Financial Report - Next Plc

Feasibility Study of a new investment in Australia


Seminar Paper, 2009
14 Pages, Grade: 65% good

Excerpt

Table of Contents

1. Introduction
1.1. Background and scope of the report
1.2. Data collection and analysis method
1.3. Background and conditions of undertaking the project
1.4. Background of the country of investment – Australia
1.4.1. View on the economic situation
1.4.2. View on the relevant taxation

2. Financial appraisal
2.1. Net Present Value (NPV)
2.2. Payback Period (PP) & Discounted Payback Period (DPP) & Break Even Analysis
2.3. Accounting Rate of Return (ARR) & Internal Rate of Return (IRR)

3. Feasibility study
3.1. Financing
3.1.1. How to finance: equity vs. debt
3.1.2. Where to finance: UK vs. Australia vs. other countries
3.2. Risk Management
3.2.1. Risk identification
3.2.2. Management of Forex risk
3.3. Conclusive advice on the organisational and financial arrangements
3.3.1. Organisational arrangements
3.3.2. Financial arrangements

APPENDICES

REFERENCES

1. Introduction

1.1. Background and scope of the report

This report is written within the scope of the coursework assignment for the Strategic International Financial Management module at the Nottingham Trent University.

It is not our role to verify the given information. It is also assumed that the reader is familiar with the details of the assignment (Appendix I), background of the Next Plc as well as its last annual report.

The aim of the report is to provide the management of the Next Plc with information about the financial aspects of the investment project, calculations of the key quantitative indicators, its analysis and finally a well-grounded advice on the organisational structure and financing arrangements which the company should adopt if it were to undertake such a project.

1.2. Data collection and analysis method

Next to the information from the assignment we used data from the Next Plc Annual Report 2008, official Next Plc website and other generally accepted sources of financial information.

All information about the used data and applied calculation can be found in the Appendices.

1.3. Background and conditions of undertaking the project

Current strategy of Next Plc is to extend the Next Brand into new overseas markets in order to generate new opportunities to build profitable businesses and new sources of growth over the longer term. This project is taken in consideration in order to move towards the realisation of the latter strategy by means of setting up 150 shops in Australia over the course of two years. Carrying out of this expansion would almost double the overseas presence of the Next Retail (Next AR&A, 2008).

1.4. Background of the country of investment – Australia

1.4.1. View on the economic situation

According to the Global Market Information Database (GMID) Australia has experienced more than 15 years of continuous real growth of GDP in average more than 3% p.a. and inflation under 3%. The expansion was first led by a property bubble and more recently by a China-led boom in resources. “Exports of goods and services account for almost 20% of GDP, up from 15.6% only 16 years ago. The increase comes mainly from services and manufactured goods as well as sales of raw materials to China. Australia’s abundance of natural resources means it has been singled out for a close relationship with China. The share of the manufacturing sector has fallen to around 11%. Finance, business services and communications now account for most of the economic growth” (GMID, 2009). Volatility of the Australian Dollar to British Pound on the 1 month run is up to 19 % whether on the long 3 years distance it is 12% (www.ratesfx.com, 2009).

Currently due to the global financial crisis the main growth factors of Australian economy are under strong threat. The economic downturn in the USA has a negative influence on the rest of the world and especially on China, its biggest trade partner. The year 2008 was signified by the strong downfall of stock markets as well as property and the most raw materials prices all over the world. The key factors of Australian economic growth are thus strongly affected by the global economic instability of its major trade partners. The first negative developments are indicated in the relative low GDP growth of 2 % and the growing inflation of 4.6 % in 2008 (www.economist.com, 2008).

1.4.2. View on the relevant taxation

“An Australian resident company is currently subject to tax at a rate of 30 % of its taxable income.

A non-resident company is taxed on its Australian source income (apart from interest, dividends, royalties and certain distributions by managed funds, which are subject to withholding tax) at the same rate as a resident company. A non-resident company may obtain relief from, or a reduction in Australian tax under a relevant Tax Treaty in certain circumstances.

Repatriation of profits can generally be undertaken at any time as there are no foreign exchange controls on such repatriation. Dividends paid to foreign shareholders are subject to withholding tax (10 %.)” (www.austrade.gov.au, 2008).

2. Financial appraisal

To arrive at the decision of whether to go or not to go with this investment we did a financial analysis starting with calculating the total initial investment needed for the setup. This amounted 375 £m for the 5 years lease of the 150 shops, however it will be paid in 2 equal parts (onward: initial investment) of 187.5 £m for the setup of 75 shops at the first and second year’s beginning.

Calculations imply financing of the project through the equity of the Next Plc from the UK (onward: Equity Financing) or by raising a loan in Australia (onward: Debt Financing). The details of the project financing are examined in the part 3.1.

2.1. Net Present Value (NPV)

The NPV calculated for the operating cash flows of the first 5 years after the initial investment are positive for the both considered cases of financing. That means that the project is generally worth to undertake (Buckley, 2004).

However there are some aspects in regard to financing and the split setup which can considerably influence the NPV.

The NPV of the debt financed project is 78 % higher than in the case of the alternative financing. Noticeable is also that especially in the case of the Equity Financing the NPV of the cash flows from the shops opened in the second year is 23 % higher than in the first year. The reason for this is the shift in the time line which means different exchange courses and inflation rates. This gap between to the NPVs points out the volatility of the cash flows and thus a bundle of risks which are discussed later in the part 3.2.

Table 1

illustration not visible in this excerpt

[...]

Excerpt out of 14 pages

Details

Title
Financial Report - Next Plc
Subtitle
Feasibility Study of a new investment in Australia
College
Nottingham Trent University
Grade
65% good
Author
Year
2009
Pages
14
Catalog Number
V143373
ISBN (eBook)
9783640544615
ISBN (Book)
9783640544554
File size
512 KB
Language
English
Notes
Tags
Payback Period, Break Even Analysis, Feasibility study, Risk Management, ForEx Risk, Investment Analysis, Financial appraisal, Equity Financing, Debt Financing, NPV Net Present Value, ARR Accounting Rate of Return, IRR Internal Rate of Return
Quote paper
BA (Hons) Artur Gleyberman (Author), 2009, Financial Report - Next Plc, Munich, GRIN Verlag, https://www.grin.com/document/143373

Comments

  • No comments yet.
Read the ebook
Title: Financial Report - Next Plc


Upload papers

Your term paper / thesis:

- Publication as eBook and book
- High royalties for the sales
- Completely free - with ISBN
- It only takes five minutes
- Every paper finds readers

Publish now - it's free