ACC10707 - Finance: Capital Investment, CVP Analysis Solution

This assignment solution for ACC10707 addresses key concepts in finance, including capital investment and cost-volume-profit (CVP) analysis. The solution begins with a cash budget for Garden Enterprises, projecting cash inflows and outflows over three months. It then proceeds to a break-even analysis, calculating break-even units for a multi-product scenario and assessing the impact of sales mix changes. The assignment further explores capital investment decisions, evaluating a small truck purchase using Net Present Value (NPV) at different discount rates and calculating the payback period. The analysis concludes that the truck purchase is advisable based on the positive NPV, although the payback period is longer than initially expected. The solution incorporates relevant financial calculations and interpretations, offering a comprehensive understanding of the topics covered.

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ACC10707

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Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................3
Question 3........................................................................................................................................4
a)..................................................................................................................................................4
b)..................................................................................................................................................4
c)..................................................................................................................................................5
d)..................................................................................................................................................5
References........................................................................................................................................6

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Question 1
Cash budget
Particulars October Novembe
r
December
Opening balance 78010 174495 832020
Cash Sales 45000 47500 49000
Receipts from Accounts
Receivable
220000 244920 284020
Receipt of Loan 0 550000 0
Interest Received 2210 2305 2430
Total income 345220 1019220 1167470
Wages 50000 50000 70000
Office Furniture 16050 18950 0
Prepayments 0 0 9890
Administrative Expense 15000 15000 15000
Payments of Accounts
Payable
89675 103250 106950
Total payments 170725 187200 201840
Closing cash balance 174495 832020 965630
Question 2
a)
Particulars 1 year
old
2 year
old
3 year
old
Total
Sales mix 50000 35000 15000 100000
Selling price 12 18 30
Variable cost 8 12 18
Contribution 4 6 12
Sales mix % 0.5 0.35 0.15
Weighted contribution
margin
200000 210000 180000 590000
Weighted average contribution margin 5.9
Fixed cost 220500
Total break-even units 37373
Breakeven units 18686 13081 5606

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b)
Particulars 1 year
old
2 year
old
3 year
old
Total
Sales mix 40000 30000 30000 100000
Selling price 12 18 30
Variable cost 8 12 18
Contribution 4 6 12
Contribution in value 160000 180000 360000 700000
Fixed cost 260500
Net profit 439500
With the undertaking of the initiative, there will be profit which will be made by the company
and so the initiative shall be undertaken. Although the fixed cost has increased, it is providing
with the higher returns as the sales mix has changed.
Question 3
a)
Year Cash
flow
PVF @
5%
PV
0 -
191000
1 -191000
1 62000 0.952381 59047.62
2 62000 0.907029 56235.83
3 57000 0.863838 49238.74
4 41900 0.822702 34471.23
5 68700 0.783526 53828.25
PV of inflows 252821.7
NPV 61821.67
b)
Year Cash
flow
PVF @
7%
PV
0 -
191000
1 -191000
1 62000 0.934579 57943.93
2 62000 0.873439 54153.2
3 57000 0.816298 46528.98
4 41900 0.762895 31965.31
5 68700 0.712986 48982.15

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PV of inflows 239573.6
NPV 48573.57
c)
The small truck shall be purchased by the company as the net present value which has been
calculated is positive in both the cases (Žižlavský, 2014). With the discount rate to be 5% it will
be $61821.67 and $48573.57 with a rate of 7%. The more benefit will be obtained at the rate of
5% and the business, therefore, purchase the truck as there will be gain which will be made with
the help of this.
d)
Year Cash
flow
Cumulative
cash flow
1 62000 62000
2 62000 124000
3 57000 181000
4 41900 222900
5 68700 291600
Payback period 3.24
The payback period which is expected by the company is 2 years but in actual it is higher with
3.24 years. The higher payback period shows that it will be taking more time to recover the cost
which is incurred in the business (Gorshkov et al., 2014). This will be reducing the period for
which the earnings will be made and fewer amounts will be gained by the company. Due to the
higher payback then the expectation it is not advisable to invest in the purchase of the truck.

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References
Gorshkov, A.S., Rymkevich, P.P., Nemova, D.V. and Vatin, N.I. (2014) Method of calculating
the payback period of investment for renovation of building facades. Stroitel'stvo Unikal'nyh
Zdanij i Sooruzenij, (2), p.82.
Žižlavský, O. (2014) Net present value approach: method for economic assessment of innovation
projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.