Financial Accounting Assignment - Gelco Ltd Project Evaluation

Running head: FINANCIAL ACCOUNTING ASSIGNMENT
Financial accounting assignment
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1FINANCIAL ACCOUNTING ASSIGNMENT
Table of Contents
Question 1........................................................................................................................................2
(a) Payback period..................................................................................................................3
(b) Accounting rate of return (ARR)......................................................................................6
(c) Discounting technique and net present value....................................................................8
(d) Profitability index (PI)....................................................................................................10
Question 2......................................................................................................................................12
(a) Relevance of variance analysis.......................................................................................12
(b) Strategies for saving the market leadership....................................................................15
(c) Break-even point and margin of safety...........................................................................17
(d) Absorption costing..........................................................................................................19
Reference.......................................................................................................................................21

2FINANCIAL ACCOUNTING ASSIGNMENT
Question 1
Gelco Ltd is considering 2 projects for its expansion with different cash flows and useful
lives. Project A has useful life span of 4 years and requires £85,000 as initial investment whereas
project B has useful life span of 5 years and requires £60,000 as initial investment. These
projects will be evaluated based on their ARR, NPV and payback period and profitability index.
Project A
Year 0 Year 1 Year 2 Year 3 Year 4
Cash flows -£ 85,000.00 £ 15,000.00
£
35,000.00
£
32,000.00
£
53,000.00
Depreciation -£ 17,000.00
-£
17,000.00
-£
17,000.00
-£
17,000.00
Salvage value
£
5,000.00
Cash flows -£ 85,000.00 -£ 2,000.00
£
18,000.00
£
15,000.00
£
41,000.00
Discounting @ 10% £ 1.00
£
0.91
£
0.83
£
0.75
£
0.68
Discounted cash flows -£ 85,000.00 -£ 1,818.18
£
14,876.03
£
11,269.72
£
28,003.55
NPV -£ 32,668.88
ARR 18.75%
Profitability Index 0.62
Discounted payback
period More than 4 years
Year Cash flows
Cumulative
cash flows
0 -£ 85,000.00 -£ 85,000.00
1 -£ 1,818.18 -£ 86,818.18
2 £ 14,876.03 -£ 71,942.15
3 £ 11,269.72 -£ 60,672.43
4 £ 28,003.55 -£ 32,668.88
Project B
Year 0
Year
1 Year 2 Year 3 Year 4 Year 5