.

Issuing annual reports as a social responsibility.

Provides information to company top level decision making process. They are main decisions are depends on annual reports because overoll company working process covered by annual reports.

Differences and Similarities between the formats of financial statements of selected two companies.

Odel PLC Company and orient garment PLC both companies register in 2007 no 7 company act as Public limited company. Following clause are effect to the company accounts,

148 clause – Every company must want to maintain and want to present proper financial accounts.

150 clause – company financial making process full responsibility has company direct board.

These two companies financial reports and accounts are equal because they use Sri Lankan acts, Sri Lanka Accounting Standards and formats of making and presenting financial accounts who issue by THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA. Sometimes few different in this financial accounts because of that companies are use own systems for they are financial reports making process but that systems want to accept the auditing company and government rules and regulations.

Similarities of financial statement for Odel PLC and Orient Garment PLC.

Both companies’ financial statements devided topics and giving order same.

Balance sheet – Non-current assets, current assets, equity and liabilities, Non-current liabilities, current liabilities.

Incomes Statement – Turnover, Gross Profit, Expenses, profit before tax, Basic earnings per share.

These two companies are using ‘NOTE’ to explain the each part.

Both companies are using Sri Lankan rupees for the fully financial statements.

Relevant year and past year amounts and information included both companies balance sheet and income statement.

Company chairman and director signature and certified bellow the balance sheet because of them are the main responsible persons of these financial statements.

These two companies under the balance sheet main topics assets and liabilities ordering in liquidity.

Both companies balance sheets following items calculate separately,

Total assets. ( Non-Current and Current)

Total Equity.

Total Liabilities. (Non-current and Current)

Total Equity and Liabilities.

This two company income statement calculate following categorize separately,

Gross profit

Profit before tax

Income tax Expenses

Profit for the year

Basic earnings per share

Differences financial statement for Odel PLC and Orient Garment PLC.

Odel PLC

Orient garment PLC

Financial statement presenting order is different. (First balance sheet and then income statement)

First income statement and then balance sheet

Income statements expenses categorize are different. ( Distribution, administrative, Finance)

(Administrative, Marketing and logistic, Impairment of assets, Financial cost)

Categorize of under the balance sheet main topics are different.

EX :- Non-current liabilities and Deferred Income

Long term interest bearing borrowings.

Deferred tax liabilities.

Retirement benefit liability.

Non- Current liabilities

Non-current portion of interest bearing borrowings.

Interest free loans.

Retirement benefits obligations.

Deferred tax liability.

Finally they calculate net asset per share in balance sheet.

They dint mention about that.

Analyze the financial performance and financial position of both companies by using appropriate ratios and select best company accordingly.

(All value are Sri Lankan rupees)

Financial performance ratios.

Gross Profit Margin.

Gross profit margin = Gross Profit 100

Sales

Odel PLC Orient Garment PLC

1,235,874,744 / 3,305,402,432 * 100 381,725,966 / 3,571,133,382 * 100

= 37.39% = 10.689%

This is the basic ratio to calculate company financial performance. This ratious is not success to get information for decision making process. But we can get basic idea about company annual financial performance. In this case Odel PLC have leading percentage when comparing the Orient Garment PLC. Odel PLC have huge profit margin comparing the Orient Garment PLC that is more than trible.

NET PROFITE MARGINE

Net profit ratio = Net profit before tax 100 Sales

Odel PLC Orient Garment PLC

329,814,842 / 3,305,402,432 * 100 124,188,127 / 3,571,133,382 * 100

= 9.978 % = 3.478 %

This is the best ration for calculate company main profitable effectiveness. When we consider about this two companies we can identified huge different in these two. But this ration didn’t mention about company main expenses of tax that is the main disadvantage of this. Most of internal and external stake holders mainly attend about this specially shareholders because of they are income depend on this percentage. This ration analyze about how much percentage earn depending in sales. Odel PLC earns more than double when compare the Orient garment PLC. Then we can understand Odel PLC have best financial performance comparatively Orient Garment PLC.

RETURN OF TOTAL ASSETS

Total assets return ratio = Net profit after tax + Interest 100

Total assets

Odel PLC Orient Garment PLC

191,447,439 + 67,335,951 / 3,080,980,651*100 111,227,561 + 80,238,931 / 1,680,260,777 * 100

= 8.399% = 11.395%

In this ration calculating about total assets how to effect to earn net profit. Simply this ration analyze about net profit and total asset how to control that annual year. Interest add net profit because of loan capital use for controlling the assets. When consider about this two organization can identified they are earn best profit margin comparing with total assets. In this ration Orient Garment has best and leading percentage when comparing the Odel PLC.

Return of equity ratio = Net profit after tax 100

Total EquityRETURN ON EQUITY

Odel PLC Orient Garment PLC

191,447,439 / 1,395,942,328 * 100 111,227,561 / 618,871,316 * 100

= 13.715% =17.937%

In this ration analyze about net profit how to sharing with in shareholders. Simply this ration describe about company net profit how to divided within owners (shareholders). New investors and company investors mainly pay attention in this percentage. This is main point company can attract investors because they will be assume these company might be increase they are profit in huge margin in future. When consider about these two companies they maintain good percentage. In there also Orient Garment PLC has highs percentage more than the Odel PLC. 4% different is in there.

.

Financial position ratios.

CURRENT RATIO.

Current ratio = Current Assets

Current Liability

Odel PLC Orient Garment PLC

1,303,957,480 / 1,300,123,240 1,204,883,612 / 924,245,569

= 1:1 =1.3:1

This ration calculates and analyze about company paying capability of short term loan. Can get clear idea about operating capital. Using this ration can understand easily company daily process financial position. Simply this ration describe about company current assets can be fulfill the current liabilities. Normally recommended 2:1 rate good for company and that want to maintain. In this two companies didn’t have good current ration rate. Some time it makes some problems in daily process. But when comparing in this two companies Orient Garment PLC is in good potions comparatively Odel PLC.

QUICK RATIO.

Quick ratio = Current Assets – Inventory 100

Current Liability

Odel PLC Orient Garment PLC

1303957480 – 993246649 / 1300123240 1204883612 – 650573539 / 924245569

= 0.2:1 = 0.6:1

This ration calculating partnership between Liquidity assets and current liability. Asset can transfer to money without any lose that called liquidity assets. Then inventory and prepaid expanses never included for liquidity assets. This ration also using measure about short time company financial position. There also 1:1 is normal and good rate for company. In this two companies dint stay in good financial potion. Because of they have current liabilities more than liquidity assets. That is very risky potion for the organization. But Orient garment PLC in meddle stage potion Odel PLC want to pay more attention about they are current liabilities and current assets. When compare this two companies Orient Garment PLC has good rate more than Odel PLC.

CAPITAL OF GENARAL RATIO ( Gearing Ratio)

Capital of General Ratio = loan capital

Mass of Ordinary shares

Odel PLC Orient Garment PLC

322,411,942 / 251,925,000 78,914,860 / 90,438,320

=1.28:1 =0.87:1

In this ration presenting about combination of loan capital and owners capital. This ration describing about how loan liability divided in owners (ordinary shareholders). When this ration more than one that called ‘high gearing’ and less than one that called ‘low gearing’. Low gearing positive and high gearing negative for organization. …………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

TIMES INTEREST EARNED RATIO

Times interest earned ratio = profit before tax + Interest

Interest

Odel PLC Orient Garment PLC

329,814,842 + 67,335,951 / 67,335,951 124,188,127 + 80,238,931 / 80,238,931

= 5.9 Times = 2.55 Times

In this ration presenting about possibility of pay loan interest in company profit. This ration counting and calculating how many times can cover annual loan interest using annual net profit. When company has more loans and they pay interest more than ‘time interest earn’ ration will be low amount. When we pay attendance in these two companies Orient Garment PLC has has high loan liability and Odel PLC have low loan liability. Then Odel PLC financial problems they can obtain bank loans but Orient Garment not suitable for obtain bank loans because of they are time interest earned ratio times is low. Then can identified Odel PLC is the best company with in this ratio more than Orient Garment PLC.

How Above Two Companies Financial Information Help Various Stake Holders to Make Decisions.

Stake holders they are the main party in business or organization. Organization life time depending on these stake holders’ decisions and effort of they are. There two category stake holders in organization they are Internal stakeholders and External stakeholders. This all stakeholder are want to know about company complete and correct information for they are decision making process because of that organization making annual reports. But in annual reports also some points are never explain and present very clearly then we want to go for the ratios. Sometimes annual reports can’t understand new investors but they can easily understand ration percentages and amounts. Ratio can analyze and explain huge area in of company financial side.

Internal stakeholders.

Share Holders (ordinary shareholders)

Odel PLC and Orient Garment PLC has good financial position and performance between Sri Lankan other companies. In their shareholders decisions basically depending on company financial performance. Because of them every time expected good revenue for they are investor. This two companies are PLC ones they issue shares for public then that shareholders always searching information about company. Then company want to make good and proper finance information communication system for that. Then shareholders decide they will purchase new shares or sale they are shares.

Employee

Basically they are participate low for the decision making process. They work for the wages and salary. They will try and concern about increase they are salary. They all ways find information about other companies’ salary and wages amount for comparing. As well as they searching company profit also. If they not satisfied then they will move for other organization.

Director board and CEO

They are the main and huge decision makes in the organization. They collect information in finance reports, financial statements. Then they analyze company performance and then make the best decision with in options.

Creditors

Company Credit purchasing make by creditors. They always staying good attention about company financial potion because of their protect for receivable money and continue business with them.

Managers

They also most interest about company information because of some times they also want to make small decisions. Most of the companies managers has target they all ways try to achieve they are target that working path they want correct financial information quickly. They will consider about salary and job security also. That also they want company finance information.

3.2 EXTERNAL STAKE HOLDERS.

Competitors

Developing organization always searching there competitors finance information then company can compare their financial position and financial performance. When they analyze competitor annual reports then can identify company strong and weakness. Then company can identified competitors good and success accounting systems, how to fulfill financial problems, how to manage assets and liabilities, going on or future projects or plans.

Customers

They all ways searching organization financial potion and performances because of they will doing business with that company. They can get organization financial information using with annual reports. Main thing is sometimes doing business credit…… ant they want to know about protecting of they are money. And other these are,

They can supply or purchase product continuously wanted capacity.

If they are increase they production capability (about new projects)

If they anugamanaya government rules and regulations. ( Tax payment, Vat registration and Ex.)

Government

There is the main party who find organization financial information. Because of charge tax, if company working in government rules and regulations, how to effect in economy develop, add information for country production reports. Specially government income tax department searching companies financial potion and performance for charge more tax because that is the main income for government.

Banks.

There also always searching and pay more attention about company financial potion. Because of main two things there are,

Conform protection for supplied bank loans.

If they have extra money interact that money as deposits.

Banks and other financial companies is main partner with the company. They are the main consulter for company financial section. If the bank understands this company has good financial potion and performance. Then without any problem and avishwasayakin they provide low interest loans and other financial services.

How financial information helps various stakeholders to make decision summarize chart.

Stake holder

How important financial information

Internal

Investors

To get idea about the performance company

To identify whether this business stable or not

To seek profitability increase or the decrease

Employees

Identify the job security

Forecast the salary stability

External

Customers

Warranty and guaranty

Quality of the product through the inventory period

Creditors

Identify the company’s ability to pay repayment+ interest

Check the ability to pay on time

Suppliers

To identify the continuous orders will get or not

Government

To decide the taxes

Identify they pay due taxes or not

Public

Can do charity work or can not

Competitor

To compare with them

Identify how can be treat for them

Financing sources of companies.

Finance Available to a Business.

Every business or organization arise financial problems because of their daily working process and developing process. Then organization want to go different sources answering there financial problems. Organization has more financial options but there select few sours. That selecting sours depending in following things,

Financing cost.

Government rules and regulations.

Availability.

Guarantees.

Obtain time.

Religion believes.

Social culture.

Company top level management decisions.

Organization Identified following sources are available in economy,

BANK LOANS.

Most of companies using bank loans for fulfill their financing need. Because of that is very easily and quick method for get any amount of loan with in proper method. In Sri Lank this part mainly act in commercial banks. There have private and govemment banks. In present this field more competitive and they provide best services for companies. They provide long term and short term loans with variable interest rate that will be depending on business capacity or project.

ISSUING SHARES.

Public limited companies can issue share for public and they can full fill their financial needs. This is best way for PLC companies. Share issuing process first of all they want to register ‘Colombo Stock Market’. There have two types of shares there,

Ordinary Shares.

The ordinary shareholders are the owners of the business and they can receive dividends from the company out of its profit. The dividends payable are often expressed in terms of cents per share. These shareholders can vote at company's annual general meeting and have the ability to elect the board of directors. Each share carries the right to one vote at the meetings.

Preference Shares.

Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first. Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders, preference share shareholders usually do not have voting rights.

COMPANY DEPOSITS.

Every company extra money deposits in commercial Banka and other financial institutes for future protection and earn interest income. That money can use company finance needs without any loss. This also good method for collect funds but it is limited and very problematic thing.

SALES OF ASSETS.

This also easy and quick way for fulfill company financial need. But this not good for organization goodwill and most of time financial loss also make it.( ex- vehicles, land and buildings). When consider about current assets (inventory) that is good way for achieve company financial requirement.

DEBENTURE

A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. PLC companies can issue debenture and can collect funds. This issuing for fixed period and variable interest (depending on market interest).

LEASING

This facility provide by commercial banks and leasing companies. This sours most use full for purchase non-current assets (land and building, vehicles). Monthly company want pay loan instalment and interest.

FAMILY AND FRIENDS

Company owner have family and friends who wish to invest in business. This is often convenient and may allow owner to get finance on favourable terms. However, make sure you have a formal agreement of loan terms in place so you or your family and friends are not left unprotected in the event that you are unable to repay the loan.

MORTGAGES

These loans also provide by commercial bank and other financial companies. They provide loans for customers’ assets using as guaranty. They charge interest for that and company can us as like a bank overdraft.

Implication of the Different financial sources.

Sources of finance

EXTERNAL SOURCES

Internal sources

SHORT TERM

LONG TERM

MEDIUM TERM

INTERNAL SOURCES

These sources find fond inside the business not going for outside. When the funds needed companies first use these sours if it not enough then going for other sources. This sources dint has any expenses, low risk and quick but this sources limited. This sources use full for small and medium category organizations.

Ex: -

Family and friends.

Sales of assets.

Company deposits.

Retained profit.

Personal capital

EXTERNAL SOURCES

When internal sources not enough then organizations going for external sources. This source has covering huge aria. Any type of financial requirement company can get good answer in external sources. But this sources costs and risky for the company. Large and extra-large category organizations most of time using this method. This sources can divided another three categorize according time,

Long Term (more than 10 years)

Any financial need requiring very large amounts of cash receives long-term funding. These sources of finance are generally designed to be paid off in one or more years. Organizations using this type of financing do so to buying other businesses or buildings or to invest in long-term product development.

Ex:-

Leasing

Long term bank loans.

Issuing Ordinary Shares

Issuing Preference shares

Debentures

Mortgages

Medium Term ( within 3 – 10 years )

Medium-term financing is used to fund a special business project or expansion that will increase production and revenue.

Ex:-

External commercial borrowings.

Debentures/bonds.

State financial corporations.

Medium term bank loans.

Lease financing / hire purchase financing.

Short Term ( less than 3 years)

Short-term finance solutions are needed on a daily, weekly and monthly basis to pay for office supplies, rent, utilities, equipment and payroll. Short term will transfer small amounts.

Ex:-

Trade credit.

Commercial banks short term loans.

Advances received from customers.

Various short-term provisions.

Bank overdraft.

Ownership Capital

Sources of finance

Non-Ownership Capital

OWNERSHIP CAPITAL

In this context 'owners' refers to those people/institutions who are shareholders.

Shares are units of investment in a limited company, whether it is a public or private limited company. In this party can control organization because of their assets in the company. But they income depending on company profit they didn’t get fix income.

Ex:-

Ordinary shares.

Preference shares.

Owner Capital

NON-OWNERSHIP CAPITAL

Whilst the following sources of finance are important, they are not classed as Ownership Capital - Debenture holders are not shareholders, nor are banks who lend money or creditors. This party can’t make any decision and control the company but they get fix income (interest).

Ex:-

Debentures.

Other loans.

Overdraft facilities.

Trade credit.

Advances received from customers.

Leasing facility.

Source of Finance

Direct way

Devious way

Share issuing Bank Loan

Debentures issuing Leasing

4.3 Proposing Appropriate Sources of Finance

Sale of Assets.

Odel PLC and Orient garment PLC didn’t have good financial potion because of they are Times interest earned ratio, current ration and quick ratio are not good that mean they have more liability to external parties. When theya are fond requirement not good go for external sources.

Odel PLC

This company have huge amount of ‘property, plant & equipment’. When there emergency found needs they can sell this assets. And they have huge amount of inventories that also they can use for the financial problems.

Orient Garment PLC

This company also have huge amount of non-current assets they are ‘Investments in subsidiaries and other Investments’ they can sell this assets for their financial need. As well as they has huge amount of inventories also that asset also they can use.

Issuing Preference Shares.

This both companies are never issuing preference shares they only issued ordinary shares. These companies can issue preference shares and can collect huge amount of funds. Can measure this preference share will be has good demand because of present Sri Lankan good economy situation and develop.

Debentures.

Organization can collect funds issuing debentures for the public. Can attract more investors for that because pay more that bank loan interest, has good protection and fixed income (interest).

Retained Earnings.

Odel PLC has retained earnings as internal deposit. They can easily use it for company fund requirements

Cost of Different Sources of Finance.

SHARES – dividend in cash or cash cheque

Public Limited Companies is issuing shares for public and collect funds. Annually director board meeting they will decide how much dividend paying per share. Dividend cost depends on director board decisions.

BANK LOANS – loan interest

Bank loan cost depends on loan interest rate. When we get loan in bank can agree with fix interest rate or moving interest rate.

LEASING – Leasing interest

This way is more expensive for the company because of their interest rate is high. but this way is very fast when comparing other sources.

DEBENTURES – Debenture interest

It has fix interest and company want to pay on time. That interest rate want to be more that bank fix deposit rate without that can attract investors

BANK OVER DRAFT – Over draft interest

This loan system interest rate also higher than normal market rates. This suitable for quick, short term financial needs.

The Impact of Finance on the Financial Statement.

SHARES

Both companies have only ordinary shares. That both companies shows in balance sheet under the main topic as "Equity and Liabilities" then again divided sub topic "Shareholder equity". As "Stated Capital" name.

BANK LOANS

Orient Garment PLC

There annual report bank loan (term loan) and finance lease obligation took together as "Non-Current portion of Interest Bearing Borrowing" under the Non-Current Liability in balance sheet.

Odel PLC

They took bank loans as "Long term interest bearing borrowings" under the Non-current liabilities in balance sheet. Want to read notes because ‘bank loan, Lease Creditors, Bank Overdraft’ the took as one point.

RETAINED EARNINGS

Only Odel PLC has retained earnings that they presenting as "Retained Earnings" under the Equity in balance sheet.

LEASING

Orient Garment PLC

There annual report bank loan (term loan) and finance lease obligation took together as "Non-Current portion of Interest Bearing Borrowing" under the Non-Current Liability in balance sheet.

Odel PLC

They took leasing as "Long term interest bearing borrowings" under the Non-current liabilities in balance sheet. Want to read notes because ‘bank loan, Lease Creditors, Bank Overdraft’ the took as one point.

PART

2

Importance of Financial Planning and Capital Budgeting Decisions.

Financial planning helps manage income, build assets and also enables an individual to live a comfortable life, post retirement.

Financial planning helps in increasing cash flow as well as monitoring the speeding and careful budgeting.

A strong capital base can be built with the help of efficient finance planning. It is possible to manage income effectively through planning. Managing income helps in segregating it in to tax payments and other monthly expenditures and savings. It helps to choose the right investment policies. a good investment planning can turn goals from dreams in to realities

Financial planning process helps understand about the current financial position. And that helps to manage income more effectively.

Financial planning provides clear direction to make effective financial decisions. Financial decisions effected to the both short term and long term goals.

The term capital budgeting is used interchangeably with capital expenditure management, long term investment decision, management of fixed asset etc. budgeting decisions are important to the financial decision. Capital budgeting is also decision making process with an investment which for an investment which includes the process of investment, evaluating, planning and financing major investment project of an organization.

Analyze Given Projects and Select Best Option.

Evaluation for Investment Techniques.

Origination of proposal – it has been suggested that good idea for investment

Project screening – before the detailed financial analysis is under taken a qualitative evaluation of the project will be made

Analysis and acceptance- this will include a financial analysis using the organizations preferred investment appraisal techniques. Qualitative issues will also be considered before a decision is made.

Monitoring and review- this is to ensure that capital spending does not exceed the amount authorized, the implementation of the project is not delayed and the anticipated benefits are eventually obtained.

Investment appraisal technique

Non discounting technique

Discounting technique

Payback period

Accounting rate of return

Net present value

Internal rate of return

Project 1 –Purchasing a new truck to the sale department.

Investment – 3500000

Life Time - 4 Years

Scape Value – 175000 3500000* (5/100)

Year

Cash Flow

Depreciation

1 Year

1000000

831250

2 Year

1500000

831250

3 Year

2500000

831250

4 Year

1000000

831250

6000000

3325000

Depreciation of annual year,

= 3500000 - 175000

4

= 831250

FIRST METHOD – [Counting Pay Back Period]

= 2 years 3500000 - 2500000 12

2500000

= 2 Years 4 Months 8 Days

SECAND METHOD – [Accounting Rate of Return (ARR)]

ARR = Average Profit after depreciation and Tax * 100

Initial Invest

= 6000000 – 3325000 3500000 * 100

4

= 19.107%

THIRD METHOD – [Net Present Value]

NPV = Present Value of cash flow – Initial Cash Investment

1/ (1+0.13)1

1/ (1+0.13)2

1/ (1+0.13)3

1/ (1+0.13)4

1 2 3 4

1000000 1500000 2500000 1000000

885000

1174500

1732500

613000

4405000 Present Value of cash flow

NPV = 4405000 – 3500000

= + 905000

FOURTH METHOD – [Internal Rate of Return (IRR)]

Find Negative NPV

Year

Cash Flow

(25%)

Present Value

1 Year

1000000

0.800

800000

2 Year

1500000

0.640

960000

3 Year

2500000

0.512

1280000

4 Year

1000000

0.410

410000

6000000

3450000

NPV = 3500000 – 3450000

= -50000

Interest Rate of Return = A + [C/(c-d)]*(B-A)

A= interest rate that taken positive NPV

B= Interest rate that taken negative NPV

C= Positive NPV

D= Negative NPV

IRR = 0.13+ [905000/(905000-[-50000])]*(0.25-0.13)

=0.2437*100

= 24.37%

Project 2 – Building a retail shop

Investment - 7500000

Year

Cash Flow

1 Year

2500000

2 Year

3500000

3 Year

4000000

4 Year

3000000

13000000

FIRST METHOD – [Counting Pay Back Period]

= 2 Years 7500000 – 6000000 12

4000000

= 2 Years 4 Months 5 Days.

SECAND METHOD – [Accounting Rate of Return (ARR)]

ARR = Average Profit after depreciation and Tax * 100

Initial Invest

= 13000000 7500000 * 100

4

= 43.33%

THIRD METHOD – [Net Present Value]

NPV = Present Value of cash flow – Initial Cash Investment

1/ (1+0.13)1

1/ (1+0.13)2

1/ (1+0.13)3

1/ (1+0.13)4

1 2 3 4

2500000 3500000 4000000 3000000

2212500

2740500

277200

183900

9564000 Present Value of cash flow

NPV = 9564000 - 7500000

= +2064000

FOURTH METHOD – [Internal Rate of Return (IRR)]

Find Negative NPV

Year

Cash Flow

(28%)

Present Value

1 Year

2500000

0.781

1952500

2 Year

3500000

0.610

2135000

3 Year

4000000

0.477

1908000

4 Year

3000000

0.373

1119000

13000000

7114500

NPV = 7114500 – 7500000

= -385500

Interest Rate of Return = A + [C/(c-d)]*(B-A)

A= interest rate that taken positive NPV

B= Interest rate that taken negative NPV

C= Positive NPV

D= Negative NPV

IRR = 0.13 + [2064000 / (2064000+385500)] * (0.28-0.13)

= 0.8621 * 100

= 86.21%

Project 3 - Purchase a land

Investment - 2500000

Year

Cash Flow

1 Year

800000

2 Year

1000000

3 Year

400000

4 Year

600000

2800000

FIRST METHOD – [Counting Pay Back Period]

= 3 Years 2500000 – 2200000 12

600000

= 3 Years 6 Months

SECAND METHOD – [Accounting Rate of Return (ARR)]

ARR = Average Profit after depreciation and Tax * 100

Initial Invest

= 700000 / 2500000 * 100

= 28%

THIRD METHOD – [Net Present Value]

NPV = Present Value of cash flow – Initial Cash Investment

Year

Cash Flow

(13%)

Present Value

1 Year

800000

0.885

708000

2 Year

1000000

0.783

783000

3 Year

400000

0.693

277200

4 Year

600000

0.613

367800

2800000

2136000

NPV = Present Value of cash flow – Initial Cash Investment

NPV = 2136000 – 2500000

= -364000

Evaluation of all the Projects.

project

Pay Back Period

ARR

NPV

IRR

PROJECT 01

2 Years 4 Months 8 Days

19.107%

+ 905000

24.37%

PROJECT 02

2 Years 4 Months 5 Days.

43.33%

+2064000

86.21%

PROJECT 03

3 Years 6 Months

28%

-364000

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When mention about table can understand project 02 is the best project to select because of that project has highest ARR, NPV, IRR and lowest payback period.

Can propose to MR. Tom to select ‘Building a retail shop’ project.

Conclusion

Financing is very important to make the short term or the long term decision. Because that shows how the business was running, what is the weaknesses organization was done what side need to improve. In the Odel PLC and the Orient Garment PLC company’s income statements and the balance sheet have differences and the similarities.

According to the calculated ratios Orient Garment PLC is more effective company compare with the Odel PCL because they have more debtors than the creditors and they have good financial position according to financial ratios. And Orient Garment PLC earnings per share is high than the Odel PLC. That mean they value of a share is high than the Odel PLC.

Financial information is more valuable to the stake holders to make decision towards the organization.

Finance sources may be internal or external but they may also be short, medium or long term.

Financial planning helps manage income, build assets and also enables an individual to live a comfortable life, post retirement. Financial planning process helps understand about the current financial position. And that helps to manage income more effectively.

There are advantages and disadvantages in different types of investment techniques. Payback period Calculations are easy and quick, Easy concept to understand, Can exchange liquidity but it Ignore time value of money, Ignore the cash flow after the end of payback period. By using Accounting rate of return can easily calculate from financial statements. But it relative measure rather than an absolute measure & hence takes no account of the size of the investment.

Net present value is Make use of all the project cash flow throughout the duration of the projects life. But Difficult for non-finance people to understand. Internal rate of return is Consider time value of money. But it is too complex.