CASE STUDY Orion Limited is a limited company, whose head office in based in South Africa. The current product that Orion Limited has to offer mostly to property developers and investment funds companies is outdated. The company is looking to invest in a new product. The details of the proposal are outlined below.

Super Suite is the first of two proposals, the expected life of this software will be 5 years and its working capital requirements, the cost of the new software, expected revenue, components cost and overheads are as follows; All of the above estimates have been prepared in terms of present day costs and prices. Assume that the cash flow arises at the end of each period. In addition, the following information has been given: l Revenues (selling cost per unit) are expected to rise by 5% per year from year 1. The units of sales will be 6000 units in year 1 and this will go up each year by 10% based on previous l years sales. l The project will require working investment equal to 8% of expected sales revenue. l The cost of component AK are expected to rise in line with inflation of the 3 % per year from year 1, and these will be based on units of sales done. The cost of the components will be 680 per unit for AK and 1080 for NK. l Overheads cost will be fixed for the whole period of the project. l Each package of software will be sold at 4800. l The costs of Specialist Technology Managers (STM), who have come from South Africa have not been taken into consideration in the forecast and are as follows: o STM 1: will be paid 190 per hour and expected number of hours for STM1 are 1,420. The rate paid is expected to rise in line with inflation at 3% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards. o STM2: will be paid 160 per hour and expected number of hours for SMT2 are 1,820. The rate paid is expected to rise in line with inflation at 3 % per year, every year from year 2 onwards. If Orion Limited invests in Super Suite, then the discount rate that will be required to assess the NPV would be 12%. Assume that cash flows arise at the end of each period. Opening of New Office You will also work in collaboration with the London office manager to prepare cash budget will be part of the report, but should be included in the appendix. The London office has plans of opening a consultancy office near Liverpool Street. It is hoped that this store will be opened for business on 1st August 2018. You have also been informed that to start with, the company will only offer two of the most popular services for a period of 3 months from August to October 2018. This will be done to test the market and see if the business will break-even in the same period. The two most popular services to be offered will be the Business Planning (BP) for SMEs and the other is Strategy design (SD). The company has provided you with the following information regarding the costs and estimated sales for the period mentioned above. Orion Consultancy plan to put in 6,000 as start-up capital and plan to sale up to 9500 consultancy services (combined) of BP and SD during the same period. They are not sure which of the two products will produce the best profit for the company. The company will have to offer a minimum of 1,500 services each for BP and SD each month to ensure that that they meet the requirements of the supplier. Total consultancy services for each month are as follows: August 3000, September 3,000 and October 3,500 of which 2,000 will be (SD). To help with the setup of the store they company has just concluded a deal with one of the high street banks to get a loan of 48,000 on the 1st of August 2018. The interest on this loan will be 3% to be paid every month. The company will be required to make 12 equal payments to repay the loan every 3 months starting end of October 2018. The assistant manager has also requested that you do provide them with some information on the importance of budgeting in the consultancy industry, as this is all new to them and this is the first time they are doing a project like this.

Financial information As mentioned above the company plans to sell a total of 9,500 services between August and October 2018. Customers are prepared to pay 15 for the BP and 18 for SD. The fixed costs for the period are as below: The company will be bringing in an expert at 12 for BP and 15 each for the SD. The fixed costs are for the whole period so they are not affected by the level of sales, on the other hand variable costs (cost of expert) will increase with sales output, and thus it is sales output multiplied with variable cost per product. The suppliers of the experts have agreed to supply the company the first experts of required services on credit to be paid end of August 2018. Thereafter, all experts supplied will be paid as 60% cash and 40% the following month. Revenue from consultancy will be on the basis of 80% cash and 20% credit to be paid the following month.

New Company Acquisition Orion Limited is also considering to grow its operations across continental Europe, and at the moment there are two potential target companies that can help Orion in creating a presence in Europe, Madison Fund Holland and Ulendo Financial Services Spain. For the purpose of this analysis, assume that the required investment funds can be sourced from parent company or Orion can source these funds from other sources. It should be noted that Orion is only willing to acquire only one of the companies. The data for the past three years is given below:

Requirement: You will be required to write a management report to the management of Orion in which the following points should be discussed. l Analyse the Investment proposal by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Orion may use, and the limitations of using those techniques l A computation of your breakeven analysis and the cash budget for the first 3 months. l What other factors may a firm take into account when making investment decisions. l Based on the information provided and to the extent possible, perform ratio analysis and make recommendations as to which company they should be looking to invest. What other information will help you in making an informed decision on ratio analysis. l An evaluation of company performance or position during the same period.

Super Suite Draft Figures f'000 Year New Software Cost Working Capital 7200 600 Sales Revenue Less: Component AK Component NK Overheads (1800) 1800 (1800) 1800) 1800)