Strategic and Financial Decision-making Referral Assignment-

The following assignment is based on HYPOTHETICAL scenarios related to Tesco plc.

Task 1 -

Tesco plc is contemplating introducing a new computer system which it is believed will streamline its supply chain activities. The major savings will occur due to the more efficient movement of goods between suppliers, Tesco central depots and Tesco stores. The new system has been proposed by staff at the Cheshunt Head Office.

The initial investment in the Computer Project would require an outlay of £14.5 million. The following cash flows related to the project (in current terms) are then predicted to arise over the next five years (which has been selected as a prudent time span over which to build an investment model due to the obsolescence factor of IT systems):

It is anticipated that over the next 5 years:

• Inflation on Cash Savings will be 6% per annum
• Inflation on Cash Outflows will be 4% per annum
• The general rate of inflation in the economy will be 5% per annum.

The central finance team predicts an annual tax rate of 28% on the net cash flows over the 5 years and the team is aware that the investors will require an overall after tax REAL rate of return of 10.5%.

Required:

a) Calculate the Net Present Value (NPV) and Internal Rate of Return (IRR) of the proposed investment in the computer project, taking into account the impact of inflation and taxation (there are no capital allowances available and tax is payable in the year of the net cash flow). You should also provide a brief comment on your answer indicating whether or not the investment is financially worthwhile.

b) Christine Lampard, a Manager at the Welwyn Garden City Head Office indicates that she and her assistant, Aditya Deokar (who studied finance at undergraduate level) have been looking at an alternative computer project and which confusingly, upon investigation, has a lower NPV and higher IRR, than the Project recommended by the Cheshunt Head Office. Therefore, they are not sure how this is possible or which methodology they should follow.

You are required to provide a considered response to their query.

Task 2 -

At yahoo finance on 3rd July 2018 the beta value for Tesco plc is stated as being 0.49. On the same website, on the same day, the beta value for InterContinental Hotels Group plc is indicated as being 1.18.

You are required to provide a considered discussion as to why there is such a disparity between the beta values of the two companies in question and explain the meaning and the impact of the beta values.

Task 3 -

Tesco plc wants to expand but foresees little exponential growth in its current retail activities. The company has, therefore, decided to utilise their ability to raise funds and their cash generation ability to organically expand into the hotel industry. Tesco feels that the market is open to a new participant and that companies such as Intercontinental Hotels Group plc are not ready for a vibrant new competitor.

Tesco could expand by undertaking 'organic' growth or could undertake the indicated growth by acquisition.

You are required to provide a critical analysis of the relative benefits of the two types of growth (i.e. 'organic' and acquisition) from Tesco's point of view, with regard to the proposed expansion.

Task 4 -

In order to fund the expansion, Tesco could raise additional long term funds by issuing debt or equity.

You are required to provide a critical analysis of the factors that Tesco would need to consider when deciding between issuing more debt or equity. You should relate you discussion to theory wherever possible.

Learning Outcomes Assessed:

• Recognise the role of accounting and finance within the strategic planning process.
• Demonstrate problem solving and decision making skills through the selection and application of appropriate tools, and control processes, for strategic project appraisal.
• Consider the importance of risk assessment at all stages of the investment process and the application of a variety of risk management techniques.
• Appreciate the importance of the cost of capital, and the influences upon it, within the strategic investment appraisal process.