FINANCIAL MANAGEMENT IN ENGINEERING
CW2: INDIVIDUAL COURSEWORK
· Please find attached ‘A CASE STUDY: Homage Engineering plc
· 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.
The project to modernise the company’s manufacturing infrastructure is expected to cost £7.5million, and the net increase in incash-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