Topic: Decision Making for Business & Finance

Scenario
Camelot Games Limited is a Birmingham based company which has been operating
profitably for the past 15 years. The business manufactures board games, which is a very
competitive industry, with many other suppliers in the UK and overseas. Camelot Games
Limited has been doing well over the past few years, but recognises that its technology is a
little dated. Over the past two years there has been a global surge in demand and this has
led to Camelot games seeing an increase in sales of over 15%. The company is currently
operating at 96% capacity. The Sales Director has estimated that, given the current demand,
the business could sell another 200,000 units per year. As a result the Board of Directors is
looking at purchasing a new machine, to expand capacity. There are three options available
to the business
Option 1
The business can commission a brand new machine from AB Games Holdings, a Dutch
company based in Veldhoven, Holland, with a subsidiary in Hull where the machine will be
constructed and the installation team are based. This business has supplied board games
manufacturers for many years. This machine would cost £1,500,000. It would last ten years.
It would be a state of the art machine, which could produce 600,000 games per year. It
would be fully computerised and zero emission. It would only require one operator. ABML
Holding would install the machine, train the operator and provide a ten year maintenance
contract, all as part of the purchase price.
Option 2
The business could purchase a new machine from XTC Limited, a British company based in
Telford. XTC Limited has supplied all of their previous machines. The new one would be the
same model as the previous four the business has bought, which was initially designed 10
years ago and based on mechanical technology. This machine cost £850,000 and would
have a ten year life. However it would require to be installed by the in house maintenance
team. This team would also be responsible for the servicing and repair of the machine, and
as such it is estimated that after the first year of operation, the maintenance team would
need to be increased. This new machine would enable the business to increase production
by 150,000 units per year.
Option 3
The business could purchase the machine from US company Baker Hughes Inc, a machine
manufacturer based in Chicago. This is a new business and has not preciously
manufactured board games. Their machine would cost $1,050,000 and have a life of 10
years. The capacity of the machine is 250,000 games per annum. This machine would be
installed by a British company (Merlin Limited) and it would come with a 5 year repair
warranty. This warranty would mean that Camelot Games Limited would be reimbursed for
any repairs required in the first five years, thereafter the maintenance department would be
required to take over the serving and repairs of the machine.
The Assistant Management Accountant has collected ALL the appropriate relevant costs and
revenues associated with these machines, and calculated the net present value (NPV),
accounting rate of return and payback period. To be able to compare the products
financially, in his calculations he has assumed that the new machine produces 150,000 units
per annum. He has assumed that inflation is 2.5% per annum for the next five years and that
the tax regime of 2019/20 remain inforce for the next 10 years.
Page 4 of 5
Option 1 Option 2 Option 3
Net present value £650,000 £700,000 £725,000
Accounting rate of return 4% 8% 6.5%
Payback period 5 years 3 years 4 years
Camelot Games Limited has a cost of capital of 9% and requires an accounting rate of return
of 6% and a payback period of less than 4 years.
It is October 2020 and the UK is still under COVID 19 restrictions, not as strict as in the
summer of 2020, but everyone must keep socially distant from each other. Bars and
restaurants are still not open, but all manufacturing has resumed, provided social distancing
can be maintained. In Europe, Asia and the Far East all lockdown provisions have been
lifted and there has been no large scale return of the infection. A vaccine has been
discovered, and is being tested. The government have issued plans for further relaxation of
the restrictions. A large scale vaccination of the UK is planned for the period December 2020
– January 2021. By March 2021 the Government have committed to lift all restrictions.
The British economy is still affected by the virus, and is heading to a recession. However the
international markets are now recovering from the impact of the Corona Virus lockdown. The
UK entertainment industry is still not back to pre-March 2020 conditions and it is likely that
home entertainment will continue to grow. This trend is being felt throughout the world, and
so the prospects for the board game industry are good.
You are the Management Accountant and you need to advise the Board of Directors on
which of the above options the business should select. The committee will expect to know
why you have come to your decision.
Requirements
Prepare a report to the Board of Directors which includes

  1. An explanation of the three financial appraisal tools, identifying their advantages and
    disadvantages, concluding on which is the most useful tool;
    a. Net present value
    b. Accounting rate of return
    c. Payback period
    (26 marks)
  2. Give advice to the Camelot Games Limited Board of Directors, given the financial
    data in the above table and your answer to question 1, as to which option should
    the business select in order to increase the capacity of the business. This must also
    include the reasons why you have given this advice. (4 marks)
  3. An explanation of five other important factors, not linked to the matters discussed in
    question 1, which the business might need to consider prior to making the final
    decision regarding this production process. (10 marks)
  4. You should conclude your report with your opinion, based on the financial AND nonfinancial analysis (matters from question 2 and 3), on which option the company
    should take, stating the key evidence that you have included elsewhere in your
    report. (4 marks)
    A maximum of 6 marks available for the report format
    (Total 50 marks)

Type of service-Academic paper writing
Type of assignment-Coursework
Subject-Accounting
Pages / words-2 / 1000
Number of sources-5
Academic level-Undergraduate
Paper format-Harvard
Line spacing-Single
Language style-UK English

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