Finance for managers
Order Description
Coursework Assessment
Case Study: Smart Carpet Ltd.
Smart Carpet Ltd is a family business established in the United Kingdom in 1996 with one
manufacturing facility in Liverpool. It produces 100% wool carpets. The company employs
240 employees and has an average annual turnover of �45 million. It currently distributes
its products across the UK and France using its own delivery fleet.
The company is currently considering a replacement of one of its production lines to allow
the use of a new technology to produce easy-clean carpets based on 70% wool and
polypropylene blends. Market research carried out to date at a cost of �150,000 indicates
that the easy-clean carpet is the new generation in the market and attracts high demand
due to improved quality, but some rivals have already applied this technology. However,
the new product is expected to be distributed mainly to the European market. The new
production line will cost �1,700,000 with an anticipated economic life of 5 years and a
scrap value of �200,000, but it is expected to reduce staffing level which may result in some
staff being made redundant. The original cost of the old production line is �850,000 with
an expected remaining useful life of 5 years and a scrape value of �50,000. The current
resale value of the old production line is �250,000.
Forecasted financial information over the subsequent 5 years about both plants is
presented in the following table:
Old Plant New Plant
Annual sales volume 150,000 m2 150,000 m2
Sales price per m2 �14 �17
Cost of material per m2 �6 �4.5
Cost of labour per m2 �3 �2.5
Variable overhead per m2 �2 �3
Annual depreciation charges �100,000 �300,000
Other annual fixed overhead �200,000 �200,000
Furthermore, the adoption of the new technology will result in the reduction of �150,000
in wool stock but an increase of �80,000 in polypropylene stock. The company’s
depreciation policy is to depreciate investment costs over the economic life of the
investment using the straight line method. The company�s threshold for the payback
period is 2.5 years and for the accounting rate of return is 35%.
Smart Carpet Ltd is currently financed by a mix of equity and long term debt with an
estimated cost of capital of 12%.
BSM017 Finance For Managers
2016 /17
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Required:
As an individual:
Prepare a report, in a format suitable for the directors of Smart Carpet Ltd, and
recommend whether they should go ahead with the replacement decision. Please ignore
taxation. Your report should include:
1. Financial analysis, and interpretation, including: [40 marks]
? A brief discussion of the relevant and irrelevant costs associated with the
replacement decision. (5 marks)
? Forecasted annual net cash flows and profits for the next 5 years. (5 marks)
? Forecasted total cash flows and total profits. (2 marks)
? Appropriate CVP analysis identifying the break-even point and the margin of
safety. (8 marks)
? Appropriate capital investment appraisal analysis, including: the payback period,
the accounting rate of return, the net present value and the internal rate of
return. (8 marks)
? Appropriate NPV sensitivity analyses using both the �what if� technique as well as
the �Zero- NPV� technique, and employing at least four different assumptions.
(12 marks).
2. Critically discuss and evaluate, by reference to the specific case study and relevant
academic studies, the strengths and weaknesses of the different financial techniques
required in section 1. [30 marks]
3. Critically discuss the nonfinancial factors that may impact this investment decision.
[20 marks]
4. Presentation and Style of your report. [10 marks]
Total for Assessment [100 marks]
You should place your detailed workings in appendices (a maximum of 5 A4 pages).
These appendices are not included in the word count. It is envisaged that these
appendices will be used to present detailed calculations rather than having these in
the main body of the report. Summary tables are more appropriate in the main
report.
Your report, excluding the appendixes and the reference list, must not exceed 2,500
words (+ or � 10%; a penalty of 10% reduction of your total mark will be applied if you
BSM017 Finance For Managers
2016 /17
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deviate from this rule). You must state the word count clearly on the front page of your
report.
The report and appendices should be clearly legible and presented in a minimum 11
point font.
Guidance on Approach and Assessment
1. In marking the calculation elements credit will be given provided the approach adopted
is reasonable and is justified. In assessing the report element, a logical flow of argument is
expected, based on the supporting calculations and a synthesis of material to arrive at a
sustainable recommendation.
2. It is essential that you document all assumptions underlying your analysis. Assumptions
made must be reasonable.
3. A critical awareness of the financial techniques used is required � their limitations and
underlying assumptions.
4. Most data are based on estimates; how sensitive is your recommendation to the
accuracy of these estimates � how much would they have to change for your
recommendation to change?
5. Remember that investment decisions are not taken purely on the quantitative financial
appraisal. Are there other qualitative factors which are important to identify in the report?
6. Ensure your conclusions and recommendations are justified and supported by the
facts.
