MIDDLESEX UNIVERSITY

PDE 4232

FINANCIAL MANAGEMENT IN ENGINEERING

CW2: INDIVIDUAL COURSEWORK

2023/24

INSTRUCTIONS TO CANDIDATES
• Hendon Submission deadline is Tuesday Jan 16, 2024 in unihub.
• Please find attached ‘A CASE STUDY: Homage Engineering plc
• Word Limit: 2000.
• This case study constitutes 50% of your assessment for the module
• It is an individual-based coursework (i.e. each student is required to attempt the case
study and submit their answer on an individual basis)
Homage Engineering plc : A consultancy Assignment
As an established consultant who has helped several companies in difficulties over the
years, you have recently been approached by Homage Engineering plc for assistance.

The company has been in existence for over ten years. It specialises in supplying vital
parts and components to the engineering industry. When it first started out, all the items
sold by the company were manufactured within its four factories dotted around the UK –
Birmingham, Glasgow, Manchester and Milton Keynes.

At its height, the company had a turnover close to £25m pa. However, recently the
company is not doing well due to strong competition from China, Poland and Romania.
Latest accounts show sales of only £15m, and profits of less than £2m.

The company is now at some cross-roads. It needs to decide on a number of options:

Option 1: One of the directors thinks that the best option going forward is to take on the
competition from China and the rest of Europe by making the company’s own
manufacturing capability more efficient and more modern. He argues that while Brexit has
its negatives, it also has positives for a company such as Homage. He thinks that Brexit
potentially gives the company a breathing space from competition from countries in the
EU - like Poland and Romania - at least in the short term. That breathing space will allow
it to consolidate its domestic market and allow it to become a stronger force on the
international market in the longer term.

If the company decides to take up this option, they will have to review and replace some
of their rather out-dated manufacturing plants, and acquire more modern, and more
efficient ones. The relevant costs and savings are detailed in Appendix 1.

Option 2: Another director has a different opinion. He thinks that a better option for dealing
with competition is to merge with or take over one of the larger ones located within the EU.
This will give the company a foothold in the large EU market after Brexit and will therefore
potentially give it a competitive edge. He has identified two such possible targets, and
Appendix 2 has a summary of their last two years’ financial statements.

The managing director has asked you to look at the company in detail and write a report
to him covering a detailed review of:

i) Option 1: Using discounted cash-flow techniques, assess whether in financial

figures alone, the proposed investment in new manufacturing equipment and
technology is worthwhile. The company’s shareholders' estimated required rate of
return is 10% p.a. Also, include key non-financial factors that the company may
need to consider in deciding whether or not to go ahead with this option.

ii) Option 2: Using ratio analysis, work out several appropriate ratios from the two
companies’ financial statements for the past few years, and assess and comment
on the companies’ respective financial performance and financial health. With
reasons, make a recommendation as to which of the two companies should be
taken over or merged with. Also, include any other key considerations to be
considered in choosing between the two companies.

iii) Overall: Explain and recommend with justification/reasons your considered view
as to which of the two options the company should go for.
Appendix 1:

The project to modernise the company’s manufacturing infrastructure is expected to

cost £7.5million, and the net increase in in cash-flows resulting from increased sales
and efficiency savings is estimated to be as detailed below. After 8 years, the
investment cycle will need to be repeated and what is left of the old plant is expected
to be sold for £900,000.

Expected annual net cash inflow £’000

Year 1 1,000

2 2,200

3 2,300

4 2,500

5 2,400

6 1,300

7 1,100

8 1,000

Net Present Value table

Rate 10%

Year

0 1.000

1 0.909

2 0.826

3 0.751

4 0.683

5 0.621

6 0.564

7 0.513

8 0.467
Appendix 2 (a)

Company A (Polish)
Statement of financial position as at 30 April 2021 2022

£’000 £’000

Non-Current assets 1,850 1,430

Current assets
Inventory 640 490
Accounts receivables 1,230 1,080
Cash 80 120
1,950 1,690
3,800 3,120

Capital and liabilities

Ordinary share capital 800 800
Reserves 1,245 875
2,045 1,675
Long term liabilities debentures 800 600

Current liabilities
Bank overdraft 110 80
Accounts payables 750 690
Taxation 95 75
3,800 3,120

Extracts from the Income statement

£’000 £’000
Sales 11,200 9,750
Cost of sales 8,460 6,825
Net profit before tax 465 320

This is after charging:

Depreciation 360 280
Debenture interest 80 60
Interest on bank overdraft 15 9
Appendix 2 (b)

Company B (Romanian)
Summarised Statements of financial position

2021 2022
£’000 £’000
Non-current assets
Tangible assets 8,992 12,860
Current assets:
Inventory 7,262 9,816
Trade receivables 7,378 7,066
Cash at bank 2,766 1,424
17,406 18,306
Total assets 26,398 31,166

Capital and reserves:

Called-up share capital of 0.25p per share 1,850 1,850
Profit and loss account 5,476 7,144
7,326 8,994
Non-current liabilities
Bank loan 5,700 5,700

Current liabilities:
Trade payables 5,688 6,014
Taxation 4,452 5,868
Other creditors and accruals 3,232 4,590
13,372 16,472
Total Liabilities & Equity 26,398 31,166

Summarised Statement of comprehensive income (SOCI)

2021 2022
£’000 £’000
Turnover 8,340 10,020
Operating profit 3,026 3,206
Interest payable 570 570
Profit on ordinary activities before taxation 2,456 2,636
Tax on profit on ordinary activities 1,320 1,648
Profit for the financial year 1,136 988
Dividends 634 660