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MOD003319 Business Finance and Garden Rite Ltd

Questions:

Part 1
GardenRite Ltd (“GRL”) owns and operates three factories in London, Birmingham and Manchester producing valves and fittings for garden hoses. The company last year had turnover in excess of £50 million.
The company is managed by Dean, the grandson of the founder. Dean owns 25% of the shares in the company, while the remaining 75% is split between three other grandchildren, Hashim, Dale and Faf.
Most of GRL’s clients are large retailers in the UK and EU. Two key customers are C&P DIY Ltd and BricoFrance SA, which are both large chains of DIY and garden centres in the UK and France.
The other shareholders are concerned about the business. Although there seems to be plenty of work coming in and the last year has been reasonably profitable (Operating profit was £5 million last year before interest and tax), the company’s debt has increased to £18 million from £16 million the year before. Dean has started talking about the need for the other shareholders to invest more money to reduce the debt. 
The company is owed £1.5 million pounds for a series of large orders placed by C&P last year. There is also an outstanding dispute about a £2 million consignment for BricoFrancecompleted in 2015. This has led to payment being withheld while negotiations continue between lawyers and technical specialists. 
There is a further problem that Dean believes the BricoFrance issue arose from faulty workmanship by a contractor which GRL engaged in 2015. He has refused to pay the contractor who is now threatening legal action. Because this area of work has been suspended, a large stock of materials and supplies has built up at the company’s London site. Dieter insists that the company needs to have this level of stock for when the dispute is sorted out. He is also reluctant to press his key customers too hard for payment.
The other shareholders have approached GRL’s accountants to review the situation. 
Requirements:
i. Using the reading list provided on the VLE, explain:
a. what is meant by Profit and Cashflow and how they are different 
b. what is meant by Working Capital and in particular, the meanings of 
Receivables, Inventory and Payables
c. how changes in Working Capital affect Cashflow
ii. Apply the concepts in (i) above to this company to show how the way the company is being managed might be reflected in its financial results. You should use hypothetical numbers (ie ones that you make up yourself) to illustrate your answer.
iii. Analyse and recommend what steps should now be taken to improve this company’s cashflow through better Working Capital management.
Part 2
Continuing with GRL, Dean is contemplating investing in a new facility in either Leeds or Bristol. Both will involve a significant investment, and, assuming the issues noted above are sorted out, the shareholders have the resources to finance either project but not both. 
The Leeds venture would involve construction on a derelict site from scratch which will cost £10m and would operate for 9-10 years before substantial further investment would be required. 
The Bristol venture involves taking over an existing but slightly out of date plant. This will need about £6 million investment and will have an expected useful life of 5-6 years.In the past, to assess the financial viability of new projects, the company has only considered profitability. At present, it does not have any formal procedure for assessing 
capital projects.
Requirements:
i. Using the reading list provided on the VLE, explain:
a. what is meant by capital budgeting and summarise the purpose and key stepsof the process
b. how the following investment appraisal methods are calculated, what they seek to show and the advantages and disadvantages of each method.
i. payback period
ii. net present value
iii. internal rate of return
ii. Apply the concepts in (i) above to compare the alternative investment options. You should use hypothetical numbers (ie ones that you make up yourself) to 
illustrate your answer.
iii. Analyse and recommend which project should be pursued by the company, using your answer in (ii) to support your argument.

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