Impact of Working Capital Management on Profitability

This assignment delves into the crucial link between working capital management strategies and a company's profitability. It requires students to examine various theoretical frameworks and empirical studies that shed light on this relationship. Students should analyze the impact of different working capital management practices on profitability, drawing upon relevant research papers and academic literature.

Running Head: Finance
1
Project Report: Finance

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Contents
Introduction.......................................................................................................................3
Part A................................................................................................................................4
Initial investment..........................................................................................................4
Operating cash inflows.................................................................................................5
Terminal cash flow.......................................................................................................7
Part B................................................................................................................................7
Relevant cash flow stream:...........................................................................................7
Part C................................................................................................................................9
Payback period..............................................................................................................9
Net present value........................................................................................................10
Internal rate of return..................................................................................................11
Past D..............................................................................................................................12
Draw the graph...........................................................................................................12
Part E..............................................................................................................................12
Conflicting ranking of projects...................................................................................13
Recommendation........................................................................................................13
Part F...............................................................................................................................13
Recommendation........................................................................................................13
Conclusion......................................................................................................................14
References.......................................................................................................................15

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Introduction:
This report has been prepared on a case study which explains about a company CQU
printers. This company is managing its operations through an old printer but the new
managing director of the company has suggested to the company to make few changes into
its current machinery and replace the machineries with new printer. Further, in this report, the
cash flows of new printers have been evaluated and it has been found that which proposal is
the best option for the company (Brown, Beekes & Verhoeven, 2011). Capital budgeting
techniques makes it easy for the companies to evaluate 1 or more investment proposal easily.
Following is the exact case:
Production units
$
50,000
Old Printer
Installed cost
$
4,00,000
Life 5 Years
Sales value after 3 years
$
4,20,000
Sales value after 5 years
$
1,50,000
Current book value
$
1,16,000
New Printer (A)
Installed cost
$
8,70,000
Life 5 Years
Sales value after 5 years
$
4,00,000
Book value after 5 years
$
43,500
New Printer (B)
Installed cost
$
6,60,000
Life 5 Years
Sales value after 5 years
$
3,30,000
Book value after 5 years $

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33,000
Tax rate 30%
Cost of capital 14%
Profit before depreciation and taxes for CQU
printers
Year Old printer Printer A
Printer
B
1 120000 250000 210000
2 120000 270000 210000
3 120000 300000 210000
4 120000 330000 210000
5 120000 370000 210000
Part A:
In this part, the initial investment, operating cash inflows and terminal cash flows of
both the projects have been calculated:
Initial investment:
The below table explain that the initial investment of printer A is $ 4,50,000 and
initial investment of project B is $ 2,40,000 which explain that the investment of printer B is
quite lesser.
Calculation of initial investment
New Mach
(A)
New Mach
(B)
Installed cost $ 8,70,000 $ 6,60,000
Less: Selling
Price $ 4,20,000 $ 4,20,000
Initial
Investment $ 4,50,000 $ 2,40,000
(Atrill & McLaney, 2006)
W.N:
Calculation of current net profit

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Installed cost $ 4,00,000
Less: Depreciation of 3 years $ 1,50,000
Value after 3 years $ 2,50,000
Current Selling value $ 4,20,000
Profit $ 1,70,000
Net profit $ 1,70,000
Operating cash inflows:
More, operating cash flows of both the projects explain that the total operating cash
inflow of Printer A is $ 7,26,5550 and on the other hand, total operating cash flow of printer
B is $ 4,28,100 (Gitman, 2009). Following is the calculation of operating cash flows:
Differential Cash Flows
from Operations
Initi
al
YEA
R 1
YEA
R 2
YEA
R 3
YEA
R 4
YEA
R 5
DIFFERENTIATED
DEPRECIATION
-
1,15
,300
-
1,15
,300
-
1,15
,300
-
1,15
,300
-
1,15
,300
Cash inflows from new
machinery
2,50
,000
2,70
,000
3,00
,000
3,30
,000
3,70
,000
Cash inflows from old
machinery
-
1,20
,000
-
1,20
,000
-
1,20
,000
-
1,20
,000
-
1,20
,000
DIFFERENTIATED Earnings
Before Interest &Taxes
14,
700
34,
700
64,
700
94,
700
1,3
4,7
00
TAXES
-
4,41
0
-
10,4
10
-
19,4
10
-
28,4
10
-
40,4
10
DIFFERENTIATED EBIAT
10,2
90
24,2
90
45,2
90
66,2
90
94,2
90
DIFF Operational CF
1,2
5,5
90
1,3
9,5
90
1,6
0,5
90
1,8
1,5
90
2,0
9,5
90
Changes in operating
assets and liabilities
Changes in cash
-
254
00
Changes in Accounts -

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Receivable
120
000
Inventories
200
00
Changes in Accounts
Payable
350
00
-
90,40
0
1,2
5,5
90
1,3
9,5
90
1,6
0,5
90
1,8
1,5
90
2,0
9,5
90
Total Operational Cash flows
7,26,
550
Differential Cash Flows
from Operations
Initi
al
YEA
R 1
YEA
R 2
YEA
R 3
YEA
R 4
YEA
R 5
DIFFERENTIATED
DEPRECIATION
-
75,4
00
-
75,4
00
-
75,4
00
-
75,4
00
-
75,4
00
Cash inflows from new
machinery
2,10
,000
2,10
,000
2,10
,000
2,10
,000
2,10
,000
Cash inflows from old
machinery
-
1,20
,000
-
1,20
,000
-
1,20
,000
-
1,20
,000
-
1,20
,000
-
1,20
,000
DIFFERENTIATED Earnings
Before Interest &Taxes
14,6
00
14,6
00
14,6
00
14,6
00
14,6
00
TAXES
-
4,38
0
-
4,38
0
-
4,38
0
-
4,38
0
-
4,38
0
DIFFERENTIATED EBIAT
10,2
20
10,2
20
10,2
20
10,2
20
10,2
20
DIFF Operational CF
85,6
20
85,6
20
85,6
20
85,6
20
85,6
20
Total Operational Cash flows
4,28,
100
(Falope & Ajilore, 2009)
W.N.
Years 1 to 5
Differential Depreciation
DEPRECIAT NEW
MACHIN
-
1,65,300 -1,25,400
DEPRECIAT OLD 50,000 50,000

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MACHIN
Differential Depreciation
-
1,15,300 -75,400
Terminal cash flow:
More, terminal cash flows of both the projects explain that the total terminal cash
inflow of Printer A is $ 3,56,500 after the end of 5 years and on the other hand, total terminal
cash flow of printer B is $ 2,97,000. Following is the calculation of terminal cash flows:
Calculation of terminal cash flows
Printer A Printer B
Salvage
Value
$
43,500
$
33,000
Book Value
$
4,00,000
$
3,30,000
Capital Gain
$
3,56,500
$
2,97,000
Net cash
flow
$
3,56,500
$
2,97,000
Part B:
Relevant cash flow stream:
Accoridng to the part A, following is the cash flow stream of both the printers of the
company:
Cash Flows Stream
Initia
l
YEA
R 1
YEA
R 2
YEA
R 3
YEA
R 4
YEA
R 5
Initial Investment
-
4,50,
000
DIFFERENTIATED
DEPRECIATION
-
1153
00
-
1153
00
-
1153
00
-
1153
00
-
1153
00

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Cash inflows from new machinery
2500
00
2700
00
3000
00
3300
00
3700
00
Cash inflows from old machinery
-
1200
00
-
1200
00
-
1200
00
-
1200
00
-
1200
00
DIFFERENTIATED Earnings
Before Interest &Taxes
1470
0
3470
0
6470
0
9470
0
1347
00
TAXES
-
4410
-
1041
0
-
1941
0
-
2841
0
-
4041
0
DIFFERENTIATED EBIAT
1029
0
2429
0
4529
0
6629
0
9429
0
DIFF Operational CF
-
4,50,
000
1255
90
1395
90
1605
90
1815
90
2095
90
Changes in operating assets and
liabilities
Changes in cash
-
2540
0
Changes in Accounts Receivable
-
1200
00
Inventories
2000
0
Changes in Accounts Payable
3500
0
-
5,40,
400
1255
90
1395
90
1605
90
1815
90
2095
90
Salvage Value
4350
0
Book Value
4000
00
Capital Gain
3565
00
Tax on capital gain
Net cash flow
3565
00
Total Operational Cash flows
-
5404
00
1255
90
1395
90
1605
90
1815
90
5660
90
6,33,
050
Present value factor 1
0.877
2
0.769
5
0.675
0
0.592
1
0.519
4
Present value
-
5404
00
1101
67
1074
10
1083
94
1075
16
2940
09
1,87,
096

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Cash Flows Stream
Initia
l
YEA
R 1
YEA
R 2
YEA
R 3
YEA
R 4
YEA
R 5
Initial Investment
-
2,40,
000
DIFFERENTIATED
DEPRECIATION
-
7540
0
-
7540
0
-
7540
0
-
7540
0
-
7540
0
Cash inflows from new machinery
2100
00
2100
00
2100
00
2100
00
2100
00
Cash inflows from old machinery
-
1200
00
-
1200
00
-
1200
00
-
1200
00
-
1200
00
-
1200
00
DIFFERENTIATED Earnings
Before Interest &Taxes
1460
0
1460
0
1460
0
1460
0
1460
0
TAXES
-
4380
-
4380
-
4380
-
4380 -4380
DIFFERENTIATED EBIAT
1022
0
1022
0
1022
0
1022
0
1022
0
DIFF Operational CF
-
2,40,
000
8562
0
8562
0
8562
0
8562
0
8562
0
Salvage Value
3300
0
Book Value
3300
00
Capital Gain
2970
00
Tax on capital gain
Net cash flow
2970
00
Total Operational Cash flows
-
2,40,
000
85,62
0
85,62
0
85,62
0
85,62
0
3,82,
620
4,85,
100
Present value factor 1
0.877
2
0.769
5
0.675
0
0.592
1
0.519
4
Present value
-
2400
00
7510
5.3
6588
1.8
5779
1.1
5069
3.9
1987
20.8
2,08,
193
(Arnold, 2008)
It explains that the cash flows stream of both the projects are $ 1,87,906 and $
2,08,193 (Davies & Crawford, 2011).

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Part C:
Further, the capital budgeting techniques have been applied over both the projects to
evaluate the best project:
Payback period:
Payback period calculations are as follows:
Calculation of Payback period (Printer A)
Year Cash Outflow Cash Inflow C.F
0 -540400 -540400
1 125590 -414810
2 139590 -275220
3 160590 -114630
4 181590 66960
5 209590 276550
Payback Period 2.37
Calculation of Payback period (Printer B)
Year Cash Outflow Cash Inflow C.F
0 -240000 -240000
1 85620 -154380
2 85620 -68760
3 85620 16860
4 85620 102480
5 85620 188100
Payback Period 1.20
(Ching, Novazzi & Gerab, 2011)
Net present value:
Net present value of the projects is as follows:
Net present value (Printer A)
Year Cash Outflow Cash Inflow P.V. Factor P.V.
0 -540400 1 -540400
1 125590 0.877 110167

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2 139590 0.769 107410
3 160590 0.675 108394
4 181590 0.592 107516
5 566090 0.519 294009
Net present value 187096
Net present value (Printer B)
Year Cash Outflow Cash Inflow
P.V.
Factor P.V.
0 -2,40,000 1
-
240000
1 85,620 0.877 75105
2 85,620 0.769 65882
3 85,620 0.675 57791
4 85,620 0.592 50694
5 3,82,620 0.519 198721
Net present value 208193
(David, 2011)
Internal rate of return:
Internal rate of return of both the projects are as follows:
IRR
Year Cash Outflow Cash Inflow
0 -540400
1 125590
2 139590
3 160590
4 181590
5 566090
IRR 24.40%
IRR
Year Cash Outflow Cash Inflow
0 -240000
1 85620
2 85620

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3 85620
4 85620
5 382620
IRR 37.93%
(Jiashu, 2009)
The above calculation of IRR, NPV and payback period explain that the Printer B is
better than printer A because the IRR, NPV of printer B is higher than printer B and payback
period do printer A is quite higher.
Past D:
Draw the graph:
Following is the graph of NPV and IRR of both the projects:

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(Kavanagh & Drennan, L., 2008)
Part E:
Conflicting ranking of projects:
Through the above calculation of NPV an IRR and the above draw graph, it has been
found that the net present value of printer A is $ 1,87,096 and the NPV of printer B is $
2,08,193 which explains that the project b would offer more return to the company in
comparison of printer A (Bierman and Smidt, 2012). On the other hand, the IRR of both the
projects have been evaluated and it has been found that the printer a would offer 24.40%
return to the company that means the company would be able to earn 24.40% profit and on
the other hand, printer B would offer 37.93% return to the company. It expresses that printer
B would offer more return to the company and this internal rate of return is quite higher than
the total cost of capital of the company which is 14%. It explains that the printer B is on top
of the list and Printer A is on 2nd number in the list.
Recommendation:
Further, if the unlimited funds aspect and Capital rationing aspects are taken into the
concern than the decision could be changed about the best printer which would offer more
return to the company (Horngren et al, 2005). In case of unlimited funds, company could
raise the money for all the profitable projects basically through paying cost of capital to the
fund holder. In the given case, unlimited fund aspect depict that both the projects are

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profitable for the company and both would offer a great return to the company so the
company should adopted both the projects and enhance its revenues (Gitman & Zutter, 2012).
Further capital rationing explains that the company is not willing to enhance the fund
and pay the required rate of return and thus the company should only invest in those projects
which would offer high return to the company (Du & Girma, 2009). Thus, the case explains
that the printer B must be adopted by the company and the investment must be done in this
printer as it would offer high return to the company and the initial investment of this printer is
also lower than the printer A (Deegan, 2013). It explains that the printer must be accepted by
the company.
Part F:
Recommendation:
If the operating cash flows of printer A are very risky and the operating cash flows of
printer b are less risky than it is recommended to the company to choose printer b only
(Romney, Steinbart, Zhang & Xu, 2006). As the capital budgeting methods and capita;
rationing model explain that the project B would offer high return to the company and the
case explain that the associated risk with project B is lesser and thus the project b would be
the best opportunity for the company to made (Kaplan & Atkinson, 2015). The above
calculation of IRR, NPV and payback period explain that the Printer B is better than printer
A because the IRR, NPV of printer B is higher than printer B and payback period do printer
A is quite higher (Shapiro, 2005).
Conclusion:
To conclude, both the projects would offer high return to the company and the
invested amount would be got back by the company soon. But the Printer b is much better
than Printer A in context with the NPV, IRR and Payback and thus it is concluded that the
project b would be the best opportunity for the company to made.

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Working Capital? Journal of Quality and Technology Management, 3 (2)
Arnold, G. (2008). Corporate Financial Management. 3rd Ed. England: Pearson Education
Atrill, P. & McLaney, E.J., (2006). Accounting and Finance for Non-specialists. Pearson
Education.
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Brown, P., Beekes, W. & Verhoeven, P., (2011). Corporate governance, accounting and
finance: A review. Accounting & finance, 51(1), pp.96-172.
Ching HY, Novazzi A,& Gerab F. ( 2011).Relationship between Working Capital
Management and Profitability in Brazilian Listed Companies. Journal of Global
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companies in Nigeria. Research
David, F.R., (2011). Strategic management: Concepts and cases. Peaeson/Prentice Hall.
Davies, T. & Crawford, I., (2011). Business accounting and finance. Pearson.
Deegan, C., (2013). Financial accounting theory. McGraw-Hill Education Australia.
Du, J. & Girma, S., (2009). Source of finance, growth and firm size: evidence from
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Jiashu, G., (2009). Study on Fair Value Accounting——on the essential characteristics of
financial accounting [J]. Accounting Research, 5, p.003.

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Kaplan, R.S. & Atkinson, A.A., (2015). Advanced management accounting. PHI Learning.
Kavanagh, M.H. & Drennan, L., (2008). What skills and attributes does an accounting
graduate need? Evidence from student perceptions and employer
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