capital investment decisions
capital investment decisions (capital budgeting), gearing, financial ratios and budgetary controls.
The assignment requires knowledge and the application of capital investment decisions (capital budgeting), gearing, financial ratios and budgetary controls.
You are asked to prepare a report to address the following matters/concerns that have been raised by the Managing Director of the company.
(a) As a going concern, he wishes to evaluate the six divisions in light of growing competition as the economy continues to grow. He has asked you to identify and assess:
• the product divisions that are producing low value-added items and require huge working capital investments, and
• the implications of low value-added items for financial returns and profitability.
(b) He wishes to make a strategic decision about the long-term viability of both the bathroom accessories division and the pipes division due to the very competitive environment both divisions are competing in. As both divisions would require considerable capital expenditure to improve efficiency and to make them more competitive, he has decided to sell them.
Critically evaluate the arguments for selling the two divisions, even though both are profitable.
(c) The company needs to reduce its financial gearing, which is too high. However, the company also needs to spend large sums of capital for equipment replacement and modernisation programmes, investments in new projects and new product developments. All capital investment projects should have a target payback period.
(i) Identify and analyse the factors which should influence how long the payback period should be for equipment replacement programmes and new development projects.
(ii) Critically analyse the relative importance of the strategic aim of reducing gearing and the aim to continue to invest in modernisation programmes.
(d) The company is about to introduce a decentralisation programme in which decision making is pushed down the line and head office staff is cut from 48 in number to just 20. The Managing Director believes that control can be exercised from head office by having a regular reporting system using financial ratios and budgets.
(i) Advise the managing director on the reliance of using financial ratios analysis and budgetary controls for co-ordination and control of the group and the possible risks that Triton may face.
(ii) Critically analyse how you would expect the management accounting function and ethical issues to be re-organised if the company expands its operations to a number of different low- cost countries.
All relevant assumptions and calculations should be included in the report (or as an appendix to it)
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