Accounting and Finance for Business: Solved Assignments and Essays
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This article includes solved assignments and essays on Accounting and Finance for Business. It covers topics such as calculation of retained earnings, preparation of financial statements, computation of financial ratios, net working capital, cash cycle, monthly cash budget, contribution margin, and break-even point. The content is relevant for students pursuing courses in Accounting and Finance for Business in various colleges and universities.
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Accounting and Finance for
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TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
(a) Calculation of Retained earnings...........................................................................................3
(b) Preparation of statement of financial performance................................................................3
(c) Journal Entries of tax payable................................................................................................5
(d)Calculation of total inventory purchases and total cash paid to suppliers..............................5
(e) Calculation of total cash receipts and closing accounts receivable........................................6
(f) Preparation of statement of financial position........................................................................6
(g) Preparation of statement of cash flows..................................................................................7
QUESTION 2..................................................................................................................................7
(a) Computation of financial ratios..............................................................................................7
(b) Analysis of the ratios-..........................................................................................................11
QUESTION 3................................................................................................................................12
(a) Calculation of net working capital-......................................................................................12
(b) Computation of cash cycle...................................................................................................13
QUESTION 4................................................................................................................................15
Monthly cash budget..................................................................................................................15
QUESTION 5................................................................................................................................16
(a) Calculation of contribution margin and weighted average contribution margin.................16
(b) Calculation of Break-even point..........................................................................................16
(c) Recommendation of the initiative........................................................................................17
QUESTION 6................................................................................................................................18
(a) Computation of net present value at 5.7% interest rate........................................................18
(b) Computation of net present value at 10% rate.....................................................................18
(c) Comparison of net present values at 5.7% and 10% rate.....................................................19
(e) Analysis of payback period..................................................................................................19
REFERENCES..............................................................................................................................20
QUESTION 1..................................................................................................................................3
(a) Calculation of Retained earnings...........................................................................................3
(b) Preparation of statement of financial performance................................................................3
(c) Journal Entries of tax payable................................................................................................5
(d)Calculation of total inventory purchases and total cash paid to suppliers..............................5
(e) Calculation of total cash receipts and closing accounts receivable........................................6
(f) Preparation of statement of financial position........................................................................6
(g) Preparation of statement of cash flows..................................................................................7
QUESTION 2..................................................................................................................................7
(a) Computation of financial ratios..............................................................................................7
(b) Analysis of the ratios-..........................................................................................................11
QUESTION 3................................................................................................................................12
(a) Calculation of net working capital-......................................................................................12
(b) Computation of cash cycle...................................................................................................13
QUESTION 4................................................................................................................................15
Monthly cash budget..................................................................................................................15
QUESTION 5................................................................................................................................16
(a) Calculation of contribution margin and weighted average contribution margin.................16
(b) Calculation of Break-even point..........................................................................................16
(c) Recommendation of the initiative........................................................................................17
QUESTION 6................................................................................................................................18
(a) Computation of net present value at 5.7% interest rate........................................................18
(b) Computation of net present value at 10% rate.....................................................................18
(c) Comparison of net present values at 5.7% and 10% rate.....................................................19
(e) Analysis of payback period..................................................................................................19
REFERENCES..............................................................................................................................20
QUESTION 1.
(a) Calculation of Retained earnings
current assets current liabilities
cash 6 suppler account payable 12
inventory 21 taxes payable 2
accounts receivable 15
prepaid lease 2
non current assets non current liabilities
ppe 60 interest on bank loan 58
accumulated
depreciation 25
equity
contributed capital 10
retained earnings 47
129 129
(b) Preparation of statement of financial performance
Statement of
financial
performance
Sales 208000
-cost of
goods sold 88000
(a) Calculation of Retained earnings
current assets current liabilities
cash 6 suppler account payable 12
inventory 21 taxes payable 2
accounts receivable 15
prepaid lease 2
non current assets non current liabilities
ppe 60 interest on bank loan 58
accumulated
depreciation 25
equity
contributed capital 10
retained earnings 47
129 129
(b) Preparation of statement of financial performance
Statement of
financial
performance
Sales 208000
-cost of
goods sold 88000
gross profit 120000
Expenses
wages 21000
lease exp 8000
utilities exp 5000
depreciation 24700
total
expenses 58700
operating
profit 61300
non
operating
income 58000
-non
operating
expenses
Dividend
paid 50000
interest
expense 3000
earnings
before tax 66300
tax 16575
net profit
after tax 49725
Expenses
wages 21000
lease exp 8000
utilities exp 5000
depreciation 24700
total
expenses 58700
operating
profit 61300
non
operating
income 58000
-non
operating
expenses
Dividend
paid 50000
interest
expense 3000
earnings
before tax 66300
tax 16575
net profit
after tax 49725
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(c) Journal Entries of tax payable
Profit and loss account
Dr.
To tax payable account 16575
16575
Tax payable Dr. 16575
To bank account 16575
(d)Calculation of total inventory purchases and total cash paid to suppliers
trading account
opening
inventory 21000 sales 208000
purchases 181000 closing stock 15000
wages 21000
223000 223000
Trade creditors
account
to balance
c/d 25000 by purchases 181000
to cash 168000 by balance b/d 12000
193000 193000
Profit and loss account
Dr.
To tax payable account 16575
16575
Tax payable Dr. 16575
To bank account 16575
(d)Calculation of total inventory purchases and total cash paid to suppliers
trading account
opening
inventory 21000 sales 208000
purchases 181000 closing stock 15000
wages 21000
223000 223000
Trade creditors
account
to balance
c/d 25000 by purchases 181000
to cash 168000 by balance b/d 12000
193000 193000
(e) Calculation of total cash receipts and closing accounts receivable
Accounts receivable
account
to balance
b/d 15000
by balance
c/d 18000
to sales 178000 by cash 175000
193000 193000
(f) Preparation of statement of financial position
Particulars amount particulars amount
Current assets current liabilities
cash 19000
suppliers account
payable 25000
inventory 15000 tax payable 31700
accounts receivable 18000
prepaid lease 0
non current assets
non current
liabilities
ppe 65000
interest on bank
loan 3000
accumulated depreciation -300 Equity
contributed capital 10000
retained earnings 47000
116700 116700
Accounts receivable
account
to balance
b/d 15000
by balance
c/d 18000
to sales 178000 by cash 175000
193000 193000
(f) Preparation of statement of financial position
Particulars amount particulars amount
Current assets current liabilities
cash 19000
suppliers account
payable 25000
inventory 15000 tax payable 31700
accounts receivable 18000
prepaid lease 0
non current assets
non current
liabilities
ppe 65000
interest on bank
loan 3000
accumulated depreciation -300 Equity
contributed capital 10000
retained earnings 47000
116700 116700
(g) Preparation of statement of cash flows
Statement of cash flows
particulars amount particulars amount
to balance b/d 6000 by wages 21000
to sales 30000 by utilities 5000
to accounts receivable 175000 by lease 8000
to interest on bank loan 58000
by interest on bank
loan 3000
to contributed capital 10000 by dividend 50000
by balance c/d 19000
by accounts
payable 168000
by equipment 5000
279000 279000
QUESTION 2.
(a) Computation of financial ratios
Particular Formula Amount
Gross profit margin
Gross profit/net sales *100 =120000/208000*100
57.69%
Net profit margin Net profit before tax/net
sales*100
=66300/208000*100
Statement of cash flows
particulars amount particulars amount
to balance b/d 6000 by wages 21000
to sales 30000 by utilities 5000
to accounts receivable 175000 by lease 8000
to interest on bank loan 58000
by interest on bank
loan 3000
to contributed capital 10000 by dividend 50000
by balance c/d 19000
by accounts
payable 168000
by equipment 5000
279000 279000
QUESTION 2.
(a) Computation of financial ratios
Particular Formula Amount
Gross profit margin
Gross profit/net sales *100 =120000/208000*100
57.69%
Net profit margin Net profit before tax/net
sales*100
=66300/208000*100
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=31.875%
Return on assets
Net profit before tax/average
total assets
=66300/92500*100
=71.675%
Return on equity
Net profit after tax/shareholder's
equity
= 16575/57000*100
29.078947368
Current ratio
Current assets/current liabilities 52000/41575
1.250751654
Quick ratio
Quick assets/current liabilities 37000/41575
0.8899
Return on assets
Net profit before tax/average
total assets
=66300/92500*100
=71.675%
Return on equity
Net profit after tax/shareholder's
equity
= 16575/57000*100
29.078947368
Current ratio
Current assets/current liabilities 52000/41575
1.250751654
Quick ratio
Quick assets/current liabilities 37000/41575
0.8899
Net cash flow ratio
Cash flow from operating
activities/current liabilities
62725/41575
1.5087
Debt ratio Total liabilities/total assets
97000/97000
01:01:00
Asset turnover ratio
Net sales/ average total assets 208000/92500
224.80%
Asset days turnover
Net sales/ average total
assets*365
208000/92500*365
820.75
Receivable days= Average
Trade debtors/net credit sales
*365
Average trade debtors=
15000+18000/2
Cash flow from operating
activities/current liabilities
62725/41575
1.5087
Debt ratio Total liabilities/total assets
97000/97000
01:01:00
Asset turnover ratio
Net sales/ average total assets 208000/92500
224.80%
Asset days turnover
Net sales/ average total
assets*365
208000/92500*365
820.75
Receivable days= Average
Trade debtors/net credit sales
*365
Average trade debtors=
15000+18000/2
16500/178000*365
33.834269663
Inventory days=Average
inventory/net sales*365
Average inventory=
21000+15000/2
18000/178000*365
36.91011236
Payable days= Average Trade
creditors/net purchases*365
Average trade payables= 12000+
25000/2
37000/181000*365
74.613
Working note-
EBIT 66300
+non operating
expense
50000
3000
- non operating
income 58000
+ decrease in
inventory 6000
33.834269663
Inventory days=Average
inventory/net sales*365
Average inventory=
21000+15000/2
18000/178000*365
36.91011236
Payable days= Average Trade
creditors/net purchases*365
Average trade payables= 12000+
25000/2
37000/181000*365
74.613
Working note-
EBIT 66300
+non operating
expense
50000
3000
- non operating
income 58000
+ decrease in
inventory 6000
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- decrease in
accounts
receivable -3000
+ decrease in
prepaid
expenses 2000
+increase in
accounts
payable 13000
-tax paid -16575
62725
(b) Analysis of the ratios-
The ideal gross profit ratio is 65%. Therefore, the company's current gross profit ratio is
below average or bad and the net profit ratio is very good as it has exceeded 20%. In order to
increase the gross profit ratio, the owner should try to reduce the direct costs of the goods. The
liquidity position of the business is good as the current ratio is greater than 1 (Sutarno and et.al.,
2019). The debt ratio is also good but the asset turnover ratio is average as the good asset
turnover ratio is above 2.5. In order to increase it, the obsolete or unused assets should be
liquidated quickly. The company has good cash flow from operating activities as it is greater
than 1. The company's return on assets and return on equity is very good as the average ratio lies
between 5% to 20%. This shows that assets are efficiently contributing to rising profits and
company is generating high profits without using much equity or capital.
Overall, the position of the firm is good as all the ratios are either good or average. Some
of the key areas which should be brought into attention or investigation by the business owner
are the direct costs such as wages, lease expenses, utilities expenses etc. should be reduced. The
ideal assets of the business should be liquidated in order to increase the cash flow position
(Mostafa, Montemagno and Qureshi, 2018).
QUESTION 3.
(a) Calculation of net working capital-
Working note-
accounts
receivable -3000
+ decrease in
prepaid
expenses 2000
+increase in
accounts
payable 13000
-tax paid -16575
62725
(b) Analysis of the ratios-
The ideal gross profit ratio is 65%. Therefore, the company's current gross profit ratio is
below average or bad and the net profit ratio is very good as it has exceeded 20%. In order to
increase the gross profit ratio, the owner should try to reduce the direct costs of the goods. The
liquidity position of the business is good as the current ratio is greater than 1 (Sutarno and et.al.,
2019). The debt ratio is also good but the asset turnover ratio is average as the good asset
turnover ratio is above 2.5. In order to increase it, the obsolete or unused assets should be
liquidated quickly. The company has good cash flow from operating activities as it is greater
than 1. The company's return on assets and return on equity is very good as the average ratio lies
between 5% to 20%. This shows that assets are efficiently contributing to rising profits and
company is generating high profits without using much equity or capital.
Overall, the position of the firm is good as all the ratios are either good or average. Some
of the key areas which should be brought into attention or investigation by the business owner
are the direct costs such as wages, lease expenses, utilities expenses etc. should be reduced. The
ideal assets of the business should be liquidated in order to increase the cash flow position
(Mostafa, Montemagno and Qureshi, 2018).
QUESTION 3.
(a) Calculation of net working capital-
Working note-
Liabilities
Shareholders fund
Equity
Contributed capital 10000
Retained earnings 47000
Total of shareholders fund 57000
Current liabilities
Suppliers account payable 25000
tax payable 16575
Total of current liabilities 41575
Non-current liabilities
Interest on bank loan 3000
Total of non-current liabilities 3000
Total liabilities 101575
Current Assets
Cash 19000
Inventory 15000
Accounts receivable 18000
Prepaid lease 0
Total of current assets 52000
Non-current assets
Property, plant & equipment 65000
Accumulated depreciation -300
Total of non current assets 64700
Total assets 116700
Computation of net working capital
Current assets – Current liabilities
Shareholders fund
Equity
Contributed capital 10000
Retained earnings 47000
Total of shareholders fund 57000
Current liabilities
Suppliers account payable 25000
tax payable 16575
Total of current liabilities 41575
Non-current liabilities
Interest on bank loan 3000
Total of non-current liabilities 3000
Total liabilities 101575
Current Assets
Cash 19000
Inventory 15000
Accounts receivable 18000
Prepaid lease 0
Total of current assets 52000
Non-current assets
Property, plant & equipment 65000
Accumulated depreciation -300
Total of non current assets 64700
Total assets 116700
Computation of net working capital
Current assets – Current liabilities
Particulars Amount
Current Assets 52000
Current liabilities 41575
Total of net working capital 10425
(b) Computation of cash cycle
b) Calculation of cash cycle
Formula: Days of sales outstanding+days of inventory
outstanding-days of payables outstanding
Computation of days of sales outstanding
Formula:[(Beg AR+End AR)/2]/(Revenue/365)
Beginning of accounts receivable 15000
End of accounts receivable 18000 16500
Revenue 208000
569.863
0136986
Total
28.9543
269231
Computation of days of inventory outstanding
Formula: [(Beg inventory+End inventory/2)]/(COGS/365)
Beginning inventory 21000 18000
End inventory 15000
512.328
7671233
Purchases 181000
COGS 187000
Total
35.1336
898396
Current Assets 52000
Current liabilities 41575
Total of net working capital 10425
(b) Computation of cash cycle
b) Calculation of cash cycle
Formula: Days of sales outstanding+days of inventory
outstanding-days of payables outstanding
Computation of days of sales outstanding
Formula:[(Beg AR+End AR)/2]/(Revenue/365)
Beginning of accounts receivable 15000
End of accounts receivable 18000 16500
Revenue 208000
569.863
0136986
Total
28.9543
269231
Computation of days of inventory outstanding
Formula: [(Beg inventory+End inventory/2)]/(COGS/365)
Beginning inventory 21000 18000
End inventory 15000
512.328
7671233
Purchases 181000
COGS 187000
Total
35.1336
898396
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Computation of payables outstanding
Formula: [(Beg AP+End AP)/2]/(COGS/365)
Beginning accounts payable 12000 18500
End accounts payable 25000
512.328
7671233
COGS 187000
Total
36.1096
256684
Computation of cash cycle
Days of sales outstanding
28.9543
269231
Days of inventory outstanding
35.1336
898396
Days of payables outstanding
36.1096
256684
Total
27.9783
910942
The cash cycle refers to the number of days that a firm takes to convert its inventory and
other resources into cash. Currently the cash cycle of the business is 27.978 days. The cash cycle
can be increased by optimizing inventory which means that neither too much inventory should be
in the warehouse nor too little inventory on hand (Perszyk and et.al., 2021). This can be done by
aligning roles and responsibilities, setting plans and forecasting schedules. It should be ensured
that the materials shipped overseas must reach on time to avoid emergency shipping charges. By
taking a hard look on each step of the invoice process to eliminate unnecessary process that
might delay the payment. Implementation of late payment fees policy to discourage payment
delays and early discounting policy for faster collection.
Formula: [(Beg AP+End AP)/2]/(COGS/365)
Beginning accounts payable 12000 18500
End accounts payable 25000
512.328
7671233
COGS 187000
Total
36.1096
256684
Computation of cash cycle
Days of sales outstanding
28.9543
269231
Days of inventory outstanding
35.1336
898396
Days of payables outstanding
36.1096
256684
Total
27.9783
910942
The cash cycle refers to the number of days that a firm takes to convert its inventory and
other resources into cash. Currently the cash cycle of the business is 27.978 days. The cash cycle
can be increased by optimizing inventory which means that neither too much inventory should be
in the warehouse nor too little inventory on hand (Perszyk and et.al., 2021). This can be done by
aligning roles and responsibilities, setting plans and forecasting schedules. It should be ensured
that the materials shipped overseas must reach on time to avoid emergency shipping charges. By
taking a hard look on each step of the invoice process to eliminate unnecessary process that
might delay the payment. Implementation of late payment fees policy to discourage payment
delays and early discounting policy for faster collection.
QUESTION 4.
Monthly cash budget
October November December
opening cash balance 555 -19545 -51675
Cash collections 49700 54670 64610
Accounts receivable
cash sales 33000 39000 54000
cash inflow 82700 93670 118610
cash payments
Wages 30000 35000 40000
office equipment 0 7000 0
lease prepayment 0 0 4000
Administrative exp 3000 3000 3000
accrued expenses 0 0 8000
maturing term deposit 0 0 0
Accounts payable 66800 76800 86800
drawings 3000 4000 5000
cash outflow 102800 125800 146800
net cash inflow -20100 -32130 -28190
closing cash balance -19545 -51675 -79865
The cash budget of garden supply company helps the company to decide if enough cash
will be available in future for meeting short term needs. If the company does not have enough
cash at the end of the quarter, then it may need to borrow money. In October, the cash balance of
the company has decreased. It shows bad cash position in October. In November, the closing
cash balance again reduces which shows that the cash payments and expenses have increased but
in December the cash collections have increased the closing cash balance of garden supply
company. Overall the cash position of the company is bad and it should take necessary steps to
reduce the expenses and increase the cash inflows.
Monthly cash budget
October November December
opening cash balance 555 -19545 -51675
Cash collections 49700 54670 64610
Accounts receivable
cash sales 33000 39000 54000
cash inflow 82700 93670 118610
cash payments
Wages 30000 35000 40000
office equipment 0 7000 0
lease prepayment 0 0 4000
Administrative exp 3000 3000 3000
accrued expenses 0 0 8000
maturing term deposit 0 0 0
Accounts payable 66800 76800 86800
drawings 3000 4000 5000
cash outflow 102800 125800 146800
net cash inflow -20100 -32130 -28190
closing cash balance -19545 -51675 -79865
The cash budget of garden supply company helps the company to decide if enough cash
will be available in future for meeting short term needs. If the company does not have enough
cash at the end of the quarter, then it may need to borrow money. In October, the cash balance of
the company has decreased. It shows bad cash position in October. In November, the closing
cash balance again reduces which shows that the cash payments and expenses have increased but
in December the cash collections have increased the closing cash balance of garden supply
company. Overall the cash position of the company is bad and it should take necessary steps to
reduce the expenses and increase the cash inflows.
QUESTION 5.
(a) Calculation of contribution margin and weighted average contribution margin
Contribution margin
I-year-
old (in
$)
2-year-
old (in
$)
3-year-
old (in
$)
Selling price 11 24 35
Variable cost/unit 9 18 20
Contribution per
unit 2 6 15
Sales mix %
I-year-
old
2-year-
old
3-year-
old
Expected sales
volume 40000 30000 10000
% 50% 37.5% 12.5%
Weighted average contribution margin
(2 * 50%) + (6 * 37.5%) + (15*12.5%)
= 1 + 2.25 + 1.88
= 5.13
(b) Calculation of Break-even point
I-year-
old
2-year-
old
3-year-
old
Selling price 11 24 35
Variable cost/unit 9 18 20
Expected Sales
Volume 40000 30000 10000
Total fixed cost 180000
Contribution per unit 2 6 15
BEP (in units) 90000 30000 12000
Break-even point in total units
$90000 + $30000 + $12000
(a) Calculation of contribution margin and weighted average contribution margin
Contribution margin
I-year-
old (in
$)
2-year-
old (in
$)
3-year-
old (in
$)
Selling price 11 24 35
Variable cost/unit 9 18 20
Contribution per
unit 2 6 15
Sales mix %
I-year-
old
2-year-
old
3-year-
old
Expected sales
volume 40000 30000 10000
% 50% 37.5% 12.5%
Weighted average contribution margin
(2 * 50%) + (6 * 37.5%) + (15*12.5%)
= 1 + 2.25 + 1.88
= 5.13
(b) Calculation of Break-even point
I-year-
old
2-year-
old
3-year-
old
Selling price 11 24 35
Variable cost/unit 9 18 20
Expected Sales
Volume 40000 30000 10000
Total fixed cost 180000
Contribution per unit 2 6 15
BEP (in units) 90000 30000 12000
Break-even point in total units
$90000 + $30000 + $12000
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= $132000
(c) Recommendation of the initiative
The initiative to increase the price and reduce the sales volume of 1-year-old trees is
recommendable as the break-even point comes at 63333 units and before the initiative it was
90000 units and in 2-year-old and 3-year-old trees, the break-even point is also decreasing which
shows that management should take the initiative. Overall the break-even point is decreased by
53400 units. (132000-78600)
working note-
selling price 330000 720000 640000
-variable cost 270000 300000 400000
contribution margin 60000 420000 240000
Sales mix percentage 37.5 37.5 25
Sales volume/total
sales*100
Contribution margin per
unit 3 14 12
Weighted average
contribution margin 1.125 5.25 3
contribution
margin*sales mix
percentage
Break even point = Fixed
costs/contribution 63333.3333333333
13571.428571
4286
1696.4285714
286
Break even points in total
units 78600
(c) Recommendation of the initiative
The initiative to increase the price and reduce the sales volume of 1-year-old trees is
recommendable as the break-even point comes at 63333 units and before the initiative it was
90000 units and in 2-year-old and 3-year-old trees, the break-even point is also decreasing which
shows that management should take the initiative. Overall the break-even point is decreased by
53400 units. (132000-78600)
working note-
selling price 330000 720000 640000
-variable cost 270000 300000 400000
contribution margin 60000 420000 240000
Sales mix percentage 37.5 37.5 25
Sales volume/total
sales*100
Contribution margin per
unit 3 14 12
Weighted average
contribution margin 1.125 5.25 3
contribution
margin*sales mix
percentage
Break even point = Fixed
costs/contribution 63333.3333333333
13571.428571
4286
1696.4285714
286
Break even points in total
units 78600
QUESTION 6.
(a) Computation of net present value at 5.7% interest rate
Year
Cash
flows
(in $)
PV factor
@5.1%
Discounted cash
inflows (in $)
1 10000 0.951 9515
2 18000 0.905 16295
3 20000 0.861 17227
4 35000 0.820 28685
Total
discounted
cash
inflows 71723
Less:
initial
investment 61000
NPV 10723
(b) Computation of net present value at 10% rate
Year
Cash
flows
(in $)
PV factor
@10.8%
Discounted cash
inflows (in $)
1 10000 0.903 9025
2 18000 0.815 14662
3 20000 0.735 14703
4 35000 0.664 23223
Total
discounted
cash
inflows 61613
Less:
initial
investment 61000
NPV 613
(a) Computation of net present value at 5.7% interest rate
Year
Cash
flows
(in $)
PV factor
@5.1%
Discounted cash
inflows (in $)
1 10000 0.951 9515
2 18000 0.905 16295
3 20000 0.861 17227
4 35000 0.820 28685
Total
discounted
cash
inflows 71723
Less:
initial
investment 61000
NPV 10723
(b) Computation of net present value at 10% rate
Year
Cash
flows
(in $)
PV factor
@10.8%
Discounted cash
inflows (in $)
1 10000 0.903 9025
2 18000 0.815 14662
3 20000 0.735 14703
4 35000 0.664 23223
Total
discounted
cash
inflows 61613
Less:
initial
investment 61000
NPV 613
(c) Comparison of net present values at 5.7% and 10% rate
On comparing the two NPV's, it is better for the garden supply company to purchase the
truck if the interest rate of the loan is 5.1%. If the truck is purchased at 10.8% interest rate, then
Net present value is 613 which will increase to 10723 so 5.7% rate is much better. Total cash
flow will be increased by 10110.
(d) Calculation of Accounting rate of return
Accounting rate of return = (Average EAT / Average investment) 8 100
= (20750 / 38000) * 100
= 54.6%
(e) Analysis of payback period
Year Cash
flows
Cumulative
cash inflows
1 10000 10000
2 18000 28000
3 20000 48000
4 35000 83000
= 3 + (61000 – 48000) / 35000
= 3.4 years
Payback period refers to the number of years it will take for the company to recover the
initial investment. Currently it is 3.4 years and if the required payback period was 3 years that
means company is not having good cash inflows and the cost of investment will be recovered
after 3.4 years.
On comparing the two NPV's, it is better for the garden supply company to purchase the
truck if the interest rate of the loan is 5.1%. If the truck is purchased at 10.8% interest rate, then
Net present value is 613 which will increase to 10723 so 5.7% rate is much better. Total cash
flow will be increased by 10110.
(d) Calculation of Accounting rate of return
Accounting rate of return = (Average EAT / Average investment) 8 100
= (20750 / 38000) * 100
= 54.6%
(e) Analysis of payback period
Year Cash
flows
Cumulative
cash inflows
1 10000 10000
2 18000 28000
3 20000 48000
4 35000 83000
= 3 + (61000 – 48000) / 35000
= 3.4 years
Payback period refers to the number of years it will take for the company to recover the
initial investment. Currently it is 3.4 years and if the required payback period was 3 years that
means company is not having good cash inflows and the cost of investment will be recovered
after 3.4 years.
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REFERENCES
Books and Journal
Perszyk, R. E., and et.al., 2021. Three-dimensional missense tolerance ratio analysis. Genome
Research. 31(8). pp.1447-1461.
Mostafa, K. G., Montemagno, C. and Qureshi, A.J., 2018. Strength to cost ratio analysis of FDM
Nylon 12 3D Printed Parts. Procedia Manufacturing. 26. pp.753-762.
Sutarno, S., and et.al., 2019, December. Implementation of Multi-Objective Optimazation on the
Base of Ratio Analysis (MOORA) in Improving Support for Decision on Sales Location
Determination. In Journal of Physics: Conference Series (Vol. 1424, No. 1, p. 012019).
IOP Publishing.
Books and Journal
Perszyk, R. E., and et.al., 2021. Three-dimensional missense tolerance ratio analysis. Genome
Research. 31(8). pp.1447-1461.
Mostafa, K. G., Montemagno, C. and Qureshi, A.J., 2018. Strength to cost ratio analysis of FDM
Nylon 12 3D Printed Parts. Procedia Manufacturing. 26. pp.753-762.
Sutarno, S., and et.al., 2019, December. Implementation of Multi-Objective Optimazation on the
Base of Ratio Analysis (MOORA) in Improving Support for Decision on Sales Location
Determination. In Journal of Physics: Conference Series (Vol. 1424, No. 1, p. 012019).
IOP Publishing.
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