Financial Analysis of Lecture Studies Limited

This assignment focuses on evaluating a proposed project for Lecture Studies Limited using both the Internal Rate of Return (IRR) and Net Present Value (NPV) methods. It presents two financial forecasts, each with different cash flow projections, and calculates the IRR and NPV for both scenarios at a 10% discount rate. The analysis concludes by recommending whether Lecture Studies Limited should accept the project based on the calculated financial metrics.

Answer 1
a. Major brand building advertising spend
Strategic and Driver
b. Loan approval times
Strategic and Driver
c. Loan approved (in dollars)
Operating and Outcome
d. Loan applications numbers received online
Operating and Driver
e. Loans numbers sent for collection due to being 60 days overdue
Strategic and Driver
f. Profitability of the loan book
Operating and Outcome
g. Percentage of loans funded against loans approved
Operating and Outcome
Answer 2
1. Sales budget
Product A Product B
Budgeted Sales (Units) 16,200.00 11,800.00
Selling price per unit (dollars) 14.35 12.20
Sale revenue (dollars) 232,470.00 143,960.00
2. Production budget
Product A Product B
Budgeted Sales (Units) 16,200.00 11,800.00
Add: Closing inventory units 8,100.00 6,600.00
Total units available 24,300.00 18,400.00
Less: Opening inventory units 5,100.00 2,600.00
Budgeted production (units) 19,200.00 15,800.00
3. Purchases budget for components
Component X Component Y
Product A Product B Product A Product B
Budgeted production (units) 19,200.00 15,800.00 19,200.00 15,800.00
Raw material required per unit 5.00 3.00 2.00 4.00

Direct material required 96,000.00 47,400.00 38,400.00 63,200.00
Component X Component Y
Total direct material required 143,400.00 101,600.00
Add: Closing inventory units 46,000.00 19,500.00
Total direct material units available 189,400.00 121,100.00
Less: Opening inventory units 38,000.00 13,500.00
Units purchased 104,000.00 44,400.00
4. Purchases budget in dollars
Component X Component Y
Units purchased 104,000.00 44,400.00
Cost per unit (dollars) 0.68 0.24
Total Cost (dollars) 70,720.00 10,656.00
5. Total labor hours and costs for the six months
Product A Product B
Budgeted production (units) 19,200.00 15,800.00
Hour per unit 2.00 1.00
Hours required 38,400.00 15,800.00
Rate per hour (dollars) 4.50 4.00
Total cost (dollars) 172,800.00 63,200.00
6. Contribution per unit
Product A Product B
Sales price per unit (dollars) 14.35 12.20
Less: Variable cost per unit (dollars)
Direct material cost per unit
Component X (dollars) 3.40 2.04
Component Y (dollars) 0.48 0.96
Labor cost per unit (dollars) 9.00 4.00
Total variable cost per unit (dollars) 12.88 7.00
Contribution per unit (dollars) 1.47 5.20
7. Profit and Loss forecast for the six months

Product A Product B
Budgeted Sales (Units) 16,200.00 11,800.00
Contribution per unit (dollars) 1.47 5.20
Total contribution (dollars) 23,814.00 61,360.00
Total contribution of company (dollars) 85,174.00
Less: Overhead costs (dollars) 250,000.00
Net profit/(loss) (dollars) (164,826.00)
Answer 3
a. Break-even point in units and dollars
Break-even point in units
Fixed cost $ 250,000.00
÷ Contribution per unit $65.00
Break-even point in units 3846.15
Break-even point in dollars
Fixed cost $250,000.00
÷ Contribution margin 26.00%
Break-even point in dollars $961,538.46
Working notes
Calculation of Contribution per unit
Selling price $250.00
Less: Variable cost per unit $185.00
Contribution per unit $65.00
Calculation of Contribution margin
Selling price $250.00
÷ Contribution per unit $65.00
Contribution margin 26.00%
b. Break-even chart

0 1000 2000 3000 4000 5000 6000 7000
$-
$200,000.00
$400,000.00
$600,000.00
$800,000.00
$1,000,000.00
$1,200,000.00
$1,400,000.00
$1,600,000.00
$1,800,000.00
$2,000,000.00
Total sales
Total cost
Fixed cost
Number of units
Loss
Area
Profit
AreaBreak even
point 3846
units
c. Profit for sales of 5000 units
Revenue $1250000
Less: Variable cost $925000
Contribution $325000
Less: Fixed cost $250000
Profit $75000
d. Decision regarding leasing new equipment
Cost of accepting the decision i.e. leasing cost $200,000
Benefit from accepting the decision $282,500
Net profit due to acceptance of decision $82,500
Hence company should accept lease the new equipment.
Working Note:
Benefit from accepting the decision
Reduction in variable cost 8100*10= $81,000
Increase in contribution for increased sale units (8100-5100)*65= $201,500
Total $282,500
Answer 4
a. Accounting rate of return

Forecast 1 Forecast 2
Average accounting profits 6,000 7,600
÷ Average Investment 9,000 9,000
Accounting rate of return 66.67% 84.44%
Lecture Studies Limited should accept the project.
Working notes
Average accounting profits
Annual accounting profits Forecast 1 Annual accounting profits Forecast 2
Cash inflow year 1 6,000.00 6,000.00
Cash inflow year 2 6,000.00 7,000.00
Cash inflow year 3 6,000.00 12,000.00
Cash inflow year 4 6,000.00 3,000.00
Cash inflow year 5 6,000.00 10,000.00
Total 30,000.00 38,000.00
Average 6,000.00 7,600.00
Average Investment
Project Cost at beginning of year 1 20,000.00
Residual value year 5 (2,000.00)
Average 9,000.00
b. Payback period
Payback period under forecast 1
Cash flows Cumulative cash flows
Project cost (20,000) (20,000)
Cash inflow year 1 6,000 (14,000)
Cash inflow year 2 6,000 (8,000)
Cash inflow year 3 6,000 (2,000)
Cash inflow year 4 6,000 4,000
Cash inflow year 5 8,000 12,000
Payback period
= 3+ 2000/6000

= 3.33 years
i.e. 3 years 4 months
Cash flows Cumulative cash flows
Project cost (20,000) (20,000)
Cash inflow year 1 6,000 (14,000)
Cash inflow year 2 7,000 (7,000)
Cash inflow year 3 12,000 5,000
Cash inflow year 4 3,000 8,000
Cash inflow year 5 12,000 20,000
Payback period
= 2+ 7000/12000
= 2.5833 years
i.e. 2 years 7 months
Lecture Studies Limited should accept the project under forecast 2, however, should reject the
project under forecast 1.
c. Internal rate of return
Forecast 1 Cash flows Cash flow discounted at 17% Cash flow discounted at 18%
Project cost (20,000) (20,000.00) (20,000.00)
Cash inflow year 1 6,000 5,128.21 5,084.75
Cash inflow year 2 6,000 4,383.08 4,309.11
Cash inflow year 3 6,000 3,746.22 3,651.79
Cash inflow year 4 6,000 3,201.90 3,094.73
Cash inflow year 5 8,000 3,648.89 3,496.87
Total 108.30 (362.76)
IRR= = 17.23%
Forecast 2 Cash flows Cash flow discounted at 26% Cash flow discounted at 27%
Project cost (20,000) (20,000.00) (20,000.00)
Cash inflow year 1 6,000 4,761.90 4,724.41
Cash inflow year 2 7,000 4,409.17 4,340.01
Cash inflow year 3 12,000 5,998.87 5,858.28
Cash inflow year 4 3,000 1,190.25 1,153.20

Cash inflow year 5 12,000 3,778.58 3,632.14
Total 138.78 (291.96)
IRR= = 26.32%
Lecture Studies Limited should accept the project.
d. Net present value
Forecast 1 Cash flows PVIF @ 10% Discounted Cash flow
Project cost (20,000) 1.00 (20,000.00)
Cash inflow year 1 6,000 0.91 5,454.55
Cash inflow year 2 6,000 0.83 4,958.68
Cash inflow year 3 6,000 0.75 4,507.89
Cash inflow year 4 6,000 0.68 4,098.08
Cash inflow year 5 8,000 0.62 4,967.37
NPV 3,986.56
Forecast 2 Cash flows PVIF @ 10% Discounted Cash flow
Project cost (20,000) 1.00 (20,000.00)
Cash inflow year 1 6,000 0.91 5,454.55
Cash inflow year 2 7,000 0.83 5,785.12
Cash inflow year 3 12,000 0.75 9,015.78
Cash inflow year 4 3,000 0.68 2,049.04
Cash inflow year 5 12,000 0.62 7,451.06
NPV 9,755.54
Lecture Studies Limited should accept the project.