MADISON PLC Harvard Case Solution & Analysis

MADISON PLC Case Solution

Introduction

 The company operates in UK. The shares of the company are traded on the London alternative investment market.

The company is considering three major strategic decisions. The company wants to upgrade its software and expand its array of services. For this, the company is considering two expansion plans, Madison Super and Madison Platform. Both of the projects will involve new software as well. The company has to decide what sources of funds are to be used to finance such expansion project.

Besides this, the company also wants to grow at international level and expand into continental Europe. For this, two companies are being taken under consideration. Both companies need to be evaluated based on ratio analysis.

Investment Proposals

The difference of total cash outflow and total cash inflow that has been generated by the organization during its business operations is determined as Net Present Value of NPV. Net Present Value is utilized during the investment appraisal program in order to evaluate the profitable of the forecasted project of investment (Higson, 2003).

The methodology of NPV uses all the relevant cash flow, which is being arisen during the tenure of capital budgeting, and provides feasibility of project by avoiding non-cash flow items, such as depreciation. However, the advantage of using NPV in contrast with ARR, Payback period is that it incorporates time value of money in its calculation, which provide more suitable and accurate results of capital budgeting. In comparison to NPV, Madison Plc may use Accounting Rate of Return Technique (ARR) that also shows the feasibility of project.However,the disadvantage or limitation of this method is that it only focuses over accounting profit of project rather than on flow timings and non-cash item exclusion.

Under the circumstances of capital rationing where the organization has limited funds to invest in the proposed projects and to determine the best option in this investment constraints. By evaluating both proposals under capital budgeting, it was determined that Madison Super is the best possible investment option whose net present value is 3292 in contrast with Madison platform, whose NPV is 2996. On the other hand, the IRR of Madison platform is 28% and IRR of Madison Super is 39%, which makes it more attractable on an investment proposal basis. Therefore, it is advisable to the management to invest in Madison Super, which provides higher NPV.

Under the circumstances of capital rationing, where only one project hasto be selected from two proposed projects of Madison Plc,it is recommended to management that they should invest in Madison Super as it provides higher NPV as compared to Madison Platform. Allocation of funds based over higher NPV enables the management of Madison Plc to effectively achieve its desired results of capital budgeting aligned with the objective of the organization.

 NPVIRR
Madison Platform$2,996.6228%
Madison Super$3,292.9439%

Working Capital Management

The organization’s cash flow statement reflects the changes in working capital. The cash flow statement details are determined within the cash flow section of operating activities. Especially, the variation in working capital requirement in shorter span is determined by cash flow statement detail within the section of operating cash flow (Corporate reporting, 2009). When the working capital figure is positive, it means that current liabilities is smaller than a current asset, from which the total cash flow for the period of business operations are measured (Elliott and Elliott, 2008)...................

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