JANAKAN LAGSHINI ENGLISH MEDIUM (P/T) 008/AEE/012

FINANCIAL MANAGEMENT ASSIGNMENT

Regd:

008/AEE/012

Individual Assignment
1. Select a medium scale business project in your region and calculate the following financial items.
Cash flow of the project Pay Back period ARR NPV IRR

I. II. III. IV. V.

2.

Consider three years financial statements of company and calculate and describe the current situation of the company by using the following ratios.
Activity ratios. Liquidity ratios. Leverage ratios. Profitability ratios.

I. II. III. IV.

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FINANCIAL MANAGEMENT ASSIGNMENT

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Executive Summary

The assignment submitted by me of the Unilever Company is Pay Back Period, IRR, ARR, PV and NPV calculated based on the Investment Appraisal future forecast cash flow. By this the profitability of the product produced the project can be found by analyzing Income Statement and Balance Sheet by using the methods analytical technique tools to find Activity ratio, Leverage ratio, Profitability ratio and Liquidity ratio. Through this is the present financial position of the Company is submitted.

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Table of Contents
1. Introduction 1.1 Details of the company. 2. DETAILS OF THE INVETMENT 2.1 Cash flow of the Project. 2.2 Pay Back Period. 2.3 ARR. 2.4 npv. 2.5 irr 3. Ratio Analysis 3.1 balance sheet. 3.2 income statement. 4. Calculations of Ratios 4.1 activity ratio. 4.2 liquidity ratio. 4.3 solvency / leverage ratio. 4.4 profitability ratio. 5. Analyzing the current situation 4 05-06 07-08 09 09-10 10-11 12 13 14 15 15-16 17 18 18 19 19-20 20-21 21-23
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1. Intraduction OF THE COMPANY

160 million times a day, someone somewhere chooses a Unilever product. From feeding your family to keeping your home clean and fresh, our brands are part of everyday life.

Life partner With 400 brands spanning 14 categories of home, personal care and foods products, no other company touches so many people's lives in so many different ways. Our brand portfolio has made us leaders in every field in which we work. It ranges from much-loved world favorites including Lipton, Knorr, Dove and Omo, to trusted local brands such as Blue Band and Suave. From comforting soups to warm a winter's day, to sensuous soaps that make you feel fabulous, our products help people get more out of life. We're constantly enhancing our brands to deliver more intense, rewarding product experiences. We invest nearly Rs1 billion every year in cutting-edge research and development, and have five laboratories around the world that explore new thinking and techniques to help develop our products.

Our vision
Our mission is to add Vitality to life. We meet everyday needs for nutrition; hygiene and personal care with brands that help people look good, feel good and get more out of life.

Our mission
Vitality is at the heart of everything we do. It's in our brands, our people and our approach to business.

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FINANCIAL MANAGEMENT ASSIGNMENT

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Type of business
Fast moving consumer goods company with local manufacturing facilities, reporting to the regional business groups for innovation and business results.

Operations
Home Care, Personal Care and Foods

Product categories
Household care, fabric cleaning, skin cleansing, skin care, oral care, hair care, tea, spreads, personal grooming

Our brands
Astra, Axe, Bru, Ceylonta, Clear, Comfort, Flora, Dove, Fair & Lovely, Knorr, Laojee, Lipton, Lifebuoy, Lux, Marmite, Pears Baby, Ponds, Rexona, Rin,Signal, Sunsilk, Sunlight, Surf Excel, Vaseline, Vim and Wonderlight

Employees
Unilever Sri Lanka provides employment to 1100 people directly and many thousands more indirectly through its dedicated suppliers, distributors and service providers.

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1.1 Details of the company

In the late 19th century the businesses that would later become Unilever were among the most philanthropic of their time. They set up projects to improve the lot of their workers and created products with a positive social impact, making hygiene and personal care commonplace and improving nutrition through adding vitamins to foods that were already daily staples. Today, Unilever still believes that success means acting with the highest standards of corporate behavior towards our employees, consumers and the societies and world in which we live. Over the years we've launched or participated in an evergrowing range of initiatives to source sustainable supplies of raw materials, protect environments, support local communities and much more. Through this timeline you'll see how our brand portfolio has evolved. At the beginning of the 21st century, our Path to Growth strategy focused us on global high-potential brands and our Vitality mission is taking us into a new phase of development. More than ever, our brands are helping people feel good, look good and get more out of life a sentiment close to Lord Leverhulme's heart over a hundred years ago.

Timeline
19th century 1900s Although Unilever wasn't formed until 1930, the companies that joined forces to create the business we know today were already well established before the start of the 20th century. Unilever's founding companies produced products made of oils and fats, principally soap and margarine. At the beginning of the 20th century their expansion nearly outstrips the supply of raw materials. Tough economic conditions and the First World War make trading difficult for everyone, so many businesses form trade associations to protect their shared interests. With businesses expanding fast, companies set up negotiations intending to stop others producing the same types of products. But instead they agree to merge - and so Unilever is created. Assignment

1910s

1920s

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1930s

Unilever's first decade is no easy ride: it starts with the Great Depression and ends with the Second World War. But while the business rationalises operations, it also continues to diversify. Unilever's operations around the world begin to fragment, but the business continues to expand further into the foods market and increase investment in research and development. Business booms as new technology and the European Economic Community lead to rising standards of living in the West, while new markets open up in emerging economies around the globe. As the world economy expands, so does Unilever and it sets about developing new products, entering new markets and running a highly ambitious acquisition programme. Hard economic conditions and high inflation make the 1970s a tough time for everyone, but things are particularly difficult in the fastmoving consumer goods (FMCG) sector as the big retailers start to flex their muscles. Unilever is now one of the world's biggest companies, but takes the decision to focus its portfolio, and rationalise its businesses to focus on core products and brands. The business expands into Central and Eastern Europe and further sharpens its focus on fewer product categories, leading to the sale or withdrawal of two-thirds of its brands.

1940s

1950s

1960s

1970s

1980s

1990s

The 21st The decade starts with the launch of Path to Growth, a five-year strategic plan, and in 2004 further sharpens its focus on the needs of century 21st century consumers with its Vitality mission.

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2. DETAILS OF THE INVETMENT

The board of Unilever Ltd is considering the exclusive investment in a new product lux, which is expected to have a life of 5 years. Forecoast profits of the investments are as follows; Rs. Mn

Year Initial Cost Project revenue Administration Cost Distribution Cost Production Cost Profit before tax

0 (400) -

1 400 100 120 40 (6)

2 450 150 100 50 35

3 500 170 120 60 59

4 550 250 150 50 26

5 600 250 200 50 39

Additional information: The company paid tax is 25% per year. The inflation rate is expected to be 8% per year for the foressable future.

2.1 Cash flow of the Project

Cash flow is an expense or revenue stream that changes a cash account over a given period for a business, a project, or a financial product. There are two entries made for each category; Cash inflow and cash outflow. Activities such as operation income, financing, investing, donations and gifts bring in cash, while investments, expenses and donations take cash out of your cash flow. This can be said for both businesses and personal accounts.

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Rs. Mn

Year Initial Cost Project revenue Administration Cost Distribution Cost Production Cost Profit before tax Tax Profit after tax

0 (400) -

1 400 100 120 40 140 (35) 105

2 450 150 100 50 150 (38) 112

3 500 170 120 60 150 (38) 112

4 550 250 150 50 100 (25) 75

5 600 250 200 50 100 (25) 75

2.2 Pay Back Period

It is one of the simplest at methods which calculates the periods within which the cost of project will be completely recovered. It is the period in which the profit expected from the project will be equal to the cost of project. This method has the following pros: 1. This method of evaluating proposals for capital budgeting is simple and easy to understand; it has the advantage of making it clear that there is no profit of any project unless the payback period is over. 2. In the case of routine projects also use of payback period method favours projects, which generate cash inflows in earlier years Thus it, has practice approach. 3. By stressing earlier cash inflows the liquidity dimension is also considered in the selection criterion. However, the technique of payback period is not a very scientific method because of the following reasons:

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1. It stresses capital recovery rather than profitability. 2. This is inadequate measure for evaluating two projects where the cash inflows are uneven. 3. It does not give any consideration to time value of money.

Year 0 1 2 3 4 5

PAT (400) 105 112 112 75 75

Balance (400) (295) (183) (71)

Unrecovered cost at start of the year Payback period = Year before recovery + Cash flow during the year

75-71 = 03years + 75 = 03years 01month 11

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2.3 ARR
CF 105 112 112 75 75 Average Profit Depreciation (80) (80) (80) (80) (80) Net Cash Flow 252 32 32 (5) (5) 79/5 = 15.8 Average Profit Accounting Rate of Return = Initial Investment 15.8 = 400 100 100

3.95%

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2.4 NPV
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield. Formula:

r NPV =

Ct
- C0
(1+r)
t

t-1

Year

Net Cash Flow

Discounted rate 10%

PV

0 1 2 3 4 5 NPV

(400) 105 112 112 75 75

1 0.925 0.857 0.793 0.735 0.680

(300) 97.1 95.9 88.8 55.1 51 87.9 Assignment

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2.5 IRR The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first. Year Net Cash Flow 0 1 2 3 4 5 (400) 105 112 112 75 75 NPV 1 0.925 0.857 0.793 0.735 0.680 (400) 97.1 95.9 88.8 55.1 51 87.9 NPV1 IRR = R1 + (R2-R1) NPV1- (NPV2) 87.9 = 8% + (30% - 8%) 87.9-(156) 1 0.769 0.592 0.455 0.350 0.269 (400) 81 66 51 26 20 (156) Discounted rate 8% PV Discounted rate 30% PV

= 14
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3. Ratio Analysis:
Ratio analysis will basically give you a clear picture of the company, that is where the company is standing and it is the study of relationship between income statement items and balance sheet accounts over a period of time.

3.1 Balance Sheet

As at December 31, 2009 ASSETS Non-current assets Property, plant and equipment Intangibles Long term investments Long term loans Long term deposits and prepayments Retirement benefits - prepayments Current assets Stores and spares Stock in trade Trade debts Loans and advances Trade deposits and short term prepayments Other receivables Tax refunds due from the Government Cash and bank balances Total assets 265,420 3,649,070 506,357 131,852 682,949 82,141 355,052 239,553 5,912,394 11,425,715 4,736,619 2,433 95,202 98,117 392,896 188,054 5,513,321 4,428,278 7,303 95,202 120,545 540,027 205,355 5,396,710 241,753 4,251,914 228,763 123,904 516,443 218,329 301,813 106,789 5,989,708 11,386,418 Assignment 2009 2008 (Rupees in thousand)

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2009 EQUITY AND LIABILITIES Capital and reserves Share capital Reserves

2008 (Rupees in thousand)

669,477 2,621,643 3,291,120

669,477 1,546,281 2,215,758 13,613

Surplus on revaluation of fixed assets Liabilities Non-current liabilities Liabilities against assets subject to finance leases Deferred taxation Retirement benefits obligations Current liabilities Trade and other payables Accrued interest / mark up Short term borrowing Current maturity of liabilities against assets subject to finance leases Provisions

12,965

56,762 636,130 327,060 1,019,952 5,785,776 28,892 1,037,911 28,419 220,680 7,101,678

77,327 369,653 239,794 686,774 4,547,794 64,075 3,232,523 32,322 593,559 8,470,273 9,157,047

Total liabilities

8,121,630

Total equity and liabilities

11,425,715

11,386,418 Assignment

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3.2 Profit and Loss Account

For the year ended December 31, 2009 2009 2008 (Rupees in thousand) 30,956,839 (20,219,184) 10,737,655 (5,847,845) (1,002,214) (247,266) 239,918 3,880,248 (489,280) 4,943,313 (427,708) 4,515,605 (1,459,865) 3,055,740 230 3,390,968 (466,166) 2,924,802 (940,476) 1,984,326 149 Assignment

Sales Cost of sales Gross profit Distribution costs Administrative expenses Other operating expenses Other operating income

38,187,582 (24,852,625) 13,334,957 (7,179,694) (1,030,478) (373,785) 192,313 4,943,313

Restructuring cost Profit from operations Finance costs Profit before taxation Taxation Profit after taxation Earnings per share (Rupees)

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4. Calculations of Ratios
4.1 Activity Ratio 2009 I. Average Collection Period = Acct. Receivable x 365 Credit Sales = 5.62 days = 5.27 days 588,498 38,187,582 2008 447,092 30,956,839

II.

Inventory Turn Over = Sales Inventory

38187582 3649070 = 10.4

30956839 4251914 =7.2

III.

Fixed Assets Turn Over = Sales Net Fixed Assets

38187582 4736619 = 8.06

30956839 4428278 = 6.99

IV.

Total Assets Turn Over = Sales Total Assets 38187582 11425715 = 3.34

30956839 11386418 = 2.71

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4.2 Liquidity Ratio 2009 5912394 7101678 = 0.83 : 1

2008 5989708 8470273 = 0.70:1

I. Current Ratio = Current Assets Current Liabilities

II. Acid Test Ratio = Cur.Assets Inventory Current Liabilities

2263324 7101678 = 0.31 :1

1737794 8470273

= 0.20 : 1

4.3 Solvency / Leverage Ratio

I.

Debt to Equity =Total Long term debts Share Holders Funds

1019952 3291120 = 0.30

686774 2215758 = 0.30

II.

CapitalGearingRatio =EquityShare Capital FixedInt.bearing Funds

669477 1019952 = 0.65

669477 686774 = 0.97

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III. CA to Proprietors Fund Ratio = Current Assets Proprietors Funds

5912394 669477 = 8.83

5989708 669477 = 8.94

IV. Fixed Assets to Proprietors Fund Ratio = Fixed Assets Proprietors Fund

5513321 669477 = 8.23

5396710 669477 = 8.06

4.4 Profitability Ratio

I.

Gross Profit Margin = Gross Profit x 100 Sales

13334957 38187582 = 34.9%

10737655 30956839 = 34.6%

II.

Operating Profit Margin = Operating Income x 100 Sales

4943313 38187582 = 12.9%

3390968 30956839 = 10.9%

III. Net Profit Margin =

Net Profit x 100 Sales

3055740 38187582 = 8.00%

1984326 30956839 = 6.40%

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IV. ROA = Net Income x 100 Total Assets

3055740 11425715 = 26.7%

1984326 11386418 = 17.4 %

V. ROE = Net Income x 100 Common Equity

3055740 3291120 = 92.8%

1984326 2215758 = 89.5% 3390968 11386418 = 0.29

VI. Basic earning power(BEP) =

EBIT Total assets

4943313 11425715 = 0.43

5. Analyzing the current situation of the company.

Analyze the Rhino Unilever Ltd based on their ratio calculation; the Average Collection Period in 2008is 5.27 days in 2009 is 5.62 days. which shows that the company is no effective in collecting receivables now in comparison of previous year, even the sales has increased by Rs. 7,230,743 on the other hand receivables increased which resulted higher Average Collection Period. The Inventory Turn Over mean how many times the inventory is enough for sales. In 2008it is 7.2 and 2009 is 10.4. The Inventory Turn Over is increased because the value of the sales increased as well as the inventory is decreased. Here the organization have to maintain a proper inventory control and proper reorder level for run their business smoothly. According to the calculations above the productivity of fixed assets 2008is 6.99and 2009is 8.06 it is increased by 1.07. Because the sales is increased in 2009/2010 and the net fixed assets is reduced because of the depreciation. The organization depreciation policy is the depreciation is calculated by using

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reducing balance on the cost or valuation of all Property Plant & Equipments. The Total Assets Turn Over is increased on 2009 (Increased 2008 is 2.71 to 2009 is 3.34) here the sales value is increased as well as the Total Assets also increased. Then, we can analyze the Liquidity Position of the Organization used the Liquidity Ratios. The current ratio is 0.7 in 2008 which is less than one and as compared to 2009 that is 0.83, but in both the years assets are on decline in trend where as liabilities see an increasing trend. Quick ratios are always less than current ratios; same is the case in both the years. In 2008, the quick ratio is 0.20 and in 2009 the Quick ratio is0.31, which is more than the previous year, indicating that the inventory is less in 2009. Keeping excess inventory is not good for the company as the capital amount is invested in carrying and holding cost. Quick ratio in both the years is less than 1, which makes a company inefficient. The Leverage of Solvency ratio is calculation of ratios, the Debt to Equity in 2008 is 0.30 and 2009is 0.30. It is not change because some position of the Organizations Long Term Debts settled in 2009. But no any changes in shareholders equity. The Capital Gearing Ratio, the equity shares capital is not changed in these years. The fixed interest bearing funds is increased. The Capital Gearing Ratio in 2008 is 0.97and 2009 is 0.65. The Current Assets to Proprietors Fund Ratio in 2008 is 8.94 and 2009 is 8.83. this is reduced by 10% because the Total Current Assets is reduced in 2009 .the Fixed Assets to Proprietors Fund ratio is increased in 2008 is 8.06and 2009 is 8.23 because the Total Fixed Assets is increased. Generally here the Solvency / Leverage ratio is not shown a big effect of their current situations. The gross profit margin in 2008 was 34.6, while in 2009 was 34.9,which is good for the company because it indicates that in 2008 the cost of goods sold and profit, whereas in 2009 the cost of goods sold was while the profit, which is good for the company. The operating profit margin in 2008 was 10.9% and in 2009 it was12.9%, which is good as compared to the previous year, because in2007, the operating expenses are higher as compared to the previous year. The Net profit margin in 2008 was 6.40% whereas in 2009 was 8.00%, which

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means that it has declined in 2009 by 0.6%, either by net income and sales better than previous year. The two ratios; BEP and ROA are interrelated. And the higher the ROA ratio the good is the company is but the ROA in 2008 was 17.4%, where as in 2009 it was 26.7%, which is not good for the company because the ratio of ROA declines by 9.3%. This ratio is high of the company, whose per share market value is high. The ROE in 2008 was 89.5% and in 2009 it was 92.8%, which means that it declines by 3.3%. Basic earning power shows that how much operating assets will generate operating profit. The BEP in 2008 was 29% and in 2009 it was 43%, which means that it declines by 7% in 2007 which is not good for the company because the company is not utilizing their operating assets efficiently to generate operating profit. Therefore their Profitability ratio is sensitive. As my observation if we consider the all types of ratio and the analysis it is not a bad situation of the organization in general practice compare with the same competitive industries.

References: 1. Annual Report of Unilever Production Ltd 2008and 2009. 2. Financial Ratios. 3. Investment Appraisals.

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