Stock Control Investment Appraisal
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Transcript of Stock Control Investment Appraisal
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Page 1
CEE CENTRE EXECUTIVE EDUCATION
Project Management,
Stock Control &
Investment AppraisalBusiness Decision Making
Rashida Yvonne Campbell6/22/2010
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Contents
ASSIGNMENTTASK 3
ANSWER Q1 5
STRATEGIC INFORMATION 6
SUMMARY OFSTRATEGIC INFORMATION 7
TACTICALINFORMATION 8
SUMMARY OFTACTICALINFORMATION 9
OPERATIONALINFORMATION 10
SUMMARY OFOPERATIONALINFORMATION 12
CONCLUSIONOFSTRATEGIC, TACTICALANDOPERATIONALINFORMATION 13
ANSWER Q2 14
TWOEXAMPLESOFSTRATEGIC INFORMATION 14
TWO EXAMPLES OF TACTICAL INFORMATION 14
ANSWER Q 6 15
ANSWER Q8 16
ANSWER Q 9 17
ANSWER Q 10 18
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Assignment Task
Answer 6 questions from 10 provided.
1. Distinguish between strategic, tactical and operational information.
2. Give two examples of strategic, tactical and operational information
relevant to an organization operating in the manufacturing sector.
6. Placing an order for an item of stock costs $340. The stock costs
$60 a unit, annual storage costs are 10% of purchase price. Annual
demand is 900,000 units. What is the economic order quantity?
8. The following activities comprise a project to agree a price for some
land to be bought for development
Activity Preceded by Duration Days
A: Get survey done ----------------------- 5
B: Draw up plans ----------------------- 9
C: Estimate cost of
building work
B 2
D: Get tenders for the
site preparation
A 11
E: Negotiate Price C,D 5
8a. What are the paths during the network?
8b. What is the critical path and duration?
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9. A company is wondering whether to spend $36,000 on an item of
equipment, in order to obtain cash profits as follows:
Year $
A 12,000
B 16,000
C 10,000
D 2,000
The company requires a return of 10% per annum. Use the Net
Present Value (NPV) method to assess whether the project is viable.
10. The Net Present Value of an investment at 25% is $90,000 and at
30% is $20,000. The internal rate of return of this investment (to
the nearest whole number) is:
A: 17%
B: 20%
C: 22%
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Answer Q1Non-profit organisations and business organisations depend on
information. They require information for many purposes and reasons.
The reasons may vary according to the organisation, below are common
general purposes for gathering and processing information:
y Planningy Controly Decision-making and problem-solvingy Co-ordinatingy Organisingy Commandingy Performance measurementsy Recording transactions, numerical data from various departmentsy Competitor movementsy Government legislation/political movementsy Customers
A vast amount of information can be related to all of the above
categories. Information is a valuable tool and resource for organisations,
it maybe confidential, crucial and or critical to the success of the
organisation. Information maybe gathered from the past, present or
anticipated future i.e. forecasting as economists and governments do. It
maybe gathered formally and/or informally, externally and/or internally, it
may consist of primary or secondary data, it maybe quantitative or
qualitative etc.
Therefore information gathering, processing and dissemination are vitalfunctions of any organisation. Information about customer requirements
gives the organisation purpose and objectives. Information about
objectives enables managers to direct and co-ordinate the activities of
others. However not all of the information that a company holds is
available to all its employees, for example: there is no need for a
manager responsible for production line output having access to the
information that it is required for the CEO of the company. For
organisational purposes information is split into three main types of
information divisions:
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Strategic Information
Strategic decisions, choices and direction of the company are long-term
objectives. These are the responsibility of the top management. It is
strategic information that is essential for planning objectives for the
organisation and to assess if the objectives are being met through the
organisational activities and practices.
The strategic information includes:
y total profitability, the profitability of sub-business units, and varioussegments of the business
y future market forecasts and predictionsy the level of retained earningsy availability of raising capital (new funds) perhaps for new venturesor re-investments purposesy overall cash needs of the organisationy overall resources requirements such as human powery availability and capital equipment requirements
This information is essential for top senior managers to decide the long-
term planning strategies, such strategies like growth of the organisation
and helps them to base decisions of growth from its information gathering
to decide upon mergers, takeovers, alliances etc. They match the
organisational competences and capabilities to the external environment
and make adjustments as necessary. The information maybe informal andmay not be possible to quantify. This level of information it is usually a
summary or total value. At this level the management receive information
mainly from the executive summaries and collect project, sales, revenue,
purchases, and departmental information this way (internal information).
The information at this level is usually formal. Strategic management
information is also reliant on external sources of data either quantitative
or qualitative. They monitor competitors, stakeholders, political, legal,
social, economic, technological and environmental movements and
indicators that assist them toward their decisions, planning, f inancing and
business choices for the overall direction and success of the company.
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Summary of Strategic Information:
It is inform
tion required by top senior m
nagement that are responsiblefor long-term planning, growth and sustainability of the organisation.
The diagram demonstrates that internal information is provided to themanagement at higher levels. However decisions and choices are then
communicated from Top level managers downwards.
trategic Information is:
y Information iscollected from both internal and external sourcesy All the information issummarised at a high levely The information is relevant for the long-term rather than the day to
day functioning
y The information required is regarding the organisation as a wholey Information maybe prepared on an ad hocbasisy The information maybe both quantitative and/or qualitativey Long-term information ismore ris
y as the future may have
unexpected changes that were not cater for.
Strategic Information for Top
Senior Managers Purpose forlong-term planning &
Decision making
MIDDLE MANAGERS
LINE MANAGERSinformation is provided to the
management at higher levels
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Tactical Information
Tactical Informationis used to decide how the resources of the businessshould be employed and monitored and how they are being deployed anddispersed.Examples include:
y Information about business productivity e.g. units produced peremployee; staff turnover
y Profit and cash flow forecasts in the short termy Pricing information from the markety Budget control and/or variance analysis reportsy Employee levels i.e. head counts per team, department, divisions,
projects and units etcy Employee turnover levelsy Short-term purchasing requirementsy Profit results of particular departments
Tactical information is essential for the middle management of theorganisation. The professional middle managers include sales &marketing, manufacturing, Finance & Accounting, Human Resources,procurement & logistics, production, purchasing managers, research &development etc. Each of these middle-managers would require tacticalinformation for various reasons. Below are some of the explanations forthe requirements of middle-managers tactical information needs:
Marketing Manager would require tactical information regarding:y Advertising techniques and analysis of their impact.y Customer preference surveysy Correlation of prices and salesy Sales force deployment and targetsy Exploring alternate marketing channelsy Timing of special sales campaigns
A Financial Manager would require tactical information regarding:y Variations between budget and expensesy L
arge outstanding payments/Receiptsy Credit and payment statusy Cost increases and pricingy Impact of taxation on pricing
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Basically tactical information allowsmiddle managers to monitor andcontrol, to chec
if operations and activities are working according to
plan. ome professional middle-managers are involved in the decision-making process and the tactical information that is useful for them will beprovided as a guide to the decision that they need to conduct, but this ismore on a short or medium term level.
Summary of Tactical Information
It is information required for professional middle-managers that areresponsible for short to medium term planning and decision-making of theorganisation.
Tactical information is:y Usually generated internally, but there maybe some external
sources incorporatedy Decision regarding the information are summarised at a lower levely The information is regarding the short-medium termy It isconcerned with activities and/or departmentsy Information is prepared on a routine and regular basisy The information is quantifiable and produces quantitative measures
Strategic
Infor-
mation Top
Senior
Managers
TacticalInformation to monitor & controlresources
Professional Middle Managersfor short-medium term planning anddecision-making
LINE MANAGERS
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Operational Information
Operational information isused to make sure that specific operational
tasks are carried out as planned/intended (i.e. things are done properly).
For example, a production manager will want information about the
extent and results of quality control checks that are being carried out in
the manufacturing process. This information is gathered by line managers
of the organisation and is essential for monitoring, identifying areas that
need attention. Operational information is needed to plan programactivities such as the use of time, people, and money, and which is used
to assess how well the planning program is functioning.
Examples include:
y Listing of debtors and creditorsy Payroll detailsy Raw materials requirements and usagey Listings of customer complaintsy Machine output statisticsy Delivery Schedules
The actual requirements and usage for operational information is an
endless list, above are just some of the examples. Operational
information is essential for lower level line managers and supervisors as a
form of control and monitoring, recording, storing, reporting etc. This
information assists operational managers to track the organisations day -
to-day activities. The decisions based on this information are small -scale
and can be programmed. It is a formal and quantitative measure. This
information is updated quickly in some cases hourly, daily, weekly etc.
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An example of this would be the workers wages relating to day-rate
labour would include the hours worked each day, week, the rate of pay
per hour, details of over-time, deductions, and the amount of time a
worker spent on each individual job. This all provides assistance to the
line managers when analysing the workers wages.
Middle managers would require the operational information provided by
lower level managers for example:
A Marketing Manager would require the lower level manager to
communicate the following operational information:y Sales analysis by regions, customer class, sales person.y Sales target versus achievement.y Market share and trends.y Seasonal variations.y Effect of model changes.y Performance of sales outletsy Costs of campaigns and benefit
A Financial Manager would require the lower level manager to
communicate the following operational information:
y Periodic financial reporty Budget status to all functional managersy Tax returnsy Share transfersy Profit and loss accounty Payments and receiptsy Payroll, provident fund accounts
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Summary of Operational Information
It is information required by lower level managers and supervisors that
are responsible for the day to day operations and running of theorganisation. The information is for their records but is also
communicated through to higher level managers and in some cases the
senior management levels.
perational information is:y Usually gathered from internal sourcesy It is detailed information and specificstep by step such as the
processing of raw datay It is for the immediate termy The information is divided into task-specific recording and
monitoringy The information is prepared frequentlyy It ismainly numerical and quantitative
TATEGIC
INFORMATION
Topenior
Managers
TACTICAL INFORMATIONProfessional Middle-
Managers
OPER
T ON
L NFORM
T ON L n
n
nd
u
v
f
h
d
y
d
yunn
n
f
h
n
n
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Conclusion of Strategic, Tactical an OperationalInformation
The diagram below shows the relevant information sections according tothe typical organisation.
Organisations require information for recording transactions, measuring
performance, making decisions, planning and controlling. The information
requirements will be influenced by the sector they operate in. Information
is vital and may be strategic, tactical or operational.
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Answer Q2
Give two examples of strategic, tactical and operational informationrelevant to an organization operating in the manufacturing sector.
Large manufacturers are usually plc companies and will therefore have
shareholders. The information that is produced at a strategic level is vital
information from a shareholders perspective. Shareholders would want to
know information such as revenue, capital investments, and sustainability
and growth options of the organisation.
Two ExamplesofStrategicinformation in the manufacturing sector:
1. Communication of corporate objectives to the management of thebusiness expressed in term or profit targets and measures of wealthsuch as earnings per share value.
2. Communicating information on strategic plans for the long termfuture of the organisation such as acquisitions, mergers,
partnerships etc, to reduce risk, increase revenue, improve product
differentiation to meet demands.
Two ExamplesofTacticalinformationin the manufacturing sector:
1. Using variance analysis and stock turnover information a salesbudget provided by middle managers my be required to be analysed
by the product team managers of the same level and/or higher level
managers
2. A manufacturing plan for the next twelve months, as at this levelthe decisions and information is either short-medium term. The
information may include performance measures of machines that
have been decided that a replacement is required.
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Two Examples of Operational informationin the manufacturing sector:
1. A record or analysis of the recorded debts showing all customerswhose deliveries have been put on hold pending settlement of
overdue balances.
2. A list of all purchase orders outstanding with the financia l evaluationof total purchase order commitment.
Answer Q 6Placing an order for an item of stock costs $340. The stock costs $60 aunit, annual storage costs are 10% of purchase price. Annual demand is
900,000 units. What is the economic order quantity? The Economic OrderQuantityEOQ is the order for an item of stock which will minimise costs.The formula is:
EOQ = 2CoDCh
D= DemandCo= CostsCh= holding costQ= re-order quantity
Therefore:
Co= $340D= 900,000Ch= $60 x 10% = $6
EOQ = 2 x $340 x 900,000 = 621000000$6 6
= 102000000 = 10099.5 = 10,010 units
900,000 = 89.91 (90) or!
ers place!
each year, so the stock cycle
10,010
52weeks / 90 or!
ers = 0.577(gi"
ing a stock cycle of e"
ery 6#
ays)The point of the EOQ is to minimise costs as holding stock costs money and lackof insufficient re-ordering can also cost the firm, if re-ordering is delayed.
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Answer Q8The following activities comprise a project to ag ree a price for some land to be
bought for development
Activity Preceded by Duration Days
A: Get survey done ----------------------- 5
B: Draw up plans ----------------------- 9
C: Estimate cost of building
work
B 2
D: Get tenders for the site
preparation
A 11
E: Negotiate Price C,D 5
8a. What are the paths during the network?
8b. What is the critical path and duration?
8a) A, D, E = 5days + 11days + 5days = 21$
aysB, C, E = 9days + 2days + 5days = 16
$
ays
8b) Critical Path is A,D,E. The critical path is identified by which eventstake the longest time, the critical activities are those activities which mustbe started on time otherwise the total project will be increased.
A
B
D
C
E
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Answer Q 9A company is wondering whether to spend $36,000 on an item of equipment, in
order to obtain cash profits as follows:
Year $A 12,000B 16,000C 10,000D 2,000
The company requires a return of 10% per annum. Use the Net Present Value(NPV) method to assess whether the project is viable.
The following discounted rates in the table below to answer question 9has been calculated assuming that the money earns 10% per annum, the
calculations are as follows:
a. PV $1 at year 1 is $1 x 1/1.10 = 0.909b. PV $1 at year 2 is $1 x 1/(1.10) = 0.826c. PV $1 at year 3 is $1 x 1/(1.10) = 0.751d. PV $1 at year 4 is $1 x 1/(1.10) = 0.683
Year Cash flow Discount factor10%
Present Value
0 (36,000) 1.00 ($36,000)A 12,000 0.909 10908B 16,000 0.826 13216
C 10,000 0.751 7510D 2,000 0.683 1366
Total $33,000$36,000$3,000-
%ET
&RESE
%T VALUE $3,000-
The Net Present Value is negative; therefore the following conclusions canbe made:
1. It is cheaper to invest elsewhere at 10% than to invest in theproject.
2. The project would earn a return of less than 10%. Since 10% of$36,000 is $3,600.
3. The project is not viable since the PV of the costs is greater than thePV of the benefits.
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Answer Q 10
The Net Present Value of an investment at 25% is $90,000 and at 30% are
$20,000. The internal rate of return of this investment (to the nearest wholenumber) is:
A: 17%
B: 20%
C: 22%
a = one interest rate at 25%b = other interest rate at 30%A= NPV at rate a = $90,000B= NPV at rate b = $20,000
IRR +{ $90,000 x (30-25) }%$90,000 (-20,000)
25% + 90,000 x 5 = 4.09%110,000
= 25% + 4.09% = 29.09%
None of the above IRR for this investment rates are correct. The project isNOT viable.
The IRR is an alternative method to NPV. It determines the rate of
interest at which NPV is 0. The internal rate of return is therefore the rateof return on an investment. Thus if a company expects a minimum ofreturn of 25% the project is viable if the IRR is more than 25%.