AFE_7_IFM International Financial Management for Business

1. Introduction (AFE_7_IFM International Financial Management for Business)

International financial management (IFM) is a global level process of maintaining and financial operation of an organisation. IFM is mainly suitable for those business organisations that operate their business in more than 5 or 10 countries. The following assignment is based on a case study of an organization named Runcorn Plc. The company intends to renovate one of its production plants named Merseyside which cost 90 million pounds. The company is currently facing financial issue, this capital structure aim to boost financial performance of business. The study highlights the allocation of capital structure and its impact on the business prospect.

2. Analysis of Runcorn Chemical’s capital expenditure and proposals

Capital expenditure refers to those types of expenses that an organisation is barred for expanding business as well as adopting new plants and technology for improving organisation performance and other business operations. As opined by Turner and Helford, (2019), the capital of any project as well as expanding business in different countries must be predetermined means pre forecasted. These types of steps are taken by effective and efficient FM. On the other hand and better organisation always makes a plan and budget for any business operation as well as project. Efficiency and success of any organisation depend on their project as well as business operation. The growth and success of a project also depend on the budget and capital expenditure of the project. Thus it is important for any business organisation that allocates a good budget. That assists projects to acquire those expenses that are important for the organisation as well as the project.

Proposal is the process of determining future expenses of a project through consideration of the present business operation of the company. The budget of Runcorn chemical is suggested through “double-declining-balance (DDB)”. This type of capital control strategy is mainly maintained by the IFM system. Tyre Company invests 3.5% as an initial cost system. Further, an organisation must be focused on their financial performance to develop any type of investment strategy. As argued by Suparman and Chandra, (2019), the company is also considering the tax rate on projects may be up to 20%. That may have affected the Runcorn chemical. Besides, Grace also wants to invest 10 million for the purposes of purchasing rolling stock and tanks for chemical storage. The capital expenditure structure is better nevertheless one factor may be affected negatively. That factor is the tax rate of the project. The project budget as well as allocation of the whole budget is too complicated for understanding the whole amount of the project. It is important for David and Grace to develop capital expenditure producers of projects in different sections such as forecasting, development and implementation.

3. Evaluation of transport Division Suggestion

The transportation division consists of the whole organisation’s transport equipment and their movement for performing the organisation’s business operation. Transport department is an important department of any business organisation as it supports organisations to perform business in the global market as well as in different areas of countries. Runcorn wants to improve the production process of the company as well as improve organisation sales in different European countries. As applied by Yazdani et al. (2017), organisation needs an effective supply chain magnet for performing better in European countries. Grace is plan management and David is wants to purchase new chemical tanks as well as rolling stock for carrying chemicals from one department to another department of the organisation. Companies may spend nearly 10 million to acquire these types of transportation equipment. This type of transportation equipment is not only a support organisation for improving performance but also development of an effective “supply chain management”. That is to improve performance of financial management as well as Runcorn chemicals.

3.1 Potential changes in other divisions of company

Modernisation in transportation of Runcorn chemicals is supporting companies to improve their production process. As opined by, (2020), the organisation currently produces 250000 tonnes of chemicals per year. Organisation is able to produce nearly 7% extra per year. Besides, companies also purchase raw materials from organisations from those countries where organisations get raw materials at low prices. This step of organisation is to assist organisations to manufacture at break-even point. As argued by Griffin and Jiao, (2019), that supports reducing the price of products at a minimum rate. There are three divisions of Runcorn chemical that are affected by changes in transportation for the company. Three departments of run corn chemical are “production depart, sales dept and supply chain dept” of the company. Thus this decision of the company may be a better opportunity for Runcorn chemicals. These are main potential changes in different organisations of the company. That must be observed by the organisation while modifying their transportation department.

4. Analysis of director’s sales suggestion

The Director of sales of Runcorn chemicals has an idea that is better for the organisation as well as competitive with their competitors in the global market as well as the European market. The direct sale is argued to have shifted our production capability from “Rotterdam toward Merseyside”. There are two main reasons for shifting our production capacity; one is Rotterdam is manufacturing polypropylene in massive tonnes. Besides, this product is more competitive in the market. As stated by Wey and Zhang, (2018), the direct is also argued that the company is improving the capability of Rotterdam than the product is oversupply and organisation may face loss. Thus the sale direct is suggested by David and Grace for improving the capacity of the Merseyside plan to improve production of other chemicals such as ethylene-propylene-copolymer rubber (EPC). This product is in too much demand in European countries and supply of this product is also not proper.

The suggestion of sales direct is not only to improve organisation production performance as well as to enable the company to compete with their competitors in the European market. The Sales director also considered main competitors such as Saone-Poulet or Varsol are affected organisational performance in the global market. Thus by selling directly, it wants to shift the improvement of plants in the Merseyside plant for manufacturing those chemicals which demand too much in European countries as well as the UK.

5. Suggestion for modification in plant by assistant manager

Harry Jones is assistant plant manager of Runcorn chemical and argues for improvement in a separate and independent part of the Merseyside plant. The Assistant plant manager is focused on modernising and adopting the latest technology for “production line for ethylene-propylene-copolymer rubber (EPC)”. That product of the organisation is in demand in European states and countries. This product of the company is a variety of synthetic rubber that is sold in massive amounts to European tire manufacturers. As opined by Ghorbanzadeh et al. (2019), this product of the company is marginally profitable as compared to other products of the company. Main reason for high marginal profitability is low entry of competitors for manufacturing the product. The plan manager argued that renovation of EPC production line may occur at a cost of £10 million for Runcorn chemical.

Runcorn chemical has several benefits while improving production of EPC products. The company may easily improve their EPS as well as NPV. The suggestion of the plan manager is also a better decision for Runcorn Chemical as the company may easily improve the price of the product as well as attract new shareholders and stakeholders. Besides, the company is also improving their opportunity cost of £ 8750000. Further organisation is also to improve opportunity cost and improve financial performance of the company. The current NPV of the organisation is £69.3 million and the IRR of Runcorn chemical is 25.3 per cent. That company may be improved in the future period of time.

6. Analysis by Treasury Staff for inflation rate

Treasury is a bond or security that is used by different types of business organisations to meet their financial needs. The financial needs may be long term or maybe short term. Nevertheless, effective financial management is focused to issue treasury while the organisation needs financial support for a short term period. As opined by Kretzer and Maedche, (2018), whereas on the other hand an organisation must be focused on the issue of share and debenture while the organisation needs finance for a long term period of time.

In this case study, Wilson Andrews is treasury staff is suggested to run corn chemical to develop a DCF for a determined budget for the project as well as allocation of sufficient budget for project. Wilson has a target nominal IRR of 12%that must be acquired to reduce the financial cost of the budget as well as improve organisational profitability. As opined by Ahuja et al. (2019), on the other hand, the treasury staffs are suggested to Runcorn the inflation rate must not exceed 3%. As it is the standard inflation rate that must Runcorn follow for better utilisation of finance in organisation. Further, the Wilson is set at a discount rate of 12% as it is the latest edition for any budget. The colony must consider this discount rate while the budget is calculated manually.

7. Modification of David’s DCF analysis

7.1 Cannibalization of Rotterdam plants

Runcorn PLC uses old machinery and in the Rotterdam plant, the efficiency of this company to produce chemicals is low. As cited by Carras et al. (2020), cannibalisation of this plant has been proposed by the management team to improve productivity and grab upcoming opportunities to sustain its existence for a long period. Davids has proposed to invest almost 90 million GBP for rationalization and renovation of polypropylene to improve production at Merseyside. According to David, consumers are not permanent in a chemical industry because a large number of competitor companies use substitute chemicals to reduce prices with high quality. David has characterized that company will be able to save energy almost 1.2% in the first five years and more than 0.7% in the next six to ten years.

Corporate overhead allocation:

Corporate overhead allocation of projects refers to expenses of project budget. There are nearly 90 million is organisation is bearded for invest in different parts of the project. The overhead allocation is 3.15. Opportunity cost. Opportunity cost must exist in any project for better performance of the organisation. There are organisations with an opportunity cost of 8750000 million. Further an organisation must be followed to modernisation of the Merseyside project that is to contribute organisation for improving opportunity cost. Interest’s parties in project this decision is better for organisation as well as stockholders. Organisation benefits such as improving the production process as well as expanding business in European countries. On the other hand, stacks get benefits in terms of organisation EPS and NPV is increased after implementation of the project in organisation.

Runcorn PLC has suffered from operating business activities due to the pandemic situation. Based on discounted cash flow analysis of the Runcorn PLC project by David, it has been found that the company has focused on selling almost 2500000 GBP each year. Construction cost was almost 334375 that is the initial investment for business cannibalism. Earnings before taxes and interest are almost 163.98 in 2021 and 39.05 million GBP in the next four years. Runcorn PLC will enjoy a high rate of return on investment after the first year. More than 32.36 million GBP will be earned by Runcorn PLC from 2026 to 2030. EBIT of Runcorn PLC will be more than 23 million GBP from 231 to 2035.

Free cash flow of David’s old discounted cash flow analysis is almost 12360000 GBP in 2021, more than 26450000 GBP in 2020, approximately 30520000 GBP in 2023, and more than 30280000 GBP in 2024. Runcorn PLC will be able to earn a free cash flow of almost 30070000 GBP by 2025, more than 24540000 GBP in 2026, around 24380000 GBP in 2027 and approximately 242500000 GBP in 2028 (Case study). Runcorn PLC supply chain is not efficient and this project has focused on purchasing new tanks that have a high capacity to store chemicals that can transport a large number of chemicals within a short period.

Net present value of old DCF analysis is around 69.29 million GBP and internal rate of return on investment was almost 25%. In David’s modified DCF analysis it has found that annual output is almost 2500000 GBP and expenses for cannibalism is more than 175000 GBP. Run corn PLC has suffered to manage organizational activities due to lack of funds that annual output has decreased and decreased cost of construction. In modified DCF analysis gross margin has increased to 12% from 11%. Discounted rate of this project has remained the same in modified DCF. Earnings before tax and interest are almost 1062500 GBP and depreciation will be more than 300000 GBP (Case study). Engineering costs will be more than 5000000 GBP that will be spent to increase efficiency of the production line. Almost 12% internal rate of return is required to recover its investment. It was forecasted that recession will end after three years and that investing in this project is risky.

Discounted cash flow is almost 362497 GBP and this project plan will ensure more than 18% EPS in upcoming years. As opined by Novak et al. (2017), a large number of investors will show interest in modified DCF analysis due to the high rate of return on investment. Based on modified DCF analysis, the transport division will be improved and its expenses will be measured separately. As cited by Biella et al. (2019), a supply chain will be developed that will improve profitability in upcoming years. Initial investment is low in modified projects and the NPV of that project is calculated to be almost 25.06 million GBP so that this company will be able to recover its investment.

New EPS is almost 18% that is 3% more than previous analysis. The 12% discount rate has been maintained to ensure profitability of the company because the company’s target is to earn almost 9% gross income and the inflation rate is around 3% in this country. Assuming an almost 12 % gross margin will increase the company’s profitability (Case study). Initial expenses for constructing new plants are so low that Run corn PLC will not face so many complications during a recession. Payback period for David’s modified DCF analysis is almost 2.35 years that will ensure recovery of initial investment of Run corn PLC. Free cash flow for 2021 is almost 184350 GBP and around 359350 GBP for the rest of the year. Run corn PLC will face low cash flow for applying modified DCF analysis due to investing in construction. [Referred to appendix 2]

7.2 Inflation in cash flow efficient

Inflation rate is increasing day by day due to recession and pandemic situations. As cited by Gu et al. (2020), a large number of people have suffered to achieve their business goals. Run corn PLC has focused on earning almost 12% gross profit because average inflation is almost 3% (Case study). Net gross profit of Runcorn PLC will be almost 9% in this modified DCF analysis and the company will be able to earn a large amount of revenue from it.

7.3 It’s impacting on shareholders wealth of organization

Modified DCF analysis has improved the quality of the project and cannibalism will increase efficiency of making chemicals. As cited by Bian et al. (2018), service quality of Runcorn PLC will be improved with an efficient and fast supply chain. Shareholders will show more interest to invest in Runcorn PLC because earnings per share in modified DCF analysis is almost 17.89% and investors will be eligible to earn a high rate of return on its investment. Shareholders wealth will grow within three years because the payback period for Runcorn PLC is almost 2.42 years. [Referred to appendix 1]

8. Analysis of Merseyside project’s worth for Runcorn Chemicals

The project worth of a company refers to the whole cost of the project that is born by any organisation to take action for performing necessary activities of the project. Runcorn is allocated £ 90 million for the project. As stated by Omodero, (2020), that is project worth. Project worth includes different types of cost such as investment cost and cost of latest plans and machinery cost. Nearly £ 20 million are spent on Runcorn organisation for square tanks and rolling stock for the company. Besides, the organisation is also spending nearly 12.5% on modification of the Merseyside plant.

Runcorn PLC was under pressure from investors of this company because this company has suffered from low EPS due to recession. As cited by Soboleva et al. (2018), the Merseyside project was to cannibalize a plan to remote production process. Productivity of the company will be developed and utilize upcoming opportunities. Modernization project has ensured profitability of the company by increasing efficiency with low engineering cost. The Merseyside project has applied for the last 12 months that is effective but the company has faced complications due to lack of funds and fear of losing products. IRR of the Merseyside project is almost 25% and more than 32% in modified projects.

A mystery side project company has decided to use sustainable energy to ensure a competitive advantage in the upcoming future.

Depreciation of cannibalized plants has been calculated for 15 years and a large number of investors have been satisfied with this decision. As cited by Tabei et al. (2019), implementation of new technology will increase engineering efficiency based on this Merseyside project. Preliminary engineering cost for the Merseyside project is more than 5 million GBP but effective planning will recover this amount within 3 years (Case study). Gross profit margin in this project is almost 11%. Resources of energy are decreasing day by day and are not available in the upcoming future. Runcorn PLC has focused on making effective changes in operating activities in this organization that will improve profitability.

9. Analysis of sensitivity of project

Earnings per share of two companies have been calculated in this study to reduce pressure from investors. EPS was more than 14 GBP in the previous project but the new EPS is more than 17.89 GBP (Case study). Payback period is more than 3 years in the previous project and has decreased to 2.42 years in the new project. On the analysis of NPV it has been noted that, NPV derived from this capital project stood at 69 million. However, the NPV in investing 90 million pounds is supposed to be 109 million pounds. Thus, in this situation NPV has to be increased which increases cash flow of business. [Referred to appendix 3]

9.1 Purpose of analysis

DCF analysis of the Merseyside project has been prepared in this study to reduce pressure from investors. As cited by Hidayat and Galib (2019), Runcorn PLC has suffered to execute a good return rate in these companies due to a lack of efficient strategy. Cannibalization will improve efficiency of companies at a low cost and sustain a business for a long period. Gross margin has been increased to 12% and discount rate has remained 12% as previously. Apart from this, based on this capital structure, the company can be able to save energy up to 7%. Saving in energy not only increases business cash flow but also enhances product quality. Furthermore, this capital structure also provides long term benefit for business by which this business can be able to compete in the market.

9.2 Limitation of sensitivity analysis

Sensitivity analysis represents a change in EPS and free cash flow of a company for taking a new strategy to operate a business organization. On analysis of the whole case study it has been found that taking forty-five days for this renovation process provides scope for its competitor. Other competitors in the market can utilize opportunity capture the market. Sensitivity analysis does not show upcoming uncertainties and consumer response that it is hard to predict sensitivity of a project accurately.

10. Impact of project on shares per earning company

EPS without cannibalism

Earnings per share are almost 14.78 in without cannibalism and initial investment is almost 90 million GBP (Case study). It has been found that a large amount of money is required in this project of business expansion because old machines are not as efficient as competitors.

EPS with cannibalism

Per-share earnings are almost 17.89GBP due to implementation of effective technologies within the organization. In cannibalism, construction cost is lower than previous and almost 3.2 GBP more EPS is earned by cannibalism.

Use of EPS and EBIT in decision making

Earnings per share are an investment ratio that is used to make a company’s decision. Company’s growth is directly reflected by EPS, investors are highly motivated to get growth of issued shares within a short period. As cited by Strouhal et al. (2019), effective decision of choosing a project for a company’s business expansion is evaluated by EPS. EBIT of a company shows the free cash flow of a company that will be available to manage operating activities of Runcorn PLC. Higher EPS is always better for business as it attract various new investors towards business operation. Apart from this, Runcorn needs to increase EPS or maintain a stable rate. For this a company needs to increase its EBIT as much as possible. Apart from this, most the financial managers prepare a budget based on the expected earnings per share and operating profit of a company. EPS and EBIT are key indicators of the decision making of a particular company for a specific period of time. As EPS after implication of capital projects increases it is a financial benefit for business.

11. Conclusion

Based on this study it can be concluded that a large number of investors has opposed the Merseyside project due to high investments and low EPS. Evaluations of different managerial tools and arguments with managerial persons have ensured profitability and choose the most effective decisions. DCF analysis of chosen projects has ensured the success of the company. Cannibalism is an efficient process to improve business actives within in short period. Based on this study it can be said that David’s DCF analysis for the Merseyside project is effective to make decisions for running corn PLC. Shareholders of this chemical organization are highly influenced to earn a large amount of return on their investments than they have pressurized the management team to improve decision making quality to ensure their needs.

Reference

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Appendices

Appendix 1: Discount rate and gross margin

Discount rate and gross margin with cannibalism
	Rate (%)	Out put (GBP)
New Gross Margin	12	1250000
Old Gross Margin	11	2500000
New Discounted rate	12	1250000
Old Discounted rate	12	2500000

Appendix 2: EPS, NPV and Payback Period

		Amount (GBP)
Modified David’s DCF Analysis of Merseyside Project		0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Particulars
New Output (tons)		2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000	2500000
Lost Output–Construction		175000
New Sales		1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000	1250000
New Gross Margin		0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12	0.12
New Gross Profit		150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000
Cost of Goods		37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500	37500
Operating profit (EBIT)		1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500	1062500
Depreciation		300000	300000	300000	300000	300000	300000	300000	300000	300000	300000	300000	300000	300000	300000	300000	300000
Overhead		3150	3150	3150	3150	3150	3150	3150	3150	3150	3150	3150	3150	3150	3150	3150	3150
Tax		250000	250000	250000	250000	250000	250000	250000	250000	250000	250000	250000	250000	250000	250000	250000	250000
Discount		150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000	150000
Discounted cash flow		359350	359350	359350	359350	359350	359350	359350	359350	359350	359350	359350	359350	359350	359350	359350	359350
EPS	17.89971719	0.17887792	17.88779	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.887792	17.88779	17.88779
NPV	25.06
Payback Period (years)	2.35