Buddy Capital Investment Analysis for Saturn Pet Care

This article provides a detailed analysis of Buddy Capital Investment for Saturn Pet Care, including tables showing cash flows, payback period, NPV, and profitability index. The article concludes that the proposal should be accepted by Saturn Pet Care as it is able to generate positive returns even in adverse circumstances.

ACC 515

TABLE OF CONTENTS
Part A.........................................................................................................................................3
(i)............................................................................................................................................3
(ii)...........................................................................................................................................5
A.........................................................................................................................................5
B.........................................................................................................................................6
C.........................................................................................................................................8
(iii)..........................................................................................................................................8
Part B........................................................................................................................................10
References................................................................................................................................16

PART A
(i)
Table 1: Statement for the proposed Buddy capital investment after tax cash flows
(In Million AUD)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Number of unit sold 16 16 16 16 16 16 16 16 16 16
selling price (per unit) 1.25 1.28 1.31 1.34 1.37 1.40 1.44 1.47 1.51 1.54
Total Revenue 20 20.47 20.95 21.44 21.95 22.46 22.99 23.53 24.08 24.65
Raw Material Cost 7 7 7 7 7 7 7 7 7 7
Fixed cost 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6
Variable Cost 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
Gross Profit 6 6.47 6.95 7.44 7.95 8.46 8.99 9.53 10.08 10.65
Depreciation 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95
Profit Before Tax 4.05 4.52 5 5.49 6 6.51 7.04 7.58 8.13 8.7
Tax @ 30% 1.22 1.36 1.50 1.65 1.80 1.95 2.11 2.27 2.44 2.61
Profit After Tax 2.84 3.16 3.50 3.85 4.20 4.56 4.93 5.31 5.69 6.09
Non-cash expense (Depreciation) 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95
Residual Value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00
Cash Flows after Tax 4.79 5.11 5.45 5.80 6.15 6.51 6.88 7.26 7.64 13.04
Table 2: Statement showing computation of payback period
Years Cash Flows (Amount in Million $) Cumulative Cash Flow

0 -20 -20
1 4.79 -15.21
2 5.11 -10.1
3 5.45 -4.65
4 5.8 1.15
5 6.15 7.3
6 6.51 13.81
7 6.88 20.69
8 7.26 27.95
9 7.64 35.59
10 13.04 48.63
Payback Period 3 + (1.15) / 5.80
3.19 Years
Table 3: Statement showing computation of NPV
(In Million AUD)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Cash Flows after Tax 4.79 5.11 5.45 5.80 6.15 6.51 6.88 7.26 7.64 13.04
Present Value Factor @ 20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
Present Value of Cash Flows 3.99 3.55 3.16 2.80 2.47 2.18 1.92 1.69 1.48 2.11
Total Present Value of Cash Flows 25.34

Initial Capital Outlay 20
Net Present Value Total present value of cash flow less initial outflow
5.344206
Table 4: Statement showing computation of profitability index
A Present value of cash inflow 25.33
B Present value of cash outflow 20
Profitability Index (A/B) 1.2665
(ii)
A
Table 5: Statement for the proposed Buddy capital investment after tax cash flows by increasing 20%
(In Million AUD)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year
9 Year 10
Number of unit sold 16.80 16.80 16.80 16.80 16.80 16.80 16.80 16.80 16.80 16.80
selling price (per unit) 1.25 1.28 1.31 1.34 1.37 1.40 1.44 1.47 1.51 1.54
Total Revenue 21.00 21.49 22.00 22.52 23.04 23.59 24.14 24.71 25.29 25.88
Raw Material Cost 7.07 7.07 7.07 7.07 7.07 7.07 7.07 7.07 7.07 7.07
Fixed cost 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6
Variable Cost 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4 1.4
Gross Profit 6.86 7.35 7.86 8.38 8.9 9.45 10 10.57 11.15 11.74
Depreciation 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95

Profit Before Tax 4.91 5.4 5.91 6.43 6.95 7.5 8.05 8.62 9.2 9.79
Tax @ 30% 1.47 1.62 1.77 1.93 2.09 2.25 2.42 2.59 2.76 2.94
Profit After Tax 3.44 3.78 4.14 4.51 4.87 5.25 5.64 6.03 6.44 6.85
Non-cash expense
(Depreciation) 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95
Residual Value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00
Cash Flows after Tax 5.39 5.73 6.09 6.46 6.82 7.20 7.59 7.98 8.39 13.80
Present Value Factor @
20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
Present Value of Cash Flows 4.49 3.98 3.52 3.11 2.74 2.41 2.12 1.86 1.63 2.24
(b) calculation of NPV
Total Present Value of Cash
Flows 28.09
Initial Capital Outlay 20
Net Present Value Total present value of cash flow less initial outflow
8.094429
B
Table 6: Statement for the proposed Buddy capital investment after tax cash flows by decreasing 20%
(C) (IN Million AUD $)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Sales (unit) 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2 15.2
selling price per unit 1.25 1.28 1.31 1.34 1.37 1.40 1.44 1.47 1.51 1.54
Total Sales 19 19.4465 19.90 20.37 20.85 21.34 21.84 22.35 22.88 23.42
Raw Material Cost 6.93 6.93 6.93 6.93 6.93 6.93 6.93 6.93 6.93 6.93
Fixed Cost 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6 5.6

Variable Cost 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33 1.33
Gross Profit 5.14 5.59 6.04 6.51 6.99 7.48 7.98 8.49 9.02 9.56
Depreciation 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95
Profit Before Tax 3.19 3.64 4.09 4.56 5.04 5.53 6.03 6.54 7.07 7.61
Tax @ 30% 0.96 1.09 1.23 1.37 1.51 1.66 1.81 1.96 2.12 2.28
Profit After Tax 2.23 2.55 2.86 3.20 3.53 3.87 4.22 4.58 4.95 5.33
Depreciation 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95 1.95
residual Value 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.00
Cash Flows after Tax 4.18 4.50 4.81 5.15 5.48 5.82 6.17 6.53 6.90 12.28
Present Value Factor @
20% 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
Present Value of Cash Flows 3.48 3.12 2.79 2.48 2.20 1.95 1.72 1.52 1.34 1.99
Calculation of NPV
Total Present Value of Cash
Flows 22.60
Initial Capital Outlay 20
Net Present Value Total present value of cash flow less initial outflow
2.598246
C
By considering the sensitivity analysis proposal should be accepted by Saturn pet care as even in adverse circumstances it is able to
generate positive returns.

(iii)
Table 7: Statement showing comparative evaluation of available options
(In Million AUD)
Years Option A Present Value
Factor @ 6%
present
value of
the cash
flow
Option B
Present
Value
Factor
@ 6%
present
value of the
cash flow
0 475000 1 475000.00 475000 1 475000.00
1 100000 0.943 94300.00 80000 0.943 75440.00
2 100000 0.89 89000.00 80000 0.89 71200.00
3 100000 0.84 84000.00 80000 0.84 67200.00
4 100000 0.792 79200.00 80000 0.792 63360.00
5 100000 0.747 74700.00 80000 0.747 59760.00
6 100000 0.705 70500.00 80000 0.705 56400.00
7 80000 0.665 53200.00
8 80000 0.627 50160.00
9 80000 0.592 47360.00
Total 5.917 966700.00 7.802 1019080.00
Annualised cost= NPV of the project/ cumulative present value annuity factor
Annualised cost under option A= 966700/5.917
163376.77

Annualised cost under option B= 1019080/7.802
130617.79
By considering the analysis, it can be noticed that project A is more beneficial in comparison to project B.

PART B
Executive summary
AMP Limited is engaged in providing various financial services to Australian and New Zealand
customers inclusive of banking, wealth management and financial planning services (AMP
Limited, 2017). The present study shows that firm has continued to improvise its financial and
capital structure, and has mitigated material risks excellently, with their risk management
strategies, statements and proper management of debt and equity.
Introduction
The present study aims to conduct the financial analysis of AMP Limited, covering the WAACC
comparative analysis, financial ratio analysis and material risks analysis. Along with this the
study also assesses the considerable changes that took place in the firm's capital structure in the
last three years.
Comparative analysis of WAACC and capital structure
Capital structure of AMP limited
Amount Weight
Debt $21009 .74
Equity $7202 .26
Total $28211 1
WACC of AMP Ltd
Weight
Cost of finance Weighted Cost
(Cost of finance *
weight)
Debt .74 1.95% Note 1 1.46%

Equity .26 9.73% Note 2 2.53%
1 3.99%
Note 1 Note 2
Cost of debt Cost of equity
Interest cost (1−tax rate) ℜ= ( Diviend paid/Price of share ) + growthrate
2.79%* (1-.3 /(tax rate)) =.29/3.22+8%
1.95% =9.73%
Working note 1
Interest /Debt*100
585/21009
2.79%
Calculation of CAPM of AMP Ltd
Risk free rate + beta (Return of market - Risk free rate
2.26 % +1.47∗¿%)
¿ 11.49 %
Working note 2
Risk free rate is considered by yield rate delivered by Australian government bonds.
Comparison of capital structure of AMP Ltd and Common Wealth Bank
Commonwealth bank Weight AMP Limited Weight
Debt 63,716 .77 21009 .74
Equity 18726 .23 7202 .26

82,442 1 28211 1
By analyzing the capital structure of the both companies, it has been observed that both the
companies implement the parallel policy for retaining the capital structure. Since both
organizations are related with the banking industry along with the objective of earning profit
therefore in the capital structure, the companies maintain the potion of debt higher than as
compare with the equity, which leads to the ideal capital cost of the organizations.
Key financial ratios for AMP Limited
Liquidity and
solvency ratio
2017 2016 2015 2014 2013
Current ratio 0.67% 0.65% 0.78% 0.86% 0.85%
Long term
debt
0.46% 0.45% 0.55% 0.52% 0.48%
Debt/equity
ratio
0.88% 0.86% 1.24% 1.09% 0.970%
The ideal current ratio is 2:1, and by considering the above table the current ratio of company is
not ideal, it is reducing overtime which shows that company has managed its working capital
effectively and is required to work on the same (Market Watch, 2018). Since the company has
given more weight to debt and less weight to equity in recent times, which is an ideal strategy
because by considering trend of profits over the years, as with the stability in profits. It is
because ensuring stability in financial costs is prudent decision in associated with the constant
profits of the business.
Profitability
ratio
2017 2016 2015 2014 2013
Operating
margin
20.58% 15.68% 21.00% 23.43% 20.01%

Net profit
margin
12.31% 11.23% 12.83% 13.20% 11.91%
Profits of the company are stabilized over the years, reflecting that company has managed its
assets and resources in an optimum manner.
Efficiency
ratio
2017 2016 2015 2014 2013
Asset
turnover ratio
0.08% 0.08% 0.08% 0.08% 0.08%
Receivable
turnover ratio
2.07% 2.20% 2.31% 2.44% 2.43%
Similar to the profitability, company had maintained their efficiency over the assets
appropriately, by focusing equally on retunes as well as available resources. However, company
is required to improvise the current situation to ensure sustainable growth. This can be attained
through investing in new technology to enjoy higher returns.
Investor ratio 2017 2016 2015 2014 2013
Return on
Equity (ROE)
24.67% 22.88% 20.13% 21.51% 16.01%
Return on
Tangible
Equity
24.67% 22.88% 20.13% 21.51% 16.01%
Return on
Assets (ROA)
1.00% 0.94% 1.16% 1.35% 1.02%
Return on
Investment
(ROI)
13.34% 11.39% 9.07% 10.41% 8.36%

Investor ratios are showing an increasing trend, stating that company has focused more on
shareholder wealth of business.
Significant changes to have occurred to the firm's capital structure during the past three years
AMP Limited
2017 Weight 2016 Weight 2015 Weight
Equity 7202 2.06% 7462 5.09% 8519 5.06%
Debt 21009 7.04% 5241 4.01% 6664 4.04%
28211 1.0% 12703 1.0% 15183 1.0%
It can be asserted that the firm has maintained an effective balance between debt and equity,
neither higher nor is lower. The management of firm is optimally good, and by the same it has
enjoyed stabilized profit over time. The firm has provided preference towards debt currently in
the year 2017, because if they earn more proceeds, then it not mandatory for them to provide
more proceeds to shareholders as well. Hence, this strategy of increasing debt strengthens the
financial performance and structure of the company, thereby assisting them in gaining more of
profits and success.
Material risks faced by the business
AMP Limited has segregated risks into seven types of material risks which are managed,
considered and reported to the board and reliable committees of make sure that there is proper
and adequate management of risk. The risk appetite statement are based on these risks that
include the main material risks types impact valid to AMP which can be employed to manipulate
risks and support the expected risk culture of AMP (Annual Report of AMP Limited, 2017).
The seven material risks types are; strategic risks which is caused by lost or foregone value
linked with key decisions, credit risks which is held by non-payment of an agreed payment by
a counterparty, market risk caused by adverse changes in prices of market and investment values,
insurance risks of drastic developments of insurance rates, liquidity risks is the risk that means
inability to fund, concentration risks is caused by variety of exposures inclusive of credit

concentration etc and the last is operational risks led from failure of internal procedures (AMP
Limited, 2017).
Conclusion
On the basis of above analysis, conclusion can be drawn that the risk management strategy with
the effective ERM structure properly deals with the AMP material risks, in this way the risk
exposures are adequately determined, assessed and mitigated by the firm. Thus, the firm has also
continued to deliver effective financial performance from the last three years.

REFERENCES
AMP Limited, (2017). Retrieved from < https://www.amp.com.au/>.
AMP Limited, 2017. (2017). corporate governance statement Retrieved from <
https://corporate.amp.com.au/content/dam/corporate/aboutus/files/2017%20corporate
%20governance%20statement.pdf>.
Annual Report of AMP Limited, (2016). Retrieved from <
https://www.asx.com.au/asxpdf/20170320/pdf/43gx9bppxvx00n.pdf>.
Annual Report of AMP Limited, (2017). Retrieved from <
http://www.annualreports.com/HostedData/AnnualReports/PDF/OTC_AMLTY_2017
.pdf>.
Annual Report of Common Wealth Bank, (2016). Retrieved from <
https://www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/
annual-reports/annual_report_2017_14_aug_2017.pdf>.
Market Watch, (2018). AMP Ltd. Retrieved from <
https://www.marketwatch.com/investing/stock/amp/profile?countrycode=au>.