Accounting and Financial Management : Assignment
Added on 2020-01-15
14 Pages2801 Words181 Views
ACCOUNTINGAND FINANCIALMANAGEMENT1
Table of ContentsINTRODUCTION ...............................................................................................................................4PART 1 ................................................................................................................................................4PART 2..................................................................................................................................................6(1) All possible scenarios with graph...............................................................................................6Calculation of Expected NPV..........................................................................................................8Calculation of standard deviation of NPV.......................................................................................9Recommendation to Cashion International......................................................................................9PART 3..................................................................................................................................................9Calculation of payback period and internal rate of return...............................................................9Advice to Cashion International whether to run project, sell or conduct an marketing campaign.......................................................................................................................................................10CONCLUSION...................................................................................................................................11REFERENCES...................................................................................................................................12APPENDIX........................................................................................................................................13Index of TablesTable 1: Cumulative cash inflows and future values of cash inflow....................................................4Table 2: Annual cash flow at 1.8 selling price and fluctuate labour cost.............................................5Table 3: Annual cash flow at £2.16 S.P. And fluctuate labour cost.....................................................6Table 4: Annual cash flow at £1.53 S.P. And fluctuate labour cost.....................................................6Table 5: Calculation of standard deviation...........................................................................................8Table 6: Calculation of PP and IRR .....................................................................................................8Table 7: Calculation of NPV at £1.8 selling price and fluctuate labour cost......................................12Table 8: Calculation of NPV at £2.16 selling price and fluctuate labour cost....................................12Table 9: Calculation of NPV at £1.53 selling price and fluctuate labour cost....................................122
INTRODUCTION Every business organization has to make investment in some capital projects such as newmachinery and acquisition of new building. Effective investment decisions lead to business successand vice versa. Thus, it becomes necessary for the organizations to evaluate the project return sothat they can take better decisions. Present project report will address the significance of investmentappraisal techniques such as payback period, internal rate of return and net present value to takestrategic investment decisions. PART 1 Albanian government is auctioning the rights to mine copper in the east of the country.Mines International (MI) is a considering to determine the amount will be require to pay as lumpsum for acquiring five-year license. Net cash inflow: It can be computed through determining the difference between cash inflow andoutflow (Thijssen, 2010). Year 12345Opening cash balance 2222Sales Cash sales 6.47.27.25.6Credit sales1.61.81.8Resale value of the engineeringequipment 2Total cash inflows 08.410.81111.4Expenses Cash material and comsumablepurchase 0.360.240.30.30.24Credit material and consumablespurchase 0.240.160.20.2Wages and salaries 0.30.70.70.70.7Overheads 0.150.250.350.350.25Albainian government payments 0.650.650.650.650.65Survey costs 0.15Specialised machinery hire costs 0.12Specialised engineering equipmentcosts 5.57.112.082.282.22.04Total cash outflows -7.116.328.528.89.363
Less: Budgeted cash reserve 22222Deficit -9.114.326.526.87.36Assumptions:It has been assumed that MI will make 80% sales in cash and 20% on credit for 4 months. Cash material and consumable purchase has been assumed at 60% and remaining 40% oncredit for 4 months. Only the project related overheads has been considered for computing NCF. Albanian government will make a one-off refund of administration charges at the end offifth year which is not considered because it does not drive any cash inflow during theproject life. Special equipment cost worth £11m has been considered and out of this half will be paid atthe time of initial investment and remaining will be paid in next year. In order to determine maximum amount of auction bid, MI should compute total cashinflows and future value of CI from the project. It is because MI should not invest more than futurevalues of cash inflows than it will bear loss while excess of initial investment over the potentialfuture values will results in profit (Investment appraisal, 2008).Cumulative cash inflows and Future values of cash inflowIt can be determined through consistently adding of cash inflows over the project duration. Ithelps to compute payback period which reflects the time period require to re-earn the initial cashoutlay. While, the drawback of this method is it ignore time value of money and does not considerpost pay back profitability (Al-Ajmi, Al-Saleh and Hussain, 2011). On the other hand, net presentvalue can be determined by considering future values of all the cash inflows. The advantage of thismethod is it consider time value of the money through using discounting factor. The disadvantage ofthis method is determining an appropriate discount rate is very difficult task (Carr, Kolehmainenand Mitchell, 2010). Moreover, using an standard rate for overall project duration can not beconsidered realistic. For the present project, 10% discount rate is using. Table 1: Cumulative cash inflows and future values of cash inflowYear Cash flow PV of £1 @ 10%Future value 1-9.110.909-8.2809924.320.8263.5736.520.7514.8965246.80.6834.64444
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