Prepare a report for the Directors of Hydro Ltd answering the following 2 questions.
The word count for your report is 1,200 words. In your report you need to answer the following questions.
Hydro Ltd is a privately owned trading company that supplies building materials to the building trade in the North of England, the business was established in 2018. The latest set of financial statements shows that the company has experienced significant growth in 2022 following two very challenging years. The company now has 50 full time employees and achieved sales of £8m, gross profit of £5m and operating profit of £1.5m in 2022. The company is a family business 100% owned and run by three members of the family. The full income statement for 2022 is included within appendix A.
The company currently rents both its office and warehouse space and is considering whether the time is right to invest in new office and warehousing space which they will own. The directors estimate that this will be at a cost of £5m, the current premises that they occupy is part of a large warehouse complex, and the company rents space there. They currently occupy 10% of the total space available at a cost of £700,000 a year (this includes all utility bills), every 3 months the company can increase the space that they use on a pro-rata basis as long as the space is available. For example, if the company decides to double the space that it occupies the costs will also double.
The proposed new warehouse would provide three times the space that they are occupying now, the annual running costs (including interest of £150,000 on the loan to purchase the property) are estimated at £800,000 and these costs will be incurred regardless of whether the warehouse space is fully occupied or not.
Prepare a report to the directors of Hydro Limited advising them on the following:
Advise on whether the company should purchase a new warehouse outright, when giving this advice you should comment on: –
How to assess whether the purchase of the warehouse would be financially viable, include here a critical evaluation of two investment appraisal techniques and if the decision is made to go ahead, how the associated project finances, costs and revenues would managed and monitored
the operational gearing of each option and the sensitivity of each to the level of sales and also any of the cost assumptions.
(60 marks)
2. The Directors are also reviewing their pricing policy. Whilst annual profits have grown, they have found that they are losing out on some large one-off orders due to price. The company currently determines its prices using a traditional costing model. a standard mark-up of 10% is applied to full cost.
Include in the report a critical evaluation of the suitability of the company’s current pricing policy and advise (with reasons) of any more appropriate approaches. Where applicable you are required to support your points with appropriate examples.
(40 marks)
Total 100 marks
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more TIPS – — in the atached files
You are asked for a report so write a report
No need for an abstract
Not necessarily references
Part A (60%) – 3 requirements with equal weighting
Provide advise as to how to assess the financial viability of a project. YOU CAN’T DO THE INVESTMENT APPRAISAL
Critically evaluate 2 investment appraisal techniques
Comment on the operational gearing and the sensitivity to costs and revenue
Assessing the financial viability of the project
How would the company identify the cash flows associated with the project?
Is this about profit or cost
Sunk costs
Incremental costs – which costs will change if the investment takes place? Costs? Savings?
Which costs would I exclude?
Critical evaluation of investment appraisal techniques?
You have generic advantages and disadvantages
Can you think about any factors that are internal or external (interest rates?) to the firm that might allow you to tailor your advice to the specific situation this company faces?
Can you give examples of how the specifics might apply in this situation?
Operational gearing and sensitivity
Scenario 1: RENT THE WAREHOUSE (warehouse is a variable cost)
Option 1 for layout – this is producing an overview if you assume that all costs are variable so operating profit increases or decreases in line with expansion or contraction of activity.
Scenario 1: RENT THE WAREHOUSE (warehouse is a variable cost)
Option 2 for layout – recalculate the whole profit and loss account. You can assume some costs are fixed and others are variable. You can calculate operational gearing if some of your costs are fixed.
Part B
