Question
Q-Sound is a UK company manufacturing and distributing high-end sound systems for retail customers in the UK and Europe. The manufacturing plant is in Scotland,
Q-Sound is a UK company manufacturing and distributing high-end sound systems for retail customers in the UK and Europe. The manufacturing plant is in Scotland, with a distribution warehouse based in Kent. Electronic components are imported from China and India.
The year ended March 2022 was the first year the business exported sound systems to Europe. Whilst the first year was seen as a successful start to exporting, the senior management team is less clear about the medium to long term future of imports and exports, particularly with the uncertainty surrounding future trade arrangements with the UK and EU, and economic conditions across Europe.
Q-Sound is now considering two options for a new manufacturing plant that will replace the plant in Scotland. Option 1 a European plant based in northern France, or option 2 a UK plant based in the south-east of England. Estimated free cash flows have been determined for both options over the next five years:
European Plant
Year Cash Flow millions
0 (219)
1 25
2 47
3 58
4 86
5 105
UK Plant
Year Cash Flow millions
0 (250)
1 40
2 60
3 70
4 80
5 90
The companys cost of capital is 11%
Required: (a) Calculate the net present value (NPV) and modified internal rate of return (MIRR) for both options. Present value tables are attached. (14 marks)
(b) Provide a summary of the investment appraisal results using MIRR and NPV from part (a) and recommend whether the manufacturing plant should be built in Europe or the UK. Include in your answer a discussion about what other criteria could or should be considered before a final decision is taken. (6 marks)
(c) Q-Sound has historically operated an incremental budgeting system. Critically evaluate the suitability of an incremental budgeting system based on Q-Sounds business model and market environment. Recommend with reasons, alternative budgeting and forecasting techniques the company could use to improve planning, control and measuring management performance. (5 marks)
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