Assume you work for a financial advice consultancy. A client company, New Directions Limited, is considering launching a new
on-line financial training/education service for business executives. The project is, in the first instance, likely to last for three
years before being re-evaluated. You have been asked to advise on and lead the approach to accessing potential sources of
finance to fund the new project, and assess the financial viability of the proposed project. The client has provided the data
contained in Appendix A. Appendix A is shown immediately after the Tasks specified below.

To complete this assignment you are required to identify potential sources of finance for the new project, explaining the
characteristics of each source, and develop an appraisal of the project’s profitability and cash-related viability. The client
requires advice on the matching of funding sources with the type of project under consideration, and profit forecasts, cost-
volume-profit analyses, and an appraisal of the investment. The specific requirements are detailed in each of the tasks shown
below.

Task 2 (this task provides evidence for Lo2 (AC 2.1, 2.4)

The client is concerned about the impact on the profitability and viability on the project of the costs of each source of finance.
You are required to analyse the costs of different sources of finance, and explain the impact of finance on the financial
statements associated with the proposed project. In so doing, ensure that you assess and explain the cost of each type of finance
source you have identified in Task 1 on the profitability of the proposed project and the appraisal of the project. Design,
construct and include a spread sheet to illustrate the impacts of the costs of differing sources of finance on the profitability and
viability of the proposed project.

Appendix A

The owner of New Directions Limited. a new company. has a bright entrepreneurial idea: providing on-Iine
Accounting/Finance tuition services to Business Degree students who had suffered from poor tuition at
University. The students would access materials on demand and pay £10 via debitlcredit card at the time of
each hit for access and retrieval. The company already has £150,000 in its bank account. The company
has a cost of capital of 10%.The following has been provided to you:

1. The preject would have a likely operational life of 3 years. after which it would be scrapped as by
then the standard of university tuition would have improved.

2. The preject would require up-front initial investment of £108,000 in equipment on day 1 of month 1
of year 1. The equipment would be depreciated (straight line) over three years. In addition the
project would use a piece of equipment that was purchased three years ago at a cost of £36,000
with a useful life of six years.

3. The preject would require the use of specialist branded’ software from Microhard Limited. a
specialist company. This would require a fixed annual payment of £12,000 at the start of each year
plus £1 for each access hit’. The hit charges are paid at the end of each month.

4. In year 1, cash sales revenues would be derived from students accessing the service on-line. In
year 1. the following sales profile in terms of access hits’ is projected:

January: 1,000, February. 2,000, March 3.000. April: 2.000, May: 5,000, June: 2,000, July: 1,000.
August: 1,000. September 1.000, October: 3.000. November: 4. 000, December: 5,000.
Monme sales would increase by 10% in Year 2 and by a further 10% in year 3.

5. Bank and credit card charges would be £0.10 per access hit’. paid at the end of each month.

6. Additional staff salaries expenses. including employers National Insurance contributions,
associated with the project would be. in total, £36,000 annually. payable across 12 months at the
rate of £3000 for each month. These salaries would be in addition to those of staff already
employed who will work full-time on the project. These existing salaries expenses are. in total,
£36,000 annually. including employers National Insurance contributions. payable across 12 months
at the rate of £3000 for each month.

7. On day 1 of month 1 in year 1. New Directions Limited would pay 5:36.000 in advance for a three
year lease of office space at a local university.

8. Additional variable expenses would cost £0.10 per access hit’. paid for at the end of each month.

9. Legal and insurance costs would be £1,000 per month, payable one month in arrears.

10. Advertising costs would be £1,000 per month, Payable one month in arrears.

11. The company is of the view that variable costs should be classified as Cost of Sales for the
purposes of establishing Gross Profit but is unsure about this.

2 Understnd the hnplcatians of finance as a resource within a business

Finance costs: tangihie costs eg interest. dividends; opportunity costs eg loss of alternative projects when using retained
earnings; tax effects

Financial plan-mm: the need to identify shortages and surpluses eg cash budgeting; implications of failure to finance adequately;
overtradirg

Decision making: information needs of different decision makers

Accounting for finance: how different types of finance and their costs appear in the financial statements of a business; the
interaction of assets and liabilities on the balance sheet and on international equivalents under the International Accounting
Standards (IAS)
Lo2 Understand the implications 2.1 analyse the costs of different sources of finance
of finance as a resource with
an business 2.2 explain the importance of financial planning
2.3 assess the information needs of different decisions
2.4 explain the impact of finance on the financial statements