aengelbrechtblog.files.wordpress.com€¦ · web viewacct11059 accounting, learning and online...

ACCT11059 ACCOUNTING, LEARNING AND ONLINE COMMUNICATION

Assignment Stage 2 (ASS#2)

Restated Financial Statements & Ratios

By Angela Engelbrecht

Angela Engelbrecht Blog

Bellway plc website

http://www.bellway.co.uk/

https://aengelbrechtblog.wordpress.com/

ACCT11059 Accounting, Learning and Online CommunicationLecturer: Martin TurnerBy Angela Engelbrecht____________________________________________________________________________________________________

Step 7

Identify three products of your firm and estimate the selling price and variable cost

Product 1

1 Bedroom Apartment£179,995.00

Product 2

2 Bedroom Semi-Detached£264,995.00

Product 3

4 Bedroom Detached Home£365,995.00

Contribution MarginsCM = S - VCProducts Selling Price Variable Cost Contribution

Margin £Contribution Margin Ratio

Product 1 £179,995.00 £129,596.40 £50,398.60 28%Product 2 £264,995.00 £193,446.35 £71,548.65 27%Product 3 £365,995.00 £278,156.20 £87,838.80 24%

Page | 2


Discuss why the contribution margins may differ or be similar

The three products I have chosen are three types of homes Bellway builds. I selected these three because they represent different price brackets and different categories of buyers.

Product one is a one bedroom apartment. This is an entry level home which would attract first time or lower income buyers. I have worked out the variable cost to be 72%. This apartment sells for £179,995.00 and therefore I worked out the variable cost to be £129,596.40. Although it is not a very high-volume product, it is a high cost product and I think the profit margin would be relatively low. I believe the profit margin for this item to be around 18% which would leave around 10% for fixed costs. This product would have mainly variable costs because most of the materials and labour for house building would be purchased or engaged solely for this build and if this item was not built those costs would not be incurred. The 10% for fixed costs would be for office rents, administration costs, machinery, repairs and maintenance etc. The contribution margin, (sales – variable cost), is £50,398.60. The contribution ratio (CM/Sales) is 28% which contributes to funding the fixed costs and contributes to profit margin.

Product two is a two-bedroom semi-detached home which would attract small families and middle-income earners. As with product one I believe the variable cost would be quite high, around 73%. This semi-detached home sells for £264,995.00. I worked out the variable cost to be £193,446.35. I believe this home would also have a relatively small profit margin because of the high cost of the product and that is why I have put the variable cost at 73%. The contribution margin, (sales – variable costs), is £71,548.65. The contribution margin ration (CM/Sales) for this produce is 27% which is the contribution towards fixed costs and profit margin.

Product three is a four-bedroom detached home which would attract middle to higher income earners and larger families. Although all three types of houses are different they comprise the same building methods and use similar materials and resources. I believe all the homes would have relatively low contribution margins because they all have higher variable costs. The price of this four-bedroom home is £365,995.00 with a variable cost of 76% which £278,156.20. I believe the profit margin on this home would be slightly lower than that of the middle range and cheaper priced homes because the higher priced homes would have better quality fixtures and fittings to justify the higher prices. The contribution margin (sales price – variable cost) is £87,838.80 with a contribution margin ratio (CM/Sales) of 24% left to contribute towards profit margin, which I guess would be around 14% and fixed costs of around 10%.

Page | 3


Bellway’s products have relatively similar variable cost percentages because all their products are similar and they are individually produced. Most the homes sold are done so off plan or to order. When a home is sold the products, labour and services for that home are then ordered and used according to what that home requires. This results in a lower contribution margin. Their sales revenue is higher every year and this year they sold 8721 homes. They have a mix of flats, townhouses, 1 bedroom, 2 bedroom, 3 bedroom and 4 bedroom homes which allows them to cater to all different aspects of the market. Their contribution margins on these different price structured homes is different because the prices of the homes are very different.

Products with high contribution margins mean the variable costs are low and the fixed costs are higher. These products would be high risk because their profit would depend strongly on activity levels. Products with a high contribution margin would depend on sales of high numbers to cover fixed costs and make a profit. I think a mix of products with different contribution margins would be better than only products with higher contribution margins because if sales are low the products with higher contribution margins would not cover the fixed costs.

Identify one or more resource constraints and market constraints your firm may face

Resource Constraints

Bellway could face constraints on available land. They have certain criteria when deciding on and purchasing land as it must be suitable to build on. The land would need to be relatively flat and able to have a certain number of homes built on it to make it feasible. They also must make sure it meets or exceeds their minimum gross margin and ROCE acquisition criteria. Gross margin is worked out by taking the cost of sales away from the revenue and then dividing it by the revenue. Bellway’s gross margin is 25.7%. ROCE is return on capital employed which measures the company’s profitability and efficiency. They use this as a key indicator of how they are performing. They obviously have sufficient strategies in place, which is why they are so profitable, but they need the land available to be able to do this. Planning and obtaining approvals and designs can be a lengthy process and they therefore would have to plan long term with sourcing land so that they have enough short-term and long-term projects to keep to their targets. Bellway has to make sure they have the land ready to go to reach their required number of homes they want to sell to meet their growth strategy. If they don’t have the land available they won’t be able to sell as many homes and that would impact their profits because with a smaller number of homes or less activity of homes being sold to cover the fixed costs this would make fixed costs higher on each home.

Page | 4


Availability of qualified staff is also a resource constraint that they have to overcome. Skilled construction workers and subcontractors are not readily available in some areas and Bellway has to focus on training existing and new employees and they have to find ways to secure qualified staff to make sure they keep up the level of activity. With staffing and contractor shortages they could face delays which cost money and eat into profits. Another resource constraint could be shortage of building materials at the right prices. If they have a delay in building materials or the prices rise too much they will have problems with time delays and budget which would impact on activity levels and profits.

Market Constraints

I think Bellway’s main market constraint would be competition. There would be other developers in the market for land but they would have to make sure they did their research and feasibility studies to realise the maximum amount they could pay for land and still make a profit on the final product. They would also have competition in the sales of the homes once built. If Bellway had to pay more for land than they anticipated because of competition driving the prices up that would impact on sales of the final product. In that case, they could try to build more high-priced homes, if the land allowed it, because even though the variable costs are higher with the higher priced homes there is still more dollar profit because of the sales price.

I thought I would try out Maria’s break even. To work this out I looked at Bellway’s income statement from 2016. I worked out an average price for homes based on the total revenue / homes sold in 2016.

Selling Cost Variable Price Contribution Margin Homes SoldAverage £256,926.00 £191,021.00 £65,905.00 8721

Revenue = £2,240,651,000Cost of Sales = £1,665,892,000Gross profit = £574,759,000Profit for the year = £385,596,000Gross profit – Profit for the year = Fixed cost£574,759,000 - £385,596,000 = £189,163,000BE = FC / CM£189,163,000.00 (FC) = 2870 units£65,905.00 (CM per unit)

Hopefully I have calculated this correctly.

Page | 5


Step 8

Calculating some ratios for your firm (and its economic profit) and assessing its business performance

Ratio Analysis

Profitability Ratios 2016 2015 2014 2013

Net Profit Margin Net profit after tax/Sales 18.0% 16.0% 12.9% 9.8%

Return on Assets Net profit after tax/Total assets 14.8% 12.4% 9.8% 6.6%

We can see from the net profit margin that Bellway’s net profit margin has been steadily increasing from 2013 to 2016. There is an 8.2% increase. Likewise, with the return on assets (ROA), there is a steady rise from 2013 to 2016 with a total increase of 8.2%. It is interesting to see that the net profit margin and the ROA have increased at the same percent. The net profit margin shows what percent a company has left over after all deductions. So, in 2013 Bellway had 9.8p profit for every dollar of sales. But in 2016 Bellway had 18p profit for every dollar of sales. I think 18% net profit margin is a very healthy profit margin and I am interested to compare this with other development or building companies. The ROA is how much profit a company makes in relation to its assets. I can see that between 2013 and 2014 Bellway had the highest increase in both net profit margin and ROA. And then between 2013 and 2014 was the second highest increase. The percentage increase slowed down between 2015 and 2016. April 2013 was when the government’s help to buy scheme came into effect and I can’t help but think this had a big effect on Bellway.

In the graph below I have shown the difference between the net profit margin and return on assets from the financial statements and then the profit margin and return on net operating assets from the restated financial statement. The profit margin is slightly higher in the restated financials but the return on net operating assets in the restated financials are quite a bit higher and have been climbing more steeply in recent years. As profit margin and asset turnover are drivers of RNOA the increase must be because their profit margin has increased and they are using their assets more efficiently.

Page | 6


2016 2015 2014 20130.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Profit Margin & Return on Assets

Net Profit Margin - FinancialsReturn on Assets - FinancialsProfit Martin - Restated FinancialsReturn on Net Operating Assets - Restated Financials

Efficiency Ratios 2016 2015 2014 2013

Days of Inventory Inventory/Av. daily cost of goods sold 558.35 585.74 560.86 608.83

Total Asset Turnover Ratio Sales/Total assets 0.82 0.77 0.76 0.67

The efficiency ratios are no surprise to me. As a development company, there will be an extended period from starting the project to selling the complete product and one and a half years I would presume is not an unreasonable amount of time. The days of inventory have declined quite a bit since 2013 so they are turning over their product quicker now than they did in 2013. 50.48 days to be exact. That is a considerable amount of money saved as the longer a build takes the more costly it is and the longer the cash flows are tied up. As with the profitability ratios it is evident that between 2013 and 2014 they cut their days of inventory by the largest amount showing that 2013 to 2014 was a very good year for Bellway. This would have helped with the rise in profit margin and ROA. The asset turnover ratio, which is sales/total assets tells me the value of the company’s revenue generated compared to the value of the company’s assets, or how effectively the company uses its assets to generate sales. For every dollar invested in Bellway’s assets it produced £0.82 in sales in 2016. This figure has climbed from £0.67 in 2013. Again, the biggest increase is between 2013 and 2014. I am looking forward to comparing this with other student’s companies. It is very interesting to see the difference between the total asset turnover ratio and the asset turnover in the restated financials. In 2016 the figure rises from £0.82 to £1.20 when you divide the sales by the net operating assets as opposed to dividing the sales by the total assets. Taking out the financial aspect of the company shows that for every dollar invested in Bellway’s operating assets it produced £1.20 in sales. That’s fantastic.

Page | 7


2016

2015

2014

2013

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

Total Asset Turnover Ratio & ATO

Asset Turnover (ATO) - Restated Financials Total Asset Turnover Ratio - Financials

Liquidity Ratios 2016 2015 2014 2013

Current Ratio Current assets/Current liabilities 3.55 3.43 3.61 4.21

The current ratio shows that Bellway can pay its current liabilities. The current ratio shows how well a company can pay its short-term obligations. In 2013 Bellway had a higher current ratio of assets to liabilities and that figure dropped slightly in 2014 and a bit more in 2015. In 2016 it rose a little again and Bellway in 2016 had 3.55 times more current assets than current liabilities. This shows me that Bellway is making more than enough from its operations to fund itself. It is therefore able to easily pay its current liabilities if needed.

Financial Structure Ratios 2016 2015 2014 2013

Debt/Equity Ratio Debt/Equity 45.7% 45.3% 43.6% 35.5%

Equity Ratio Equity/Total assets 68.6% 68.8% 69.6% 73.8%

Debt Ratio 31.38% 31.16% 30.39% 26.21%

Bellway’s financial structure looks quite good. The debt/equity ratio is 45.7% in 2016. The debt/equity ratio compares a company’s debt with its equity. Bellway’s debt/equity ratio has increased since 2013 by 10% so their liabilities are increasing. Between 2013 and 2014 the debt/equity ratio increased by 8.1%. It seems their trade and other payables increased quite sharply and this was likely due to increase in revenue. It is interesting to note that they sold 5652 homes in 2013 and then it jumped to 6851 homes in 2014. I believe the help-to-buy scheme encouraged this. Their equity ratio looks good too as it is fairly high. The equity ratio divides the equity by the total assets. This figure has dropped a little from 2013 to 2016

Page | 8


but not too much. This shows how much of the company is being financed by the shareholders equity as opposed to the creditors. Almost three quarters of Bellway is financed by investors. As I understand it this is a good thing because it shows potential investors that the current investors have faith in the company and they are investing money back into the company.

Market Ratios 2016 2015 2014 2013

Earnings per Share (EPS) Net profit after tax/nos. of issued ordinary shares

3.28 2.31 1.57 0.89

Dividends per Share (DPS) Dividends/number of issued ordinary shares

£0.86 £0.61 £0.37 £0.23

Price Earnings Ratio Market price per share/earnings per share

6.38 10.43 9.65 15.48

It was great to see that my earnings per share matched the earnings per share (EPS) in my financial statement. I was relieved that my calculations were correct. The EPS have increased considerably from 2013 to 2016. The net profit after tax divided by the number of issued ordinary shares has increased from 0.89 in 2013 to 3.28 in 2016. I found it very interesting that the earnings per share increased the most between 2015 and 2016 and the least between 2013 and 2014, which is opposite to the ratios above. The EPS tells you how much money the company is making in profits for every issued ordinary share. Bellway is making so much more profit for every share in 2016 than it was in 2013 which tells me there is a lot of investor confidence in this company. The price earnings ratio has decreased over the years and as at 2016, as Maria explained it, we can expect our investment to be paid back in 6.38 years if we invest in Bellway. Not so bad compared with 15.48 years in 2013. The price per earnings ratio is trending the same as the other ratios, showing that Bellway is faring better every year.

Ratios Based on Reformulated Financial Statements 2016 2015 2014 2013

Return on Equity (ROE) Comprehensive income/shareholdersequity

21.48% 17.8% 13.95% 8.99%

Net Borrowing cost (NBC)

Net fin expenses after tax/net financial obligations

-219.43% 18.46% -36.80% 321.39%

The return on equity (ROE) looks great in 2016. The ROE shows how many dollars of profit a company makes for every dollar of equity. I think 21.48% is an excellent return on equity and I think the shareholders should be very happy with their investment, especially since in 2013 it was only 8.99%, which is an increase of 12.49% over the 4 years. Again, the biggest increase in ROE was 2013 to 2014 which aligns with the figures above. The net borrowing costs (NBC) really baffled me. I checked the figures and checked again but came up with the same answer every time. In 2013 Bellway had a net financial expense after tax of -£7.7 million and a net financial obligation of £2.4 million. They didn’t have very much cash in the

Page | 9


bank and they had loans and borrowings resulting in 321.39% net borrowing cost. In 2014 Bellway had a net financial expense after tax of -£7.7 million, the same as 2013, but they had net financial assets of £21 million resulting in a -36.8% because they had a lot more financial assets than borrowings. In 2015 their borrowings were up again and they had a net financial obligation resulting in a net borrowing cost of 18.46% and then in 2016 because there is a -£8.9 million net financial expense after tax and a net financial asset of £4 million there is a -219.43% net borrowing cost. I am finding this figure a little hard to comprehend and I think I need to investigate further to understand exactly what they are telling me.

Comparison with other firms

Comparison between Bellway, Stephanie Purnell’s Cardiff Property and Katrina Brown’s Formation Group

I was very surprised when I compared the profit margin of Bellway with the profit margin of Cardiff Property and Formation Group. Cardiff Property has a huge profit margin compared with Bellway. When I looked at the financials of Cardiff Property I noticed that their profit was not only generated from revenue but they had a lot of profit from other investments and share of results of joint venture. Bellway has their main income from revenue and not much from other streams. Formation Group is much the same as Bellway in that their income is only from revenue. The difference with Formation group is that in previous years they were barely covering their cost of sales with their revenue and then their fixed costs and taxes still had to be paid, resulting in the loss and negative profit margin. The surprising part was when I compared the economic profit of Cardiff Property and Formation Group to Bellway. Economic profit is (RNOA – cost of capital) x NOA. I had a look at Cardiff Property to see why their economic profit is so low compared to Bellways’. I saw that Cardiff Property has comprehensive operating income after tax (OI) of £1.32 million and net operating assets (NOA) of £1.85 million. Since RNOA is OI/NOA and Cardiff Property has NOA only marginally higher than OI their economic profit is so much smaller, I presume because they are overworking their assets. Formation group has OI of £1.36 million and NOA of £21.7 million, therefore I was surprised that they still had a negative economic profit in 2016. Then I looked further and realised this is only 6.25% and when you take away the 10% for cost of capital it results in a negative economic profit. On the other hand, Bellway has OI of £409.87 million and NOA of £1.86 billion, so when you work out the RNOA of Bellway it results in a much higher economic profit. The results are shown in the graphs below.

Page | 10


2016 2015 2014 20130.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

-£50,000.00

£-

£50,000.00

£100,000.00

£150,000.00

£200,000.00

£250,000.00

Comparison - Bellway & Cardiff PropertyNet Profit Margin & Economic Profit

Bellway - net profit margin Cardiff Property - net profit marginBellway - economic profit Cardiff Protpery - economic profit

2016 2015 2014 2013-£50,000.00

£-

£50,000.00

£100,000.00

£150,000.00

£200,000.00

£250,000.00

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Comparison - Bellway & Formation GroupNet Profit Margin & Economic Profit

Bellway - net profit margin Formation - net profit marginBellway - economic profit Formation - economic profit

These results were surprising to me as looking at the other ratios alone I could see that Cardiff Property is more profitable. In 2016 they have a net profit margin of 101% compared to Bellway’s 18% but a return on assets of 10.2% compared with Bellway’s 14.8%. Cardiff Property’s net borrowing costs (NBC) are very low and it looks like they do not rely on borrowings to fund the company. In contrast Formation Group borrows heavily and has a higher NBC but it looks like this heavy borrowing has helped Formation Group to buy assets which have helped them to turn the company around in 2015 and 2016. Formation Group has a return on assets of 15.7% in 2016 which is higher than Bellway. But when you look at Cardiff Property’s total asset turnover ratio it is only 0.1 in 2016 and Formation Group is a high 1.6 in 2016 compared with Bellway’s total asset turnover ratio of 0.86 in 2016. As you

Page | 11


can see by the graphs below Bellway is making more sales from their assets than Cardiff Property, but Formation Group is making even more than Bellway.

2016 2015 2014 20130.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

0.000.100.200.300.400.500.600.700.800.90

Comparison - Bellway & Cardiff PropertyReturn on Assets & Total ATO Ratio

Bellway - return on assets Cardiff - return on assetsBellway - total ATO ratio Cardiff - total ATO ratio

2016 2015 2014 2013-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0.000.200.400.600.801.001.201.401.601.80

Comparison - Bellway & Formation GroupReturn on Assets & Total ATO Ratio

Bellway - return on assetsFormation - return on assets Bellway - total ATO ratioFormation - total ATO ratio

Economic Profit

Ratios Based on Reformulated Financial Statements

2016 2015 2014 2013

Economic Profit

(RNOA – cost of capital) x net operating assets (NOA)

223,576.55 127,719.76 63,775.19 -4,786.23

RNOA Return on Net Operating Assets 22% 17.83% 14.74% 9.61%

Page | 12


NOA Net Operating Assets £1,862,955 £1,632,075 £1,345,123 £1,221,246

Profit Margin

Operating income after tax/sales 18.29% 16.48% 13.35% 10.56%

Asset Turnover

Sales/Net operating assets (NOA) 1.20 1.08 1.10 0.91

2016 2015 2014 2013-£50,000.00

£-

£50,000.00

£100,000.00

£150,000.00

£200,000.00

£250,000.00

Economic profit

The graph above shows the economic profit of Bellway between 2013 and 2016. This was a shock to see. Looking at the figures written down in the ratios tab did not jump out at me like the graph. The economic profit in 2013 was -£4,786.20. As you can see from the graph above the economic profit has increased enormously to £223,576.50 in 2016.

The key drivers of past economic profit are RNOA, cost of capital and NOA. I have used the suggested WACC of 10% because I could not find evidence of Bellway using anything different. Bellway has gone from a profit margin of 9.8% in 2013 to 18.0% in 2016. Their asset turnover has gone from 0.91 in 2013 to 1.20 in 2016. I believe the increase has to do with reinvestment of retained earnings. Bellway has been acquiring assets with their own shareholders retained earnings to make sure they have land available with planning permission ready to go. Bellway has a policy of linking their director bonuses to buying land and this is having a compounding effect on their growth. This would also explain why their equity ratio is sliding slightly and their debt is increasing a little since 2013.

They have opened offices in six new locations over the past 3 years, which has given them scope in a wider area than they had before. The mortgage rates are very low because of competition in the mortgage market, together with the governments help-to-buy scheme, housing is now more affordable than ever in the UK. I believe the help to buy government scheme, which was introduced on 1st April 2013, has helped Bellway enormously in their success. This is shown in all the ratios above where the greatest increase is from 2013 to 2014. Clients who otherwise would not have been able to afford a new home are now able

Page | 13


to and because there is such a shortage of housing in the UK the market conditions are strongly in their Bellways favour.

Bellway also has the capital available and a good borrowing credit to be able to stockpile land for future development, but they also have a cap on how much land they purchase so that they don’t have too much capital tied up and not easily available. This means they have land ready to build on when they need it and they do not have to wait for planning permissions which can take months, if not years. They also do market research and only build in areas where there is great demand, ensuring they sell their houses in appropriate time. We can also see from the days of inventory above that they have been working on their efficiency which will have impacted their economic profit.

Step 9

Developing a capital investment decision for your firm and completing a simple analysis of this decision using Payback Period, NPV and IRR

Bellway is looking at developing two new sites. The first site is in Uplands which is in Swansea, Wales. The second one is in The Park, St Marys Road, Ealing, London.

The site in Swansea, Wales is in a high quality residential area of Uplands, Swansea. The top floors offer views towards Mumbles Head and it is located only one mile to the nearest train station. It is also close to the city centre which offers great shopping as well as excellent night life with bars and restaurants. It is only 15 minutes to the M4 which is easy access to London and other parts of the country. This site will have 24 apartments and 8 houses. The site is for sale for £1.3 million. There will be a negative cashflow in the first year due to planning and site preliminaries and a negative cashflow in the second year due to building the homes. In the third year over half the homes are expected to be sold with the remaining selling in year 4 and 5.

The site in London is in a prime site in Ealing. It is a short walk from Ealing town centre which offers plenty of nigh life and restaurants. The train station offers fast access to Central London and it is only 30 minutes by car to London, which will suit professionals. The site will consist of 2 detached homes and 6 semi-detached homes, all with four bedrooms and four bathrooms over 3 floors and offering off street parking. It is close to Walpole Park so would also suit families. This site will attract high income earners and will be fitted out with all the latest innovations and high-class fittings and fixtures. The site is for sale for £5.3 million. This site will have a negative cash flow in year 1 due to planning and preliminaries and in year 2

Page | 14


due to building costs. Around half these homes are expected to be sold in year 3 with the balance being sold in year 4 and 5. Although there are only 8 homes in this development, the price and exclusivity put it in an expected 5 year useful life.

Both projects are expected to start on 1st August 2017 with the future cash flows expected on 31st July of each year. Bellway is not expecting to have any residual value as all homes are expected to be sold.

All the original costs, estimated useful life and estimated future cash flows are in the table below.

Swansea LondonOriginal Cost -£1.3million -£5.5 millionEstimated Useful Life 5 years 5 yearsResidual Value £0 million £0 millionEstimated Future Cash Flows31 July 2018 (time period = 1 year) -£2.5 million -£1.5 million31 July 2019 (time period = 2 years) -£5.0 million -£3.0 million31 July 2020 (time period = 3 years) £8.5 million £7.2 million31 July 2021 (time period = 4 years) £2.5 million £4.2 million31 July 2022 (time period = 5 years) £1.5 million £3.2 million

I think Bellway should invest in both options. While the development in Swansea has a better net present value (NPV) and internal rate of return (IRR) and the payback period is slightly shorter at 3 years and 1 month, compared with 3 years and 7 months, I think Bellway has enough capital to invest in both.

The Swansea site has a net present value of £1.32 and an internal rate of return of 18.9% which are both higher than that of the London site, which has a net present value of £1.12 and an internal rate of return of 14.4%. The interesting thing is that at the end of the 5 year period the London site will have a cumulative cash flow of £4.8 million while the Swansea site will have considerable less at £3.7 million even though the NPV and IRR of the Swansea site are higher. The London site has a much bigger initial outlay but will generate more cashflow at the end of 5 years.

The net present value of both projects is greater than zero. The rule is that if a project is greater than zero then accept. Both projects have a net present value greater than zero and Bellway has the financial capacity to undertake these projects so I think they should accept both projects. The internal rate of return of 18.9% with the Swansea project and 14.4% with the London project show at what percent the net present value of the expected future cash flow equals zero. It shows the discount rate where the expected future cash flow from the investment will equal the initial investment. In both projects, the IRR is positive which

Page | 15


means that the IRR is above the breakeven point and will add value to the company and therefore we should accept these projects.

A weakness of the analysis could be that a development project could have outlays during the building stage as the site is sometimes built in stages. This could impact on the outcome and create different numbers for the internal rate of return.

Step 10

Feedback

References

http://www.rightmove.co.uk/commercial-property-for-sale/property-55365103.html


Page | 16



aengelbrechtblog.files.wordpress.com€¦ · web viewacct11059 accounting, learning and online...

Documents