AFE_7_IFM International Financial Assignment Sample

1. Introduction

The international financial manager is followed by Runcorn chemical in order to achieve a good market in European countries. An organisation must improve their production performance as well as sales performance to acquire a good position in the global market. This report is prepared for analysis of cash flow performance of Runcorn chemical. Runcorn Chemical wants to expand business in European companies. The company is developing a project for modification of the Runcorn plan and acquiring new tanks and rolling stock for the transport division. The total cost of the project is nearly 90 million that is allocated by David. Davis is project manager and leads the whole project of Runcorn chemical.

2. Runcorn Chemical’s capital-expenditure and proposals

Capital expenditure means an organisation invests some amount in order to modernise the organisation as well as boost the production process. Runcorn chemical is taking a division to modernise the Merseyside plan for improving the production line and acquiring the European market. The company is noticed the market situation of European countries and it is observed that the chemical organisation of the European market is not increased production and demand for EPC chemical is European manufacturing industry. As opined by Suparman and Chandra (2019), [project proposal and project capital may be different it depends on types of projects.  Mainly an organisation is firstly forecast project cost proposed in the organisation at different managerial level. After that, different level managers observe the cost of the project and timetable aligned to the project. The project is considered an important factor that improves project quality and gives good results in organisation at the time of providing approval.

The proposal of the Merseyside project consists of all important factors such as cost of transport division as well as modification cost of old plants of Merseyside plant. Further Runcorn chemicals may be invested nearly 90 million for all required steps of the project. As opined by Nguyen and Nguyen (2020), David is also invested nearly 10 million  for upgrading transport division and purchasing new rolling stocks and tanks

3. Analysis of transport Division Suggestion

The transport division of the company must be modernised to improve the production process of the company and take a better position in the global market and European countries. The company is spending 10 million for rolling stock and transport equipment such as tanks for transport chemicals from one depart to another depart or to market. Runcorn chemical’s main motive for upgrading transport of the Merseyside plant is to develop a “digital supply chain”. DSC plays a prime role in any global business to maintain supply of products from one country to another country. Runcorn chemical is considered a suggestion of grace; he is plant manager of the Merseyside project.

Grace suggested to David to look into the transport division of the company and also improve the production line. As argued by Wang et al. (2018), that is another reason for upgrading the transport division that assists in supplying extra production of EPC chemical and other demanded chemicals in European countries and also to acquire the global market of that product through this product.

3.1 Potential changes in other divisions of the company

On analysis of potential changes due to this capital project, it can be seen that due to this project gross margin of business has increased from 11% to 12%. Apart from this energy-saving is another major benefit that arises through this capital project. On the evaluation of this capital project, it has been seen that this project saves energy up to 7%. Saving in energy not only reduces unnecessary costs but also adds value to the product.

4. Evolution of director’s sales suggestion

As per the case study, it has been provided that the existing company has two major competitors who sold polypropylene named Saone-Poulet or Vaysol. In this situation, one of the sales directors decided to shift production from Runcorn to Merseyside. However, due to the presence of two major competitors, it may cannibalize another plant named Runcorn. Apart from this, currently, the industry is facing a downstream which affected this decision of shifting production from one to plant to another. As stated by Yip and Bocken, (2018), customer preference may change due to certain changes in the production of business. Apart from this, the decision of shifting production capacity is also argued by the vice president of marketing. According to the author, lower cost of production at Merseyside plants can be able to capture the market. As opined Sumter et al. (2018) by providing a great quality product at great price attract customers towards business products. This action not only increases business revenue but also provides scope to compete with its competitors in a better way.

The decision of ignoring cannibalisation charges is an effective move that increases business efficiency to compete in the market. As provided in the case study, it can be seen that if a company focuses on these factors it can be able to reduce cost and increase value to the product. Apart from this, the current market position of this business is not as good as to adjust these charges. Thus, in order to increase revenue, business companies need to shift their production capacity from Runcorn to Merseyside. Moreover, if a company focuses on the cannibalisation charge and expenses, its competitors can be able to use the opportunity to capture margate. This may not be good for the financial health of a business. Thus, focusing on cost competitiveness is the right decision taken by business management.

5. Modification in a plant by assistant manager

In order to increase financial performance in the market, the company also decided to renovate the EPC production pipeline which cost 10 million pounds. Expediting that much amount on renovation increases the cash flow of business as well as a financial position in the market, As opined Sudari et al. (2019), renovation of production also increased product quality as well as the number of customers. As mentioned in the case study it has been found that this renovation will increase business costs by 2500000 pounds which seems beneficial for business. Thus, this step of management provided scope to compete in the market in a   better way.

Sales suggestion is the specific technique that enhances the basic performance level of Runcorn chemicals. Runcorn chemicals are major competitors of the chemical industry and they can deliver huge polypropylene to the individual business industry. These specific chemicals are generally used for making carpet fibers and automobile spare parts and Runcorn chemicals supply polypropylene to another industry. As per the study of Jović et al. (2018), the sales suggestions of assistant plant managers sometimes enhance the basic cash flow level of the industry. Harry Jones is the assistant plant manager of Runcorn Plc and has tried to modify business cash flows by enhancing business activity. Numerous automobile components are using these chemicals and Runcorn chemicals are enhancing their movement policy with the help of several tank cars.

Directors’ sales suggestion is enhancing basic sales volume and it improves innovative decisions to promote opportunities. To improve business cash flow is a huge investment and around £10 million are included for the Merseyside project. The oversupply of polypropylene is needed for accurate investment policy and that helps to develop basic cash flows of the business. Sales suggestions and continuous innovative decisions are enhancing basic business flows and harry jones understands the cannibalization of the market. Sales suggestions sometimes analyze the Merseyside project and analyze the competitors to eliminate several difficulties.

6. Analysis by Treasury Staff for an inflation rate

Wilson Andrew is the treasury staff of Runcorn chemicals and maintains the financial statements to understand and compare the financial condition of the Merseyside project. David’s analysis describes the current inflation rate and a discounted rate of the specific project. Long term forecasting helps to prepare budget plans and other costs of the specific project and that helps to reduce unusual expenses of Merseyside projects. As per the opinion of Dong et al. (2020), understanding the current market situation has the potential to enhance the basic cash flows of the business. The Merseyside project requires huge investments and that is recognized by the David analysis. Numerous project requirements are fulfilled with the help of David’s analysis and it helps to enhance the basic performance level of the Merseyside project. The inflation rate sometimes depends on the current value of the market and overall financial policies are recognized or monitored by the treasury staff.

Basic cash flows rate and inflation rates are recognized by the treasury staff and David’s analysis helps to fulfil numerous project requirements of Runcorn chemicals. Long term inflation rate is increased by 3% per year and Runcorn chemicals achieve their targets by 9% in the same year. A budget plan is a systematic procedure that helps to understand the accurate costing of the specific project. As per the study of Wang et al. (2019), treasury staff describes the overall financial activity of the business. Around 12% discounted rate is described by the David analysis and which is the latest valuation of the capital budgeting. Numerous financial activities of Runcorn chemicals are described by the financial statements such as Gross margin, discounted rate, and other financial statements. General outcomes of the business are described by the project planning and that communicate numerous employees with the specific project.

7. Modification of David’s DCF analysis

7.1 Inflation in cash flow.

Inflation is the phenomenon procedure that recognizes the money incremental plans of the business. In DCF analysis cash inflows, outflows are described and it also recognizes the future outcomes of the specific project. The present value reducing and fixed cash flows are recognized by the long-term bonds. The inflation rate and purchasing power of the cash flows are described by the David analysis. The discounted rate and inflation rate are identified by the NPV calculation.

7.2 It’s impacting on shareholders ‘wealth of organization

The inflation rate is the biggest threat for the shareholders and it can harm the shareholder’s value in the business. Basic costs of the numerous industries are enhanced by the inflation and it is also losing sales volume of the business. Enhancing inflation is reducing the purchasing power of business and that includes some common threats in the business. Most of the business organizations are described by the financial statements and that helps to monitor the business performance of Merseyside projects. The fixed cash flow and long term bonds are affected by the inflation rate.

7.3 Engineering study

The engineer’s activity and educational research sometimes eliminate the business difficulties of the specific project. As cited by Al-Bayati et al. (2020), engineering studies are a systematic process that helps to monitor numerous engineering studies of the project. The engineering study is a complicated process and that helps to enhance numerous business activities of the Merseyside project. Assistant plant managers are enhancing the modification and that helps to enhance basic cash flows of the specific business. The preliminary engineering cost is £5,000,000 million which is invested by Runcorn chemicals. The engineers’ groups are highly confident in enhancing the basic percentage of the specific project. Capital expenditure sometimes creates a manual suggestion for the specific project and that helps to enhance the basic performance level of Merseyside projects.

7.4 Corporate overhead allocation

Corporate overhead allocation describes the basic performance level of the project and compares the incurred costs of the Merseyside project. The management of the company describes the overhead cost by some activities and that helps to enhance the basic performance level of Runcorn chemicals. A corporate allocation is a powerful tool and that specific factors manipulate numerous business transactions of the specific project (Suryaningrat et al. 2021). The corporate cost allocation is measured by the treasury staff and it also describes numerous business units and multiple entries of cost measurement. Corporate policy is the manual policy of the Merseyside project and that helps to understand the marginal cost of the Runcuncorn chemicals.

7.5 Cannibalization of the Rotterdam plant

Project cannibalism is described in the discounted cash flows of the project and it helps to monitor the basic performance level of Runcorn chemicals.  Cannibalizing sales of each company is described by the analysis and that helps to understand the overall project requirements of the project (Church, 2019). Project cannibalism rate is described by the financial statements and engineering groups of the project is eliminating common difficulties of Merseyside project. Sales and marketing teams of the project describe their current inflation rate by the project efficiency.

7.6 Opportunity cost

Opportunity cost represents the essential benefits of the specific project and that focussed on the individual investor’s performance level. As per the opinion of Muraina (2018), opportunity cost describes the next best alternative value in a systematic process. The opportunity cost refers to numerous alternative values of the business and that helps to recognize numerous business issues of the Merseyside project. Opportunity cost is the specific factor that helps to enhance some basic opportunities of the specific project.

7.7 interests are at stake

The interest of the stake describes the investment policy of a business and most business organizations achieve a succession plan with the help of risk analysis. Understanding the future threats and difficulties is an accurate way of enhancing the basic cash flows of Merseyside projects.

7.8 Interdependence of excess capacity and the cannibalization issue

Market cannibalism is the specific process that helps to meet the basic demands of the original products. As per the study of Cusbert and Kendall (2018), cannibalism occurs at the time of lower sales volume, and at the time of revenue, it sometimes harms the market shares. Cannibalism issues sometimes hamper the market shares and it also describes the overall structure of the project. Sometimes cannibalism issues reduce the basic business performance of Runcorn chemicals.

7.9 Changes in inventory

The inventory value is increased by the WIP and it also describes the 3% of the cost of goods sold. From the project analysis, it is easy to recognize the present value of the cost of goods sold and it is necessary to enhance the basic cash flows of the business. The preliminary engineering cost is £5,000,000 which is preceding the 9-month efficiency. As per the study of Croushore and Stark (2019), capital expenditure is a manual suggestion for the project and it sometimes focuses on the inventory level of a project. The overhead cost for the reflected rate of the project is 3.5% and that depends on the book value of the project in the financial year.

7.10 Adjustment for inflation

The assumption of inflation is described by the capital expenditure proposals and that describes the overall financial performance of the specific project. Most business organizations describe their current performance by the manual process which is capital budgeting.

8. Merseyside project’s worth for Runcorn Chemicals

8.1 With cannibalism (NPV and IRR)

Net present value and internal results of the project are described by the financial statements. The initial outlay rate of the project is zero and a David analysis describes their business performance by the Rotterdam project. With cannibalism rate, the purchase of new products is £200000 with an estimated margin of 0.84.  Market cannibalism sometimes indicates basic losses of the introduced company and that also hampers the sales growth (Gale et al. 2019). The overall interest rate is described at the time of total unit calculation. The new sales are described as 1170.31 and total units are described with a 5% cannibalism rate. The new gross profit is described as £23433.5996 which is calculated after the cannibalism rate. The cannibalism rate is described by the old sales, new sales, and estimated margin of the project. The new gross profit margin is identified as almost £10121.0575. [Referred to appendix 4]

8.2 Without cannibalism (NPV and IRR)

The internal rate of return is described by the cannibalism rate and it sometimes introduces new products of the specific project. Cannibalism is enhancing market shares despite sales growth of the new and specific products. There are some assumptions such as the purchase of the new products and estimated margin which is 0.84 and £250000. The new sales of the project are described as £1170.31 and incremental gross profits are £267500. Cannibalism is the systematic procedure that helps to enhance the basic performance level to fix cannibalism of the industry (Schoper et al. 2018). Total units are described as £468672 and these also describe the overall business requirements of the specific project. [Referred to appendix 5]

9. Sensitivity of the project

9.1 Purpose of sensitivity analysis

The projected sensitivity is described by the discounted rate and cannibalism of the specific project. Runcorn chemical has made annual outputs of almost £2500000 and that needs huge investment to fulfil basic requirements of the specific projects. Accurate project sensitivity sometimes describes and analyzes the overall business projects. Project quality is sometimes enhanced by sensitivity and it can easily change the general outputs of a project (Schoper et al. 2018). Understanding the risk, qualities and evaluation are potential factors to achieve succession plans for the specific project.

Calculation of EPS with cannibalism

Average EPS with cannibalism is almost 8.13% and NPV for this project is more than 109.98 million GBP. Company will be able to improve its performance with this project and production line will be improved. Runcorn has will be able to recover its invested capitals with in 1 year and a large amount of working capital will be available to operate dai8ly activities. Internal return rate will be more than 31.03% in cannibalism project of Runcorn PLC.

Calculation of EPS without cannibalism

Without cannibalism Average EPS is almost 14% but payback period is around 4 years. NPV for without cannibalism project is around 69.29 million GBP and company may face loss, if it is unable to recover its invested capital before recession end. Implementation of new technology and tank cars are necessary to improve performance   of Runcorn. Internal rate of return is approximately 25% in without cannibalism of Rotterdam plant.

[Referred to appendix 5]

Sensitivity analysis

Net present value of Runcorn PLC project will be increased by 80.96 million GBP and it can easily satisfy its stakeholders for a long period.  Internal return rate will be increase by 6.43% that will attract new investors and it will become a financially stable company within short period.

[Referred to appendix 6]

9.2 Limitation of sensitivity analysis

Conducting a sensitivity analysis involves complicated factors and it requires basic knowledge and skills to enhance the performance level of a project (Ohrn, 2018). Sometimes project difficulties are not accurately described by the sensitivity analysis and that reduces the basic performance level of the Merseyside project. The projected sensitivity is a time scheduling process and it includes huge investments to enhance basic performance levels. Sensitivity analysis is a method and it also compares the key predictions of the Runcorn chemicals.

10. Impact of the project on shares per earning the company

Earnings per share is measures the basic financial and it indicates companies performance. The dividend policy is calculated by the dividend policy of the specific company. Earnings per share describe company’s profitability and economical factors of a company (Bartik et al. 2020). The net income of the business is described by the outstanding shares of the project.

10.1 calculate the average rate of return

The average rate of return is described as a (Net income / Average investment), it is the basic procedure of calculating ARR. Profit from the operation describes the earning prices of the shares. The average rate of return requires basic skills and knowledge. The average rate of return describes overall project performance and provides basic knowledge of the investment policy. The average rate of return is calculated after describing the investment policy. The average rate of return sometimes indicates the gross profit margin of the project. In the DCF analysis cash flows are described and the average rate of return is also described at the times of calculating the average rate of return.

11. Analysis of EPS-EBIT as a financial tool of company

Earnings before interest and taxes are a standard process and that includes a basic impact on the investors’ performance. Earnings per share are calculated after recognizing the outstanding values of the project. Earnings per share describe the profit allocation of the specific project. Financial break even points and earnings before interest and tax are described by the earning per share. Earnings per share sometimes deduct the interest expenses and depreciation value of the project and that reduces some unusual expenses and increases net earnings (Husnain and Toor, 2017). The earnings per share and Earnings before interest and taxes describe the basic performance level of the project. Earnings per share describe the basic performance level of the business.

Earnings before interest and taxes describe the company’s net profit and it analyzes the basic performance level of company’s core operations. To calculate EBIT operating expenses includes some overhead costs, marketing expenses, corporate salaries, equipment, and other non operating income (Nenu et al. 2018). From the total revenue or net income, EBIT was calculated and it shows some difference between net profit and depreciation value. To calculate the basic interest rate, EBIT is potential and it describes the net earnings of the project. Most business organizations are describing their basic profit by the outstanding share on an annual basis.

Conclusion

Based on the above discussion it can be concluded that Runcorn chemicals and Merseyside project. From the David analysis easily understand numerous threats of the project. The basic sales suggestion of the assistant plant manager is to enhance the cash flows of the Merseyside project. The transportation services of the project require huge investment to enhance the tank allocation to improve their transport division. The discounted rate and gross margin are increasing the basic production level of the Merseyside project. The production level of polypropylene is required to make rubber fibers and numerous automobile industries. Earnings per share and profit before interest and taxes are described as gross margin and a discounted rate of specific projects.

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Appendices

Appendix 1: DCF Analysis

David’s DCF Analysis of Merseyside Project
Assumptions Discount rate 14.00%
Annual output 2,62,000 Depreciable life (Year) 16
Original output/ Output Gain 9.00% Overhead /investment 4.60%
Price / Ton (Pounds sterling) 800 Salvage Value 0
Inflation rate (Price and cost) 0.00% WIP Inventory/Cost of Goods 5.00%
Gross margin (Ex. Deprec.) 14.00% Months Downtime, Construction 1.9
Old gross margin 11.00% After-tax Scrap Proceeds 0.00%
Tax rate 20.00% Preliminary Engineering Costs 6
Investment outlay (mill.) 90.00% No of Shares 140,891,140
Sales/ Energy saving      1-5 yr 1.30%
                                               6-10yr 0.90%
                                             11-15yr 0.00%
(Source: MS Excel)

Appendix 2: Discounted rate

Particulars Cash
New capital appropriations
Capital budget bill 51755
Equity injections 56535
Total new capital appropriations 108290
Purchase for non financial assets 108290
Total item 108290
Purchase of non financial assets
Funded by capital appropriations 161276
Funded by capital appropriations (DCB) 51755
Funded initially from departmental resources 133556
Total 346587
Total purchase 346587
Total cash used to acquire uses assets 346587
(Source: MS Excel)

Appendix 3: Cash flow with Cannibalism

With cannibalism
Assumption Amount
Purchase of new products 200000
Estimated margin 0.84
Interest rate 0.842
Incremental gross profit 267500
New sales 1170.31
Total Units 468671.992
Cannibalism rate 5%
New gross profit 23433.5996
With cannibalism
Assumption Amount
Purchase of new products 200000
Old Sales 1250
New Sales 1170.31
Old Output 2,500,00
Estimated margin 0.84
Total Units 202421.15
Cannibalism rate 5%
New gross profit 10121.0575
(Source: MS Excel)

 

Appendix 4: Cash flow without Cannibalism

Without cannibalism
Assumption Amount
Purchase of new products 200000
Estimated margin 0.84
Interest rate 0.842
Incremental gross profit 267500
New sales 1170.31
Total Units 468672
Without cannibalism
Assumption Amount
Purchase of new products 200000
Old Sales 1250
New Sales 1170.31
Old Output 2,500,00
Estimated margin 0.84
Total Units 202421.2
(Source: MS Excel)

 

 Appendix 5: Cash flow of 15 years

Particulars 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 3033 3034 3035
Incremental gross profit
New outputs 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000 2675000
Lost outputs 275125
New sales Million 1272 1301 1325 1354 1398 1398 1398 1398 1398 1398 1398 1398 1398 1398 1398
New Gross Margin 12.30% 11.11% 13.01% 13.25% 13.98% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89% 13.89%
New Gross Profit 156.45 144.54 173.57 179.405 185.235 185.235 185.235 185.235 185.235 185.235 185.235 185.235 185.235 185.235 185.235
Old output 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000
Old Sales 1358 1358 1356 1385 1358 1358 1325 1358 1358 1385 1396 1374 1385 1398 1365
Old gross profit 122.56 121.33 135.51 135.54 138.35 139.25 139.75 169.25 144.36 135.58 135.36 136.89 142.69 148.98 169.26
Incremental gross profit 33.89 23.21 38.06 43.865 46.885 45.985 45.485 15.985 40.875 49.655 49.875 48.345 42.545 36.255 15.975
Depreciation
New depreciation 6.66 6.98 5.69 4.89 9.56 9.65 8.78 9.89 8.89 7.98 5.89 9.89 7.89 8.92 8.98
Overhead 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98 3.98
Engineering cost 6.58
Preliminary incremental profit 16.67 12.25 28.39 35.00 33.35 32.36 32.73 2.12 28.01 37.70 40.01 34.48 30.68 23.36 3.02
Tax expenses 0.95 6.45 8.69 6.85 5.69 4.58 2.69 3.96 2.85 2.22 2.99 3.11 3.19 3.45 3.45
Profit after tax               (10.09)               (12.25)         (28.39)         (35.00)         (33.35)         (32.36)         (32.73)           (2.12)         (28.01)         (37.70)         (40.01)         (34.48)         (30.68)         (23.36)           (3.02)
Add back depreciation 33.89 23.21 38.06 43.87 46.89 45.99 45.49 15.99 40.88 49.66 49.88 48.35 42.55 36.26 15.98
WIP inventory 2.98 -3.98 -2.98 -1.98 -0.91 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Free cash flow 33.36 6.98 6.69 6.89 12.63 13.63 12.76 13.87 12.87 11.96 9.87 13.87 11.87 12.90 12.96
EPS 6.66 6.98 5.69 4.89 9.56 9.65 8.78 9.89 8.89 7.98 5.89 9.89 7.89 8.92 8.98
NPV 109.98
IRR 31.03
Average EPS                  8.13 Pense
Payback period 0.95 Year
(Source: MS Excel)

Appendix 6: Sensitivity analysis

Sensitivity analysis change
NPV = 40.7
IRR = 6.0298
(Source: MS Excel)

 

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