Accounting for Business: Ventilator Capital Investment Appraisal, Surgical Mask Costing

This document discusses accounting issues related to ventilator capital investment appraisal and surgical mask costing. It explains evaluation methods such as payback period, net present value, accounting rate of return, and internal rate of return. The limitations of these methods are also discussed. The document provides recommendations based on the analysis.

Accounting for Business

Contents
INTRODUCTION.......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
Issue 1: Ventilator capital investment appraisal.......................................................................................3
Issue 2: Surgical mask costing...............................................................................................................13
Issue 3: Respiratory Davison budget.....................................................................................................17
CONCLUSION.........................................................................................................................................21
REFERENCES..........................................................................................................................................22

INTRODUCTION
The term accounting can be defined as a way of recording financial transactions in a
systematic manner. This is essential for business entities to record their transactions
(Alstadsæter, Kopczuk and Telle, 2016). The project report is based on management accounting
issues at AV Roe plc. The company is located in Manchester and involved in preparation of
aircraft. Now company is decided to engage in medical equipments. For this purpose they need
guidance and various calculations are done such as capital investment appraisal, breakeven point
analysis and cash budget.
MAIN BODY
Issue 1: Ventilator capital investment appraisal
a) Evaluate the alternative ventilator investment options:
Payback period:
Highball ventilator:
Year Cash flow Cumulative cash flow
1 550 550
2 800 1350
3 1050 1400
4 1300 2700
5 1550 4250
Initial investment= 3000
Payback period= Year before recovery+ amount to be recover/ next year cash flow
= 4+300/1550
= 4+0.19

Thus, cost of this project will be recovered in 4 year and 2 months.
Working Note:
Amount to be recover= 3000-2700
= 300
Upkeep ventilator:
Year Cash flow Cumulative cash flow
1 350 350
2 500 850
3 700 1550
4 950 2400
5 - 2400
Initial investment= 1500
Payback period= 2+650/700
= 2+0.92
Thus, cost of this project will be recovered in 3 years.
Net present value:
Highball ventilator:
Year Cash flow PV factor at 10% Discounted cash flow
1 550 0.909 499.95

2 800 0.826 660.8
3 1050 0.751 788.55
4 1300 0.683 887.9
5 1550 0.621 962.55
962.55
Net present value= Discounted cash flow- Initial investment
= 962.55-3000
= -2037.45 pounds
Upkeep ventilator:
Year Cash flow PV factor at 10% Discounted cash flow
1 350 0.909 318.15
2 500 0.826 413
3 700 0.751 525.7
4 950 0.683 648.85
5 - 0.621 0
1905.7
NPV= 1905.7-1500
= 405.7 Pounds
Accounting rate of return:
Highball ventilator:

Year Cash flow
1 550
2 800
3 1050
4 1300
5 1550
Total 5250
Average profit= 5250/5
= 1050
Average initial outlay= Investment + residual income/2
3000+650/2
= 3650/2
= 1825
ARR= Average profit/average initial outlay*100
= 1050/1825*100
= 57.53%
Upkeep ventilator
Year Cash flow
1 350
2 500
3 700
4 950

5 -
Total 2500
Average profit= 2500/5
= 500
Average initial outlay= 1500+550/2
= 1025
ARR= 500/1025*100
= 48.78%
Internal rate of return:
Highball ventilator:
10+ (-2037.45)/(-2616.55)*2
10+1.55
11.55%

Working Note:
NPV at 10%:
Year Cash flow PV factor at 10% Discounted cash flow
1 550 0.909 499.95
2 800 0.826 660.8
3 1050 0.751 788.55
4 1300 0.683 887.9
5 1550 0.621 962.55
962.55
Net present value= Discounted cash flow- Initial investment
= 962.55-3000
= -2037.45 pounds
NPV at 12%:
Year Cash flow PV factor at
12%
Discounted
cash flow
1 550 0.892 490.6
2 800 0.797 637.6
3 1050 0.711 746.55
4 1300 0.635 825.5
5 1550 0.567 878.85
3579.1
Net present value= Discounted cash flow- Initial investment

= 3579.1-3000
= 579.1
Upkeep ventilator
IRR= 10+ 405.7/ (405.7-311.65)*2
= 10+405.7/94.5*2
= 10+405.7/188.1
= 10+2.15
= 12.15%
Working Note:
NPV at 10%
Year Cash flow PV factor at 10% Discounted cash flow
1 350 0.909 318.15
2 500 0.826 413
3 700 0.751 525.7
4 950 0.683 648.85
5 - 0.621 0
1905.7
NPV= 1905.7-1500
= 405.7 Pounds

NPV at 12%
Year Cash flow PV factor at
12%
Discounted
cash flow
1 350 0.892 312.2
2 500 0.797 398.5
3 700 0.711 497.7
4 950 0.635 603.25
5 - 0.567 0
1811.65
NPV= 1811.65-1500
= 311.65 Pounds
(b) Advise AVR’s Board by explaining your evaluation methods and results.
Payback period- On the basis of above calculated value of both ventilator this can be find out
that Highball ventilator’s cost can be covered in 4 years and 2 months. While Upkeep
ventilator’s cost will be covered in 3 years. Hence, above company should make investment in
Upkeep ventilator due to its lower payback time period.
Net present value- The NPV of both ventilators is different. Such as Highball ventilator’s NPV is
of -2037 pounds. On the other hand, Upkeep ventilator’s value is of 405.7 pounds. This indicates
that above company should make investment in Upkeep ventilator because its net present value
is higher.
Accounting rate of return- The accounting rate of return of highball ventilator is 57.53% and
other ventilator’s is of 48.78%. It is showing that highball ventilator will generate higher amount
of return in further time period. It is so because of higher rate of return.
Internal rate of return- The internal rate of return of highball ventilator is of 11.55% while
Upkeep ventilator’s IRR is of 12.15%. This is showing that second ventilator will be beneficial

for above company. This is so because if they will invest in Upkeep ventilator than they will be
able to produce higher amount of return in further time period.
So on the basis of above analysis of each method, this can be stated that above company should
make invest in Highball ventilator.
Pros and cons of evaluation method:
Payback period: This can be defined as kinds of method which is related to calculating value of
time which may occur in order to cover cost of project (Bugeja and Loyeung, 2017). It has below
mentioned benefits and drawbacks:
Pros: This technique is very easier to use because of lower factors. As well as managers can take
appropriate decisions by help of this technique. The calculation and efficiency of this
methodology allows administrators to easily access. This is deemed the most powerful approach
in cases of confusion since it provides fast and reliable tests. Liquidity is preferred during the
measurement cycle which assists management in ensuring that their decisions are advantageous
for organizations.
Cons- This technique is impractical as it hasn't been in operation in recent decades. This strategy,
which ignored the return on the expenditure of the enterprise, often overlooked this viability.
This approach is limited to long-term ventures since it may yield unreliable findings in these
circumstances.
Net present value: The net current value (NPV) is the gap between the real cash flow value and
the estimated cash flow value for a span of time.
Pros: It is useful in decision-making as the time worth of the money is taken into account in the
real interest estimates (Duska, Duska and Kury, 2018). For the estimation of NPV, this method
brings into consideration both the gains and disadvantages of all investment possibilities,
allowing for their pacing.

Cons: The calculation process is quite complicated and the results generated by this procedure
cannot easily be understood. This cannot assess a proportional level of return or a particular
profit amount that the company will obtain on prior investments. When the projects don't have
the same scale, there's no good because it can't equate them.
Accounting rate of return- This can be defined as a method of calculating percentage of return in
order to determine efficiency of a project (Loughran, and McDonald, 2016). It has some
advantages and disadvantages:
Pros- This offers a straightforward picture of sustainability, as the measurement of net income
instead of capital inflows can be done by means of cost-effectiveness and productivity of
different ventures that can be advantageous to investments. It can help satisfy investors' demands
because they are keen to make higher returns on their money invested in the entity.
Cons- The issue of this method is that under it, time factor is ignored as well as it consumes too
much time and cost in order to find out the value of project.
Internal rate of return- This is a type of method which is related to computing an investment’s
rate of return.
Pros- The results are very simple to understand and interpret as IRR is measured. It is also not
appropriate to measure the rate of return or the hurdle limit (Obaidullah, 2016). This requires
time to evaluate the worth of the capital that helps assess the productivity rate.
Cons- If mutually exclusive ventures which are to be evaluated, these are neglected by this
technique. External considerations including economies of scale do not take into consideration
the intrinsic cost of return estimate.
(c) Discuss any analysis limitations and make a final recommendation.

Investment appraisal technique- Payout period, internal return rate, net present value, accounting
metric and profitability measure must be the methods of investment evaluation. They are mainly
intended to evaluate the achievement of a new project (Florou, Kosi and Pope, 2017). This
technique has below mentioned limitations such as:
 This technique does not consider time value of money factor.
 It is not helpful for those companies whose size is smaller.
Apart from the above mentioned techniques, companies can use other methods such as ratio
analysis and preparation of financial statements.
Issue 2: Surgical mask costing
Particulars Amount
Sold units 550000
Selling price 13
Total sales 7150000
Variable cost per unit 4
Fixed cost 2000000
Option A:
BEP- The break-even point method is measured in accounting by calculating the average fixed
cost of supply by sales per actual unit minus the variable cost per item. Fixed costs apply in this
situation to those that do not differ due to the amount of units produced (Yang and Liu, 2017). In
other terms, the level of output for which gross profits are equivalent in the total costs of a
company is the gap.
Breakeven point (In units) = Fixed cost/contribution per unit
Contribution per unit= Selling price-variable cost per unit
= 13-4
= 9 pounds per unit

Thus,
Breakeven point (in units) = 2000000/9
= 222222.22 or 222222 units
Breakeven point (in pounds) = Fixed cost/PV ratio
PV ratio= Contribution/sales*100
= 9/13*100
69.23%
Hence,
BEP = 2000000/69.23%
= 2888920.99 or 2888921 pounds.
Margin of safety- It is an accounting concept in which an individual only acquires shares when
the share price is far below the interest. In other terms, if the protection market price falls just
below the inherent value calculation, the disparity is the safety margin (Schroeder, Clark, and
Cathey, 2019). Because buyers may create a margin of protection depending on their own risk
decisions, while this gap is present, the buying of shares makes investment that is at reduced risk
on a negative hand.
Margin of safety (in units) = Sales units-breakeven point in units
= 550000-222222
= 327778 units
Margin of safety (in pounds) = Sales- breakeven point in pounds
= 7150000-2888921
= 4261079 pounds

Option B:
Particulars Amount
Sold units 660000
Selling price 10
Total sales 6600000
Variable cost per unit 4
Fixed cost 2000000
Breakeven point (In units) = Fixed cost/contribution per unit
Contribution per unit= Selling price-variable cost per unit
= 10-4
= 6 pounds per unit
Thus,
Breakeven point (in units) = 2000000/6
= 333333.33 or 333333 units
Breakeven point (in pounds) = Fixed cost/PV ratio
PV ratio= Contribution per unit/selling price per unit*100
= 6/10*100
60.00%
Hence,
BEP = 2000000/60.00%
= 3333333 pounds.

Margin of safety (in units) = Sales units-breakeven point in units
= 660000-333333
= 326667 units
Margin of safety (in pounds) = Sales- breakeven point in pounds
= 6600000-3333333
= 3266667 pounds
b) Advise AVRs management team on these alternative options.
Analysis of both options- On the basis of above calculation of BEP and margin of safety
of option A, this can be find out that value of breakeven point is 222222 units and 2888921
pounds. While option B has BEP of 333333 units and 3333333 pounds. This is showing that
option B seems better and AVRs management should go with option B. this is so because higher
value of breakeven point indicates that company can sell more number of units. Thus above
company can sell more number of masks if they consider option B. On the other hand option A
has lower value of breakeven point in both terms. Thus they should go with option A.
Margin of safety- On the basis of above calculation, this can be find out that margin of safety is
327778 units and 4261079 pounds of option A. While option B has margin of safety of 326667
units and 3266667 pounds. This is indicating that above company should go with option A. it is
so because this will be beneficial for them and they will be able to generate higher revenue from
option B.
In comparative manner, above company should invest in option A because under it both margin
of safety and breakeven point both are higher.

Issue 3: Respiratory Davison budget
(a) Prepare a cash budget for the two months of August and September 2020
The cash budget is an estimate or scheme for planned cash receipts and payments
throughout the period (Cleary and Quinn, 2016). Such cash inflows and outflows comprise
wages, taxes charged, and interest and payments on loans. In other terms, the financial forecast is
an estimation of the potential liquidity condition of the organization.
Cash budget for month of August and September 2020
Particulars August September
Cash Receipts:
Online sales 38000 42000
NHS sales 525000 550000
Opening balance of bank 10000 -
Total cash receipts (A) 573000 592000
Cash payment:
Purchase of raw material 284250 287950
Labor cost 202250 153300
Purchase of new manufacturing
equipment
6667 6667

Overheads 75000 81000
Total cash payments (B) 568167 528917
Cash flow (A-B) 4833 63083
Working Note:
Calculation of NHS sales:
For month of August:
600000*25%+ 500000*75%
150000+375000
525000
For month of September:
400000*25%+600000*75%
100000+450000
= 550000
Calculation of raw material cost:
For month of August
270000*70%+317500*30%
= 284250
For month of September
317500*70%+219000*30%

= 287950
Purchase of new manufacturing equipment
240000/36
= 6667
b) Critically appraise AVR-RD’s cash budget and advise how the division could improve its cash
flow.
Analysis of cash budget- On the basis of above prepared budget this can be find out that
cash flow in August was of 4833 pounds while in September this was of 63083 pounds. This is
showing that their cash position enhanced in September as compared to August.
Way to improve cash flow of above company:
 By increasing sales prices- This is a way which can raise cash flow of above company. It
is so because if they will raise their price of products than their sales revenue will
increase and as a result total cash receipts will be higher.
 By minimizing expenses- In addition, above company should try to reduce their
additional expenses because higher expenses lead to lower cash flow.
 Get customers to pay invoices on time- The customers can also be required to pay their
invoices on time to increase the cash flow of above company. They are mindful that it is
simpler to tell than to perform, but there are lots of practice methods to allow transfers
more easily.
 Expand sales market- The strategizing of new sources of revenue is another way to
improve positive cash flow. By bringing the vision group together, sit down and take a
look at innovative approaches to grow the market can be helpful for above company to
raise their cash flow in an effective manner. This is so because higher sales market lead
to more scope of getting revenues from various sources.
 Re-evaluation of operating expenses- Cash flow management doesn't only imply that the
company has more funds. It is also necessary to raising the business' cash to the fullest
extent possible. This can become possible by help of managing operating expense
because it is essential for companies to keep their expenses lower as much as possible.

c) Explain why AVR-RD should prepare a cash budget in addition to a budgeted income
statement.
The above company should prepare a cash budget in addition to a budgeted income
statement due to following reasons:
 Helpful in Planning- Cash budget allows preparing for resources to be spent most
effectively. It defines a cash surplus or deficit at a certain point and allows it easier to
handle the shortage until point or to spend the surplus capital to the fullest degree
practicable without presenting a liquidity hazard.
 Forecasting the Future needs- The Cash Budget prepares well in preparation with
potential budget needs, period and number. It helps to prepare to collect capital at fair
rates through the most productive sources.
 Basis of Long-term Planning and Co-ordination- Cash budget is a significant basis for
long-term financial preparation and it assists in analyses of long-term funding in terms of
possible sums, duration, support mechanisms and strategies of repayment. This co-
ordinates various roles such as purchases, deposits, savings, job resources, etc.
 Maintenance of Ample cash Balance- Cash is the foundation of business sustainability.
Cash budget facilitates cash preservation. This implies an appropriate cash flow for the
anticipated requirements and a reasonable backup margin (Masadeh, Mansour and AL
Salamat, 2017).
 Testing the Influence of proposed Expansion Program- The cash budget forecasts the
inflows from a potential plan of growth or improvement which has an effect on the cash
situation.
So, these are the reason which shows that cash budget too crucial for companies instead of cash
flow. This is so because income statement all those activities which are related to income and
expense. It does not classify cash receipts and payments. Due to which it becomes difficult for
companies to find out actual value of cash at the end of year.

CONCLUSION
On the basis of above project this can be concluded that companies need to evaluate their
proposals so that they can take suitable decisions. The report concludes that AVR should go with
high ball ventilator because of its efficiency is better as compared to other. As well as company
should go with option A of selling mask because of its value of BEP and margin of safety. The
end part of report concludes about cash budget of company along with ways to enhance their
cash position.

REFERENCES
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