Accounting for Business: Investment Appraisal and Budgeting Report

This report provides a financial analysis of Delcom Chemical's investment opportunities, evaluating the purchase of a new business and an existing plant. It utilizes capital budgeting techniques, including payback period, net present value (NPV), and accounting rate of return (ARR), to assess the profitability and feasibility of each investment. The analysis includes detailed calculations of cash inflows, discounted cash flows, and profitability metrics. Additionally, the report examines sales, labor, and cash flow budgets to forecast financial performance. The report concludes with a comparison of the two investment proposals, recommending the purchase of the existing plant based on a shorter payback period and higher net cash inflow within a shorter timeframe, despite lower overall cash inflows compared to the new business, which would take longer to generate returns.

Accounting for Business

Table of Contents
QUESTION 1..................................................................................................................................1
QUESTION 2..................................................................................................................................2
QUESTION 3..................................................................................................................................3
QUESTION 4..................................................................................................................................4
QUESTION 5..................................................................................................................................4
REFERENCES................................................................................................................................6
Index of Tables
Table 1 Calculation of cash inflows................................................................................................1
Table 2 Calculation of payback period............................................................................................1
Table 3 Calculation of net present value.........................................................................................1
Table 4 Calculation of accounting rate of return.............................................................................2
Table 5 Sales budget........................................................................................................................3
Table 6 Labor budget.......................................................................................................................3
Table 7 Cash Flow Budget..............................................................................................................3

QUESTION 1
Delcom Chemical has an investment opportunity to purchase a new business; its
quantitative analysis through capital budgeting method is performed as follows:
Table 1 Calculation of cash inflows
Year Profit Depreciation Cash inflow
1 $ 200,000.00 $ 160,000.00 $ 360,000.00
2 $ 210,000.00 $ 160,000.00 $ 370,000.00
3 $ 300,000.00 $ 160,000.00 $ 460,000.00
4 $ 320,000.00 $ 160,000.00 $ 480,000.00
5 $ 340,000.00 $ 160,000.00 $ 500,000.00
$ 1,370,000.00 $ 800,000.00 $ 2,170,000.00
Table 2 Calculation of payback period
Year Cash flow Cumulative cash flows
1 $ 360,000.00 $ 360,000.00
2 $ 370,000.00 $ 730,000.00
3 $ 460,000.00 $ 1,190,000.00
4 $ 480,000.00 $ 1,670,000.00
5 $ 500,000.00 $ 2,170,000.00
Pay−back period=2 year +( $ 800,000−$ 730,000)/$ 460,000
¿ 2 year 2months
Table 3 Calculation of net present value
Year Cash flow
Discounting factor
@13% Discounted cash flows
1 $ 360,000.00 0.8850 $ 318,584.07
2 $ 370,000.00 0.7831 $ 289,764.27
3 $ 460,000.00 0.6931 $ 318,803.07
4 $ 480,000.00 0.6133 $ 294,392.99
5 $ 500,000.00 0.5428 $ 271,379.97
Total cash inflows $ 1,492,924.38
Less: Initial investment $ 800,000.00
Net present value $ 692,924.38
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Table 4 Calculation of accounting rate of return
Year Profitability
1 $ 200,000.00
2 $ 210,000.00
3 $ 300,000.00
4 $ 320,000.00
5 $ 340,000.00
Total $ 1,370,000.00
ARR=average profitability / Initial investment∗100
¿( $ 1,370,000/5 years)/$ 800,000∗100
¿ $ 274,000/$ 800,000∗100
¿ 34.25 %
QUESTION 2
Payback period is a method to determine the time required by a project to recoup back its
initial investment (Baum and Crosby, 2014). Delcom Chemical’s project of investment in new
industrial business will get back its initial outlay within just 2 year 2 month. It state that initial
cash outlay will be get back quickly through cash inflows. However, investment decisions can’t
be taken considering only the payback duration because neither it focuses on cash inflows after
payback nor it considers monetary value.
NPV is the best way of investment appraisal as it takes time value of money and also
considers cash inflow of the entire life (Almarri and Blackwell, 2014). The results show that
company will generate positive NPV worth $692,924.38, by exceeding discounted cash inflows
over initial investment; hence, investin money in the new industrial business will be definitely
worthy for Delcom Chemical. Besides this, ARR consider expected profit and used to anticipate
possible accounting return (Guerra, Magni and Stefanini, 2014). For the given proposal, ARR
found 34.25% that shows good profit margin over the required investment.
Thus, it becomes clear that all the method shows that Delcom Chemical must go head and
invest $800,000 to purchase new industry that will drive good return.
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QUESTION 3
Table 5 Sales budget
Particulars Jan Feb March April
Sales quantity (in ton) 400 400 400 400
Selling price /ton
$
1,600.00
$
1,600.00
$
1,600.00
$
1,600.00
Total sales
$
640,000.00
$
640,000.00 $ 640,000.00 $ 640,000.00
Table 6 Labor budget
Particulars Jan Feb March April
Weeks per month 4 4 4 4
Number of days per week 5 5 5 5
Working hours/day $7.50 $7.50 $7.50 $7.50
Working hours/employee 150 150 150 150
Staff members 14 14 14 14
Total working days 2100 2100 2100 2100
Wages /per hour $26.50 $26.50 $26.50 $ 26.50
Total labor cost $55,650.00 $55,650.00 $55,650.00 $55,650.00
Table 7 Cash Flow Budget
Particulars Jan Feb March April
Cash inflows
opening Bank balance $100,000.00 $244,350.00
$
388,699.00 $533,047.00
Sales revenue $640,000.00 $640,000.00 $640,000.00 $640,000.00
Total cash available $740,000.00 $884,350.00 1,028,699.00
$
1,173,047.00
Less: cash outflows
Material $300,000.00 $300,001.00 $300,002.00 $ 300,003.00
Labor $ 55,650.00 $ 55,650.00 $55,650.00 $ 55,650.00
Electricity $100,000.00 $100,000.00 $100,000.00 $100,000.00
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Administration $ 40,000.00 $40,000.00 $ 40,000.00 $ 40,000.00
Total cash ioutflows $495,650.00 $495,651.00 $495,652.00 $495,653.00
Net cash (deficit or surplus) $244,350.00 $388,699.00 $ 533,047.00 $ 677,394.00
QUESTION 4
Sales budget, as name itself, is used to know the total expected sales value by multiplying
the sales quantity and selling price (Whitecotton, Libby and Phillips, 2013). For the prospective
plan of investment in an existing chemical plan, Delcom Chemical expects to sell 400 ton @
$1600/ton and generate monthly sales revenue of $640,000. It shows that neither the sales
quantity nor selling price is expected to change in the short period of just 4 months. On the other
side, labor budget is used to know potential costs that Delcom will pay to labourers for carrying
out necessary functions (Klychova, Faskhutdinova and Sadrieva, 2014). It will pay hourly wages
rate of $26.50 at a uniform basis to all the workers and incur total labor cost of $55,650 every
month. Lastly, cash budget is used to know possible cash earnings and expenditures and
determines net cash available whether deficit or shortfall. The results indicate that Delcom will
generate rising cash balance over 4 months to $244,350, $388,699, $533,047 and $677,394
respectively.
QUESTION 5
New business purchase Existing plant purchase
Initial investment $800,000.00 $800,000.00
Total cash inflows $2,170,000.00 $1,370,000.00
Net cash inflow $1,370,000.00 $570,000.00
Finding out the results of both the proposals about purchasing a new business or existing
plant; it is determine that on purchase of unit, Delcom Chemical is expected to generate a total
net present value of $692,924.38. However, existing business unit purchase will bring net cash
inflow of $1,843,490 within just 4 months after investment and its surplus over initial outlay of
$800,000 found to $1,043,490. Considering the payback period, purchase of new building is 2
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year 2 months, whereas investment for buying existing plant will take shorter time of 2 month 10
days. Thus, based on it, Delcom Chemical must go ahead to invest in existing plant as it will be
more profitable (Baum and Crosby, 2014). Besides this, as per the above table, buying new
business will generate total cash inflow of $2,170,000; in contrast, other proposal’s total cash
inflow is $1,370,000. However, time is a major factor here, because first projects will generate
high cash inflow but take lengthy time of 5 years. Unlike this, later project take only 4 months.
Thus, on the basis of such findings, it is better to suggest Delcom to invest money to buy existing
business instead of investing in a new industry as it will be riskier.
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REFERENCES
Books and Journals
Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP
procurement success in large green projects. Procedia-Social and Behavioral
Sciences. 119. pp.847-856.
Baum, A. E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Guerra, M. L., Magni, C. A. and Stefanini, L., 2014. Interval and fuzzy Average Internal Rate of
Return for investment appraisal. Fuzzy Sets and Systems. 257. pp.217-241.
Klychova, G. S., Faskhutdinova, М. S. and Sadrieva, E.R., 2014. Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences. 5(24). p.79.
Whitecotton, S., Libby, R. and Phillips, F., 2013. Managerial accounting. McGraw-Hill Higher
Education.
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