Understanding Business Information Nishal Rayamajhi

BA4006
Student ID: 17030863
Submitted By: Submitted To:
Student Name: Nishal Rayamajhi Miss. Samjhana Gorkhali
BA (Hons): Business Administration Mrs. Krishna Maya Shrestha
Lecturer, BBA Faculty
Student Number: 170001 Islington College
Group: L1B1 London Metropolitan
Words count: 1053

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Understanding Business Information Nishal Rayamajhi

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Understanding Business Information Nishal Rayamajhi

Contents
Acknowledgement ........................................................................................................................................ 4
Introduction .................................................................................................................................................. 5
Financial Performance .................................................................................................................................. 5
Liquidity......................................................................................................................................................... 6
Gearing Ratio ................................................................................................................................................ 6
Task 2 ............................................................................................................................................................ 7
Average Rate of Return ................................................................................................................................. 7
Payback Period .............................................................................................................................................. 8
Net Present Value ......................................................................................................................................... 9
Internal Rate of Return ............................................................................................................................... 10
Analysis and Conclusion .............................................................................................................................. 11
Bibliography ................................................................................................................................................ 12

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Understanding Business Information Nishal Rayamajhi

Acknowledgement
I would like to thank Miss. Krishna Maya Shrestha for her guidance
through the semester and assisting to complete my task. I would also
like to thank London Metropolitan University and Islington College and
also our module leader Miss. Samjhana Gorkhali.

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Understanding Business Information Nishal Rayamajhi

Introduction
Tesco PLC is one of the world’s leading international retailers with a
turnover of billion for year; it is the largest British Wal-Mart (USA) and
Carrefour (France) and the third largest retailer in the world measured
by profits. Tesco controls 28.4% of the grocery market in the UK, which
is appropriate to the combined market share of its closest rivals. The
most recent financial statements of the company were issued on 24th
February 2017 for the financial year closing on 25th Feb 2017. Groups
Income Statement, Cash flow statement and Balance sheet are
attached to this report.
TESCO PLC
2014 2015 2016
Performance ratios
Pre-tax profit margin ( % ) 3.5543% -10.2370% 0.2976%
Return on total assets ( % ) 4.7381% -14.4663% 0.3690%
Return on capital ( % ) 9.1133% -34.1547% 0.8009%

Liquidity ratios
Current ratio ( : 1 ) 0.6475799 0.59676849 0.74018464
Acid test ratio ( : 1 ) 0.4706028 0.44746276 0.61692198
Stocks/ sales ( % ) 5.6264% 4.7476% 4.4642%

Gearing ratio
Total debt/ net worth ( % ) 68.4540% 164.0079% 134.4772%
Table no 1. Financial report of Tesco (Tesco)

Financial Performance
Above table 1 shows the financial performance, liquidity ratio and
gearing ratio of Tesco Plc (London). From 2007 to 2014 the sales of the
company was consistently increasing then unexpectedly the turnover of
the company started to decrease to -10.2370% in 2015 from 3.5543% in
2014 and rose to 0.2976% in 2016. The company return on total assets
has also decreased to -14.4663% in 2015 from 4.7381% in 2014 and

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raised to 0.3690% in 2016. As a result the company capital has also

decreased to -34.1547% from 9.1133% in 2014 and rose to 0.8009% in
2016 (Tesco, Tesco, 2018).

Liquidity
The availability of liquid assets to a markets or company is known as
liquidity ratio. The current ratio shows the efficiency of a company’s
ability to turn its product into cash (Study). The liquidity ratio of the
company started to decrease as it is based on the performance of the
company. The table shows the decrease in current ratio to 0.60 in 2015
from 0.65 in 2014 and increased in 2016 by 0.74 which shows company
can pay 74% of their liabilities by. When the acid ratio of company is
less than 1 the company starts to owe debt and they become
dependent on their inventory. The stock sales of the company have
decreased to 4.4642% in 2016 from 5.624% in 2014 and 4.7476% in
2015.

Gearing Ratio
The fundamental analysis ratio of a company’s level of long term debt
compared to its equity capital/capital employed is known as gearing
ratio (Study). The point when processing what amount of debt an
organization is undertaking as contrasted with its equity, the debt of
ration is generally utilized. The company debt has exceeded its total
assets from 68.4540% in 2014 to 164.0079% in 2015 and decreased by
30% in 2016.

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Task 2
The problem of LMU plc is to choose between two different models of
machine that is super model and deluxe model. We have to select them
on the basis of their performance which can maximize the profit of the
company. According to investors appraisal we have calculated certain
type of data like payback period, accounting rate of return, net present
value and internal rate of return. This selection of machine can help
company to either maximize or minimize the profit. So, we have to
select carefully. Some of the investment appraisal techniques used are
described as follows:

Average Rate of Return

Average rate of return is the average annual amount of cash flow
generated over the life of an investment (Accountingexplained). It is
calculated as the ratio of average accounting profit to annual average
investment. It is used as investment appraisal techniques.
Super Deluxe
Net Net
Cash Cash
Year Flow Depreciation Profit Year Flow Depreciation Profit
- -
0 500000 -80000 0 800000 -120000
1 250000 -80000 170000 1 150000 -120000 30000
2 100000 -80000 20000 2 200000 -120000 80000
3 100000 -80000 20000 3 250000 -120000 130000
4 50000 -80000 -30000 4 100000 -120000 -20000
5 150000 -80000 70000 5 100000 -120000 -20000
6 120000 -80000 40000 6 330000 -120000 210000
Annual Annual
average Profit 48333.33 average Profit 68333.33
Average 260000 Average 440000

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Annual Annual
Investment Investment
Accounting Accounting
Rate of Return 18.590% Rate of Return 15.530%
Table no 2. Average Rate of Return for super and deluxe model

According to above tables the average rate of return in super model is

higher than that of deluxe so super model is more profitable to
company.
Advantage:
 It is easy to calculate.
 It can recognize the profitability factor of investment.
Disadvantage
 This method does not include time value of money.
 Different procedure in the process can cause error in result.

Payback Period
The payback period is the time in which the invested amount in an
asset is to be repaired by the net cash flow of the asset
(Accountingexplained, Accountingexplained). It is expressed in years or
fraction of years.
super Deluxe
Net Cash Cumulative cash Net Cash Cumulative cash
Year Flow flow Year Flow flow
0 -500000 -500000 0 -800000 -800000
1 250000 -250000 1 150000 -650000
2 100000 -150000 2 200000 -450000
3 100000 -50000 3 250000 -200000
4 50000 0 4 100000 -100000
5 150000 150000 5 100000 0
6 120000 270000 6 330000 330000
Payback payback
period 4 period 5

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Table no 3: Payback period time of super and deluxe model.

Advantage:
 It is easy to calculate.
 It helps to provide excellent project rankings which would help to
return money fast.

Disadvantage:
 Cash flow doesn’t come to an account in payback period.
 Time value of money also doesn’t get added to account.

Net Present Value

Net present value is the present value of the cash flows at the required
rate of return affected by the decision of the company to the initial
investment (Accountingexplaines, 2018). This decision of the company
is always taken with positive NPV.
Super Deluxe
Net Net
Yea Cash Discount Factor Discounted Yea Cash Discount factor Discounted
r Flow 1/(1+R%)^n Cash flow r Flow 1/(1+R%)^n cash flow
- -
0 500000 1 -500000 0 800000 1 -800000
1 250000 0.892857 223214.3 1 150000 0.8929 133928.6
2 100000 0.797194 79719.39 2 200000 0.7972 159438.8
3 100000 0.71178 71178.02 3 250000 0.7118 177945.1
4 50000 0.635518 31775.9 4 100000 0.6355 63551.81
5 150000 0.567427 85114.03 5 100000 0.5674 56742.69
6 120000 0.506631 60795.73 6 330000 0.5066 167188.3
Net Present Value 51797.37 Net Present Value -41204.8
Table no 4. NPV for super and deluxe model

Advantages

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Understanding Business Information Nishal Rayamajhi

 This method includes the whole stream of the cash flow.

 It helps to take independent decisions.

Disadvantage
 It is complicated for calculation.
 The cash flow and the discount rate doesn’t come into account.

Internal Rate of Return

It is the rate of return that sets the net present value of the company
investment equal to zero. It helps for better judgment of the
investment.
Super Deluxe
Net Net
Cash Discount Factor Discounted Cash Discount factor Discounted
Year Flow 1/(1+R%)^n cash flow Year Flow 1/(1+R%)^n Cash Flow
0 -500000 1 -500000 0 -800000 1 -800000
1 250000 0.909091 227273 1 150000 0.909091 136363.64
2 100000 0.826446 82644.6 2 200000 0.826446 165289.26
3 100000 0.751315 75131.5 3 250000 0.751315 187828.7
4 50000 0.683013 34150.7 4 100000 0.683013 68301.346
5 150000 0.620921 93138.2 5 100000 0.620921 62092.132
6 120000 0.564474 67736.9 6 330000 0.564474 186276.4
Net Present Value 80074.6 Net Present Value 6151.4675

Higher Rate(HR)=20%
Super Deluxe
Net Net
Cash Discount Factor Discounted Cash Discount factor Discounted
Year Flow 1/(1+R%)^n cash flow Year Flow 1/(1+R%)^n Cash Flow
0 -500000 1 -500000 0 -800000 1 -800000
1 250000 0.833333 208333 1 150000 0.833333 125000
2 100000 0.694444 69444.4 2 200000 0.694444 138888.89
3 100000 0.578704 57870.4 3 250000 0.578704 144675.93
4 50000 0.482253 24112.7 4 100000 0.482253 48225.309

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5 150000 0.401878 60281.6 5 100000 0.401878 40187.757

6 120000 0.334898 40187.8 6 330000 0.334898 110516.33
Net Present Value -39770 Net Present Value -192505.79
Internal Rate Return 16.682% Internal Rate Return 10.310%
Table 5: IRR for super and deluxe model for 10% and 20% respectively

Advantages

 It deals with time value of money for the evaluation of project.

 Required rate of return doesn’t have to be calculated.
Disadvantage

 The investment scale is ignored during calculation.

 It doesn’t show the investment to be considered.

Analysis and Conclusion

After all accounts on these investment appraisal technique on these two models of machine is
done by different data analysis. From accounting rate of return we accept the device with high
value. The average rate of return in super model is 18.58% which is higher than deluxe model
than 15.53%. In payback period the project with less payback period directed, the payback
period is less in super model i.e. 4 years and 5 years in deluxe model so super model is
favorable. In case of net present value the positive value is accepted which comes in super
model with 51797.36 and deluxe model has negative value of -41204.82. And internal rate of
return the project with highest value is accepted (accountingexplained, 2018). For 10% and 20%
rate of super and deluxe model NPV of super model is high with 800074.57 and -39769.80 and
IRR is also high with 16.677% to 10.287% of deluxe model.
From all above data and analysis we can have investment appraisal on super model.

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Bibliography
accountingexplained. (2018). Retrieved from https://accountingexplained.com/managerial/capital-
budgeting/npv-vs-irr

Accountingexplained. (n.d.). Accountingexplained. Retrieved from

https://accountingexplained.com/managerial/capital-budgeting/arr

Accountingexplained. (n.d.). Accountingexplained. Retrieved from

https://accountingexplained.com/managerial/capital-budgeting/payback-period

Accountingexplaines. (2018). Retrieved from https://accountingexplained.com/managerial/capital-

budgeting/npv-and-taxes

London, M. (n.d.). Keynote. Retrieved from

https://emu.londonmet.ac.uk/wamvalidate?url=https%3A%2F%2F0-
www.keynote.co.uk.emu.londonmet.ac.uk%3A443%2Fcompany-report%2Ffinancials%2Fkey-
ratio%2F00445790

Study. (n.d.). Study.com. Retrieved from https://study.com/academy/lesson/liquidity-ratio-definition-

calculation-analysis.html

Tesco. (2018). Tesco. Retrieved from https://www.tescoplc.com/investors/understanding-tesco/

Tesco. (n.d.). Tesco. Retrieved from https://www.tescoplc.com/investors/reports-results-and-

presentations/reports-archive/

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