Learner Name: Haasin Khan
Learner Registration: 21059
Qualification: ATHE Level 7 Diploma in Management
Unit Title: Finance for Strategic Managers Unit A/615/2677
Assignment Title: Finance for Strategic Managers
Assignment submitted: 6-Sep-2018
Task 1 – Financial Data and Strategic Decision Making
You must produce a presentation for Pietro Yon to use at the next meeting of the Chamber of
Commerce. The presentation should be based on your research of Samsung PLC and other
relevant information. It must be accompanied by supporting notes.
Your presentation must include the following:
 An evaluation of the sources of financial data which can be used to inform business
strategy.
 An assessment of the need for financial data and information in relation to the
formulation of business strategy.
 An analysis of the risks related to financial business decisions.
 A review of methods that can be used for appraising strategic capital expenditure projects
and strategic direction.
LO1 AC 1.1, 1.2, 1.3
LO3 AC 3.1
LO1 AC 1.1
An Evaluation of the Sources of Financial Data which can be used to inform Business
Strategy
Samsung was founded in South Korea and is the sixth in terms of brand value globally owing to
their inspiration of the world with their innovative designs, technologies and products that aim at
enriching the lives of people as well as contributing to the social prosperity by the creation of a
new future as stated in their mission statement.
Through its vision statement which entails the inspiration of the world while creating the
future, Samsung aims to take advantage of their strengths, creativity in finding solutions and
embracing new technology (Grobart, 2013). In addition, they hope for contribution to a better
world as well as a rich experience for everyone through their efforts and the support of the
industry, their partners, and their employees. Through these efforts, Samsung is planning to
achieve revenue of over four hundred billion dollars as well as being classified among the top
five brands by the year 2020.
The key indicators of a company’s potential for long term growth are its current and past
health; hence, for Samsung PLC to have a proper modern business analysis, they should rely on a
variety of financial ratios and financial data points. An evaluation of the sources of financial data
is critical to the strategic planning since it is the final stage for the consideration of resources
allocation limited by the financial realities of the business. Hence, the financial position, goals,
the performance, and the resources of a company are important towards its strategic planning;
implementing its plans and the performance of its monitoring processes (Grobart, 2013).
In the formulation of its strategy, the business can focus on one of its competitive
advantages. The analysis should the satisfaction of its customers, staff learning, and
development, its business processes among many other primary considerations. In this
presentation will evaluate the sources of financial data which can be considered in formulating a
business strategy which is viable. By the use of a balanced score card as the instrument for
monitoring and managing their business strategy, Samsung PLC will be able to align their
elected strategy with the expectations of their performance. Further, it will facilitate the
translation of their strategic plans into concrete objectives and even into operational directives
which are actionable hence the financial goals of Samsung PLC will advance ultimately.
Financial metrics of a business are the tools which are most essential in the business
performance measurement and Samsung’s balance score card should support their reliance on
any financial information and the establishment of strategic financial goals which are
coordinated and integrated effectively into their systems of operations and financial
management.
The essential uses of financial metrics in Samsung PLC will help in goal-setting in asset
management, management of their risks, benchmarking with other similar companies and the
optimization of their taxes, and financing decisions and many other functions of the strategic
decision making of their strategy managers.
LO1 AC 1.2
An Assessment of the need for Financial Data and information in relation to the
formulation of Business Strategy
 Growth of Revenue
In determining Samsung PLC’s level of potential of long-term success which is a basic concern
in strategic planning, the managers will have to consider the timing, quantity and the quality of
revenue (Grant, 2016). The following formula below will be used in the calculation of the growth
of revenue: –
Current period revenue – Last period’s revenue X 100
Total of last period’s revenue
Note that the revenues which are one time should not be included in the calculation since they
can distort the analysis of revenue growth. In addition, they should not allow the total revenues
from a single client to exceed 10 % of their total revenues since it could would be a big blow to
the company should the client seizes to seek their services.
 Net Value available
Refers to the amount of money Samsung PLC will have available after they deduct their
total liabilities from the total cash and it is a measure of their financial fitness and an indication
of their efficiency level and how they can utilize their financial resources for the generation of
more cash essential for new investments. Samsung PLC will use this metric in their planning of
major capital expenditures or in advancing their current projects.
 Profits
The net profit margin is a measure of the remaining profits which are able to be invested
into the company or distributed to its shareholders or dividends payment. The operating profit
margin will determine Samsung PLC’s ability to generate profit irrespective of how finance their
operations either equity or debt. If their profit margin is healthy, it means they will be able to
absorb negative impact to the costs of goods which will be sold or to their revenue without
risking failure to pay for routine expenses.
 Growth indices
Growth indices indicate the financial acceptability of the trade-offs which are made for
growth, in terms of reduced Return on Investment, profit margins and cash flows. They will
evaluate their growth of their market share as well as their growth of sales. The strategic
managers will need to manage their assets aggressively for them to maintain cash which is
sufficient and achieve a reduction in their rate of borrowing. In addition, if their growth rates will
be found to be below the normal rates for the industry or if the operating leverage will be high,
the strategic managers must set strategic goals aimed at improving the growth index.
 The Additional Economic Value
Finding the economic value added to the business will help Samsung PLC’s strategic
managers to make timely decisions which will lead to an expansion of their economic value as
well as highlighting the corrective actions needed in the areas which are diminishing the value of
the company. In the assessment of the company’s value contributions as well the improvement of
their resource allocation process, the goals of business which will add their economic value will
be used. The following formula will be used in order to find the economic value added:-
Economic value Added = Net income of the business – Cost of operating capital
 The Profitability Ratios
They are essential for measurement of the efficiency in the company’s operations as well
as indicating the areas which need corrective action. In addition, profitability ratios measure the
relationship between sales and profits, total assets and the net worth. When it is necessary for
Samsung PLC to plan to increase the effectiveness of operations as well as improvement of their
value-chain activities, they should establish goals for their profitability ratio.
 The Efficiency and Solvency of its Capital
The company’s capital efficiency forms the greatest interest to its lenders and investors as
it quantifies the return which the operations of the company generate to its investors. The return
on equity is calculated by dividing the company’s net income by the average equity of the
shareholders and it measures the amount of profit which a company generates with respect to the
shareholders’ equity also known as the “return on net worth” (Rothaermel, 2015). In addition, the
ratio of debt to equity or the amount of debt divided by the equity and it indicates how heavy the
company operations are leveraged. It is not supposed to exceed a ration which is reasonable to
the business.
 Liquidity
An analysis on the liquidity of Samsung PLC will examine its ability to generate cash
which will be enough to pay its cash expenses. The growth of revenue or profit cannot
compensate for insufficient liquidity regardless of their amounts. The calculation of the
company’s Current Ratio will measure its ability to cover its short-term obligations with current
and cash assets. The Current Ratio is achieved through dividing its current assets by its current
liabilities.
Current Ratio = Current Assets
Current liabilities
 The Company’s Operational Efficiency
This is a measure of the efficiency in using the company’s resources and it focuses on the
turnover of a company’s accounts receivables, hence measuring its level of efficiency in the
management of the credit accounts of the customers it has. It can also measure its inventory
turnover through measuring it efficiency in the management of its turnover on the basis of its
sales levels.
LO1 AC1.3
An analysis of the risks related to financial business decisions.
These refer to the factors which can affect the ability of a company in the management of their
debts and their leverage financially. The ability of the company to be able to generate revenue
which is sufficient and to cover expenses in the operations also affects its financial decisions
(Rothaermel, 2015). These risks result due to financial markets losses and instability which is
caused by the interest rates, currency, prices of stocks among other factors. Such risks are
classified as Market, Credit, Liquidity, Operational, and Legal Risks.
• Market Risks
Occur because of the movements in the prices of financial instruments and are classified
as either directional or non-directional. Directional risks result from interest rates and prices in
stock while non-directional while is volatility risks and affect the decision making of the
management since they don’t have any direct control over them.
• Liquidity Risks
They can be either asset which results due to insufficient sellers or buyers against buy
orders or sell orders, or funding Liquidity risks and they both occur because of the inability to
carry out normal transactions.
• Credit Risks
When one does not fulfill their debts to the respective counterparties and such risks are
classified as either settlement risks which occurs when a party makes payment and the other fails
in the fulfillment of their obligation, or they can also be sovereign risks which are caused by the
difficulty in the policies in the foreign exchange.
• Legal Risks
Legal risks result from legal constraints and at times when the company loses money to
legal proceedings or lawsuits.

business hence operational risks and can be classified into model or fraud risk. Model risks result
from incorrect applications of models while fraud risks result from the lack of proper controls.
LO3 AC 3.1
A review of methods that can be used for appraising strategic capital expenditure projects
and strategic direction
Capital investimenet appraisal is also known as capital budgeting. This is a planning process
which aims to facilitate the evaluation of the concerned company’s long term and short-term
investment. The appraisal of strategic capital expenditure projects is important to know if they
return the project is yielding. This will help in giving the strategic direction that the management
will take. The following are some of the commonly capital appraisal techniques that can be used
by the firm:
Net Present Value (NPV)
NPV is an approach that measure cash in-flow whether it is excess or it has a shortfall, after
normal finance operations are met with. The aim of capital appraisals is to attain a positive Net
Present Value. It is realized that when there is a high discount rate, the NPV will reduce.
Accounting Rate of Return (ARR)
This technique evaluates the profit that can be realized form the project, compared to the capital
that will be required to accomplish such a project. This is a non-discounted appraisal technique
which does not include time aspect for the money invested.
Internal Rate of Return (IRR)
This technique is the discount rate that can offer a zero value to the NPV. The technique typically
measures the efficiency of the capital invested. Therefore, if the cost of the project is higher than
the IRR value, the project is to be rejected. IRR considers time value of money invested and
considers world discount rate.
Adjusted Present Value (APV)
This is another commonly used technique. This approach overcomes the shortcomings of NPV .
it evaluates a particular project based on the any possible risks present while the firm undertakes
the project.
Equivalent Annuity
This appraisal approach is conducted using project comparison. Basically, it compares a project
with different life spans, in that two projects having two different life spans are compared. This
technique divides the NPV value with the annuity factorhence expressing the NPV in an
annualized cash flow outcom.
Task 2 – Discussion Paper
A meeting has been arranged with Pietro Yon and other members of the committee and you have
been asked to produce a paper for discussion which provides:
 An interpretation of the financial statements of Samsung PLC to assess the current
viability of the organization.
 A comparative analysis of financial data using ratio analysis for Samsung PLC. You are
advised to download consecutive year’s accounts from the Samsung PLC website.
Extension activities:
To gain a merit grade you must add further sections to your discussion paper that:
 Makes recommendations to Samsung PLC based on your analysis and interpretation of
the financial position.
LO2 AC 2.1, 2.2
LO2 2M1
——
LO2 AC 2.1
An interpretation of the financial statements of Samsung PLC to assess the current
viability of the organization
Balance Sheet
A close examination of the balance sheet for Samsung PLC for the year ending 2011
reveals an increase in its current assets to $61.99M up from $53.24M in the previous year
(2010). This was mainly constituted by the trade receivables, cash and inventory and the current
assets increased by 16.40%. In addition, Samsung recorded an increase in their Total assets by
13.71% to $134M way from $116M in the previous year.
They also recorded growth in their revenue compared to the previous year; however,
Samsung increased their expenditure for research and development hence resulting in a decrease
in profit as compared to the previous year 2010. Despite their liabilities increasing, they
experienced a decrease in their 2011 long-term loans as compared to the year 2010 indicating a
good financial performance. Note that the figures used hereby are in thousands of the United
States dollars.
The Income Statement
In the year 2011, Samsung PLC recorded revenue of $143M, which was a rise from
$134M in the previous year of 2010 which was a 6.29% increase. Their costs of sales increased
by 8.45 % from $89M to $97M hence their gross profit increased by a very little amount by
1.69%. This occurred because of increased expenses in the administration, research, and
development among others. The low margin of growth in profits will consequently affect the
company’s shareholders contrary to their expectations of a higher growth.
In addition, the earnings per share dropped to 77.20 dollars in the year 2011 from 91.89
dollars earnings per share in the year 2010 hence a reduction in the value of earning by the
shareholders by a whopping 14.69%. Note that the figures used hereby are in thousands of the
United States dollars.
LO2 AC 2.2
A comparative analysis of financial data using ratio analysis for Samsung PLC. You are
advised to download consecutive year’s accounts from the Samsung PLC website
Ratio Analysis is a type of Financial Statement Analysis used to get a clear indication on
the performance of a Company. Major financial ratios conducted include profitability ratios,
Asset management ratios, short-term solvency ratios, Market Value ratios and debt management
ratios. Ratio analysis has key important features. First, there is data for financial analysis, which
is readily available. Ratio computation s helps in comparing companies with different sizes.
Also, ratio can be used to analyze trends of the organizationand where there is need to improve.
The ratio analysis will help us in analyzing Samsung’s financial performance as well as finding a
better way to look at the company as well as its competitors.
Profitability Analysis
The profitability analysis will show us the trend of the profits of Samsung PLC for the
given timeline and how it will affect the other respective units used to measure its performance
with respect of the capital the invested in the entity. They experienced a reduction of their profit
at 33.19% in the year 2011 compared to 33.59% in the previous year hence affecting the return
on capital negatively. This led to a 14.59% drop in the return on capital although their position in
the industry was not affected. This shows that the management of Samsung PLC did not allocate
more to processes leading to improvement of sales. The following table shows the profitability
analysis of Samsung in the subsequent years of 2010 and 2011.
The Analysis of Samsung PLC’s Solvency
Here, we will examine its status with respect to its liabilities or long-term debts as well as
its interests. The gearing ratio of Samsung raised to 8.49% in 2011 from 5.29% in the previous
year hence an indication of an increase in their expenditure. This means that their management
should put a focus on activities which are short-term in order to minimize their reliance on credit
and debt so that they can plan for recovery. The solvency analysis is shown as below:
Analysis of Asset Efficiency
This will evaluate their ability to utilize their assets for the aim of revenue generation
hence the need for using efficiency ratios including inventory ratio, fixed asset, and the total
asset turnover ratio. Their inventory ratio dropped to 7.4 times in the year 2011 compared to 7.68
times in the year 2010 hence an indication of a reduction in their selling efforts. In addition, their
fixed asset turns over reduced to 1.96 in the year 2011 compared to 2.12 times in 2010 which is
lower 2.9 times which was the ratio in the industry. Its total asset turnover as well reflected a
reduction; hence the management of Samsung PLC can rely on it to make a decision on whether
to act on the current assets in the fixed ones to achieve a reduction in their weakness against the
industry. This table summarizes how this analysis is done.
Analysis of the Working Capital Strength
This will establish how the funds used in driving Samsung’s daily needs will have
performed whereby their stock turnover has risen in the year 2011 compared to the year 2010.
This herby indicates that they did not perform well in terms of sales hence a creation of
underutilization of their money hence their management should focus on their marketing bit as
well as the quality of their products for an improvement in the sales levels. In addition, the
increase in their creditor collector period shows their able bargain power and indicating a poor
status of their cash flow. The following table shows the working capita analysis.
The creditor collector time for the company has been going high from 57 days in 2010 to 60 days
in 2011. This shows that Samsung has improved on its ability to bargain for suitable credit
conditions. The debtor collection time also raised to 53 days form 50 days in 2010, this shows
the company had poor negotiation skills.
LO2 2M1
Makes recommendations to Samsung PLC based on your analysis and interpretation of the
financial position.
This report has identified that Samsung is a strong company which is making improvements
annualy to ensure it attains profitability. Through proper management decision on how to invest,
the company has been able to attain its objectives. The gross profit in the year 2011 improved
compared to 2010. This shows that the company had substantive returns. Liquidity analysis also
shows that the company had good and sufficient liquid assets. However, there are some
recommendation that the company need to adopt for it to improve further.
Looking at Samsung’s average ratio, the company is doing better as time goos on. For
instance, the quick ratio stood at 1,25 times while the Company’s ratio was 1.1 times in 2011.
This ratio helps in making sound and better decision making with regard to liquidity of the
company assets.
Accordin to the solvency analysis, the company is facing difficult in in managing its
capital. In fact the company is relying much on debts according to the ratios. Therefore the
company need to control the situation. Samsung management need to focus on shorter projects to
avoid the huge reliance on credits and debts, this is the only way it can recover. Also, according
to the working capital analysis, the profit margin dropped in 2011. This is a clear indication that
Samsung is not utilizing its capital efficiently. The negative impact in 2011 led to negative return
on capita value. Drop of profit led to low capital investment in 2011 by 14.5%, asset utilization
also went down. The company need to look for better means of maximizing its sales through
proper marketing stratetgies to better its profits. The Company need to move on with new
marketing and negotiation techniques to boost its sales within the joint ventures. But as per the
overall analysis, the company is growing up well. The management can do better if it opts to
venture into short term cash generating projects.
The overall position of the company is very good as it achieved sufficient profit in the two years.
In addition, its long term solvency is good since it maintained low liquidity to achieve a high
profitability.
Lastly, the company was able to distribute dividends every year to its shareholders. Revenue of
the Company improved in 2011 upto $143 million compared to 2010 which had $134 million.
This was a s a result of intensive research and development in Samsung. Also, shareholder got a
profit in 2011 compared to the situation in 2010. Since the overall profit was not good enough,
the company needs to spend more on marketing their products as well, not only in research and
development.
Task 3 – Information Leaflet
Extension activities:
To gain a merit grade you must produce an information leaflet for the Chamber of Commerce to
distribute to the members. The leaflet should assess the following:
 The impact of ‘creative accounting’ techniques when making strategic decisions.
 The limitations of ratio analysis as a tool for strategic decision making.
 The importance of cash flow management when evaluating proposals for capital
expenditure.
To gain a distinction grade you must prepare an additional section for the leaflet that:
 Recommends, with justifications, methods and tools that allow businesses to analyses
financial data for strategic decision-making purposes.
LO1 1M1
LO2 2M2
LO3 3M1
LO2 2D1
——
LO1 1M1
The Impact of ‘Creative Accounting’ Techniques when making Strategic Decisions.
Creative accounting refers to the manipulation of the financial data of a company
whereby some parties use the knowledge of the standards of accounting for the manipulation of
financial reports and a clear deviation from the regulations spirits (Tassadaq & Malik, 2015).
Creative accounting occurs on several occasions such as whereby the company
recognizes revenue or income that is premature or nonexistent or in case of an aggressive policy
on capitalization by the company. In addition, they can undervalue assets or liabilities aiming at
achieving a stronger position financially or get creative with the income statement as well as if
they experience a cash flow reporting problem. In some case, transactions that are artificial can
be used for the manipulation of the balance sheet as well as moving profits between accounting
periods. Transactions that are genuine are also timed in order to give a desired impression in the
accounts. In some instances, they can include capitalized costs, non-trading profits and brand
accounting.
However, despite its unethical nature, it gets desired results in the short run but it ends up
hurting the ultimate goal of increasing stock value. Creative accounting does not reflect the true
position of the financial position of the company hence the management lack true data through
which they can use in their strive for financial budgeting (Tassadaq & Malik, 2015). In addition,
it gives the shareholders a different perception of the performance of the company as they expect
more returns on their investment contrary to what they achieve in returns. It also leads to the
company changing their internal controls with the aim of trying to adapt their real financial
position to their presented financial reports.
Accounting regulators can curb creative accounting practices by reducing the scope for
choice of accounting methods (Tassadaq & Malik, 2015). In addition, they can minimize the use
of judgment; prescribe revaluation as well as invoking the concept of substance over form.
LO2 2M2
The Limitations of Ratio Analysis as a Tool for Strategic Decision Making.
The use of ratio analysis is able to compare the information that is taken from financial
statements with the aim of gaining an understanding of the financial position, the results or the
cash flows of a business and helps outside parties such as the lenders, stock or credit analysts as
it helps them create a picture of the positions and results of the business financially just by
looking at their statements (Rothaermel, 2015).
However, ration analysis has several limitations since it uses historical results to predict
the trend in the future which does not guarantee the same results in the future. Its consideration
of inflation leads to distorted results since the inflation rates vary from one year to another. The
company can also change their operational structure hence the calculation of a ratio over a period
of years could lead to a conclusion that is misleading. This also happens with the changes in the
trend of items in the financial statement line. In cases whereby, companies have different policies
use in the accounting hence cannot be placed at the same level. Ratio analysis fails to consider
variations in the conditions of a business environment and company strategies which vary from
one company to the other.
A detailed analysis is important in determining variations in the current ratio as opposed
to the ratio ration analysis which generalizes data trends hence posing a wrong interpretation
which can lead to misleading actions by the management (Rothaermel, 2015). Some of these
ratios usually extract their information from the balance sheet which reflects information as at
the last day of reporting hence affecting the outcome since conditions could have changed from
the said date of reporting.
LO3 3M1
The Importance of Cash Flow Management when Evaluating Proposals for Capital
Expenditure.
The evaluation and the selection of the long-term investments aim at maximizing the wealth of
the investors of a company. Hence, when a business makes a capital investment, they expect to
benefit in the future which is not limited to one-year duration. The main need for cash flow
management is to give the management a proposal which will yield the best returns to the
investors (Grobart, (2013).
This is done through the evaluation of project proposals on investment that are strategic
to the overall business objectives and the selection of an investment proposal which will
maximize on the return to the investors. The benefits of cash flow management in the evaluation
of proposals for capital expenditure include but are not limited to the following:
 Substantial Expenditure
The decisions on capital budgeting entail the investment of substantial amounts of
money, hence the importance of a firm to make such decisions in order for them to use their
resources profitably since making of the incorrect decisions would lead to losses of the company
could fail generally.
 They help in the Long Term
The effects of managing cash flows in the evaluation of expenditure on capital affect the
firm for the long term hence such decision have an influence on the direction and the rate of how
the company grows.
 Irreversibility
It is important since the majority of the decisions made on capital budgets are irreversible
because it is a difficult task to sell capital items which are already second hand hence an in deep
evaluation should be done before any expenditure on capital items is done.
 Complex Decisions
The management of cash flows in the evaluation of expenditure in capital helps in
deciding on whether to spend on complex capital investments since it also gives a clear insight
on the effects of such capital investments in the future (Grobart, (2013). It is also essential since
it is a difficult task to estimate the benefits or costs quantitatively in relation to specific decisions
on investment.
Task 4 – Capital Expenditure Appraisal
Pietro Yon has been supplied with information from a component manufacturer who has asked
for advice on the best project to accept for the purchase / replacement of a piece of machinery.
The company are considering selling their old machine that has a capital cost of £260 000 and
replacing it with an up to date model costing £220 000. For immediate purchase the company
will receive £120 000-part exchange allowance.
Both the current and new machines are able to meet the expected company demand, estimated at:

2 50 000
3 30 000
After three years, it is predicted that demand will be zero due to the technological developments
in the industry.
The following data has been provided for the existing and new machine:

Additional information
1 The selling price for each component is £5.00 and this will remain constant for the next
three years.
2 The company expect the cost of direct materials and direct labour to increase by 5% each
year.
3 The company predicts that repair and maintenance costs for the current machine will be
£7000 per annum.
4 The current machine is expected to have a zero-residual value at the end of year 3.
5 The company predicts that repair and maintenance costs for the new machine will be
£1000 per annum.
6 The new machine is expected to have a £75 000 residual value at the end of year 3.
The company’s cost of capital is 15%
Extract from the present value table for £1 at 15%
Year Units
1 0.870
2 0.756
3 0.658
4 0.572
Pietro would like you to produce a business report that can be given to the company offering
advice on the best course of action for the purchase / replacement machine.
REQUIRED
Prepare a report that evaluates the capital expenditure proposals using appropriate financial
techniques.
Extension activities:
To gain a distinction grade you must include an assessment of the impact of the business
proposal on the strategic direction of the organization.
LO3 AC 3.2
LO3 3D1
LO3 AC 3.2
Evaluate business proposals for capital expenditure in an organization using appropriate
financial techniques.
Current machine
Capital – £260,000
Expected units produced in year 1 is £90,000
Selling price is 5 per unit
Hence total output is 90,000 * 5 = £450,000
Expenses
Direct materials 1.80 * 90,000 = £162,000
Direct labor 0.75 * 90,000 = £67,500
Variable overheads 0.45 * 90,000 = £40,000
Depreciation 0.35 * 90,000 = £31,500
Repair & Maintenance = £7000
Total Expenses = £308,500
Surplus = 450,000 – 308,500 = £141,500
Table a: Year 1(£)

M
ainten
The current machine will produce the same output as the new machine in year one of £450,000.
However, the current machine has a higher cost as compared to the new machine. Hence the new
machine has more profits as compared to the current machine hence reliable.

Table b: Year 2(£)
The current machine will produce the same output of £250,000 as the new machine in year two.
However, the current machine still had more costs as compared to the new machine making the
new machine to have more profits as compared to the current machine that they are using. When
compared to year one, the overall profit in year two reduced by £66,500 and £70,000
respectively. Both outputs and cost reduced when compared to year one.

Table c: Year 3(£)
Both current and new machine will produce same output of £150,000. This was a reduction when
compared to both year 1 and 2. The total costs reduced as well as the profit from the two
machines with them achieving £42,500 and £51,500 profit respectively.
Summary of Output from the Current and New Machine for the three years (£)

Calculation of the Cost of Capital
The cost of capital of the company is 15%
When they use the current machine, the cost of capital will be: –
15/100 * 260,000 = £39,000
260,000 + 39000 = £299,000

The net present value with the introduction of the new machine is negative £34,000
indicating that the company should not consider buying the new machine but they should keep
the one they are buying currently. In addition, both machines will be faced out by technological
changes by the end of the period and the £75,000 residual value of the new machine will not be
considerable since the machine will lack buyers who they too will be adopting the new
technological trends as well.
References
Grobart, S. (2013). How Samsung became the world’s no. 1 smartphone maker. Bloomberg
Businessweek.
McConnell, J. J., & Muscarella, C. J. (1985). Corporate capital expenditure decisions and the
market value of the firm. Journal of financial economics, 14(3), 399-422.
Rothaermel, F. T. (2015). Strategic management. McGraw-Hill Education.
Tassadaq, F., & Malik, Q. A. (2015). Creative Accounting & Financial Reporting: Model
Development & Empirical Testing. International Journal of Economics and Financial
Issues, 5(2), 544-551.