Investment Appraisal Techniques and Budgeting in Strategic Planning

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Introduction to Accounting and Finance Assessment
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Table of Contents
Introduction......................................................................................................................................3
Part A - Dexter Plc...........................................................................................................................4
Part B - Philly Ltd............................................................................................................................8
Part C - Sankrust Ltd.....................................................................................................................12
Conclusion.....................................................................................................................................18
Reference list.................................................................................................................................19
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Introduction
In the context and background of every organisation, accounting and finance are the two most
significant aspects or components. This study is going to be helpful in the development and
acquiring of understanding regarding the primary concepts, techniques and models, which are
utilised within financial accounting such as investment appraisal along with the ones used in
management accounting such as breakeven analysis. At the same time, it will be showing how
finance has its role at international and local level through preparing financial statements and
reports of a limited entity. Thus, this study would be providing substantial level of information
regarding finance and accounting through three differing examples and discussions.
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Part A - Dexter Plc
Prepare a Statement of Income for the year ended 31st December 2018 and a Statement of
Financial Position as at 31 December 2018 for Dexter Plc
Statement of Income in Dexter Plc's book for period ending Dec 31st, 2018
Particulars Notes Amt Amt
Net amount of sales achieved (cash + credit) 1 £ 633,000.00
(-) Cost of goods sold (cash + credit) 2 £ 297,000.00
(+) Closing inventories for the year 3 £ 228,000.00
Gross income £ 564,000.00
(-) Operational expenditure
Payment made on premises taken on rent £ 90,000.00
Prepaid rent expenditure (advanced payment) 4 £ 22,500.00
Amount of depreciation on delivery van 5 £ 9,600.00
Payment of wages to staff £ 117,000.00
Electricity bills payment £ 5,700.00
Expenses on running van £ 33,600.00
Bad debt expense (Credit customer owing money
would not be able to clear off the dues)
£ 1,500.00 £ 279,900.00
(+) Outstanding expenses:
Wages outstanding for the year's last week £ 2,175.00
Electricity bills outstanding for the last quarter £ 2,025.00 £ 4,200.00
Profit Before Taxes (PBIT) £ 288,300.00
(-) Interest expenditure -
(-) Rates (taxes charged over business premises) 6 £ 5,775.00
(-) Business rates paid in advance 7 £ 1,125.00
Profit After Taxes (PAT) £ 281,400.00
Table 1: Income statement
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(Learner)
Notes:
(1) Net amount of sales achieved = (net sales received in cash + net sales received in credit) =
£504000 + £129000 = £633000
(2) Cost of goods sold = (net inventories sold from cash sales + net inventories sold from credit
sales = £243000 + £54000 = £297000
(3) Closing inventories for the year = Purchase of inventories (credit + cash) - Sale of inventories
(credit + cash) = £39000 + £486000 - £243000 - £54000 = £228000
(4) Prepaid rent expenditure = Rent paid in actual - Rent that was due for the year = £112500 -
£90000 = £22500
(5) Amount of depreciation on delivery van = Asset valuation at cost - Scrap valuation of the
asset ÷ Asset’s useful life = £ (60000 - 12000) ÷ 5 years = £48000 ÷ 5 = £9600
(6) Rates (taxes charged over business premises) = Rates for January 2017 to March 2018 +
Rates for April 2017 to December 2018 = £2400 + (£4500 ÷ 12 x 9) = £2400 + £3375 = £5775
(7) Business rates paid in advance = Total rates paid - Rates for the year 2018 = £4500 + £2400 -
£5775 = £1125
Statement of Financial Position in Dexter Plc's book as at Dec 31st, 2018
Particulars Amt Amt
Assets
(i) Non-current assets
Delivery van £ 60,000.00
(-) Amount of depreciation on delivery van - £ 9,600.00 £ 50,400.00
£ 50,400.00
(ii) Current assets
Inventories £ 228,000.00
Trade receivable £ 438,000.00
(-) Bad debts realised from credit customer - £ 1,500.00 £ 436,500.00
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Prepaid expenses:
Prepaid rent expenditure £ 22,500.00
Business rates paid in advance £ 1,125.00 £ 23,625.00
Bank account £ 120,075.00
£ 808,200.00
Total assets [(i) + (ii)] £ 858,600.00
Equity & liabilities
(i) Non-current liabilities -
Total non-current liabilities Nil
(ii) Current liabilities
Outstanding expenses:
Wages outstanding for the year's last week £ 2,175.00
Electricity bills outstanding for the last quarter £ 2,025.00 £ 4,200.00
Trade payable £ 393,000.00
Total current liabilities £ 397,200.00
(iii) Equity / shareholders' funds
Equity capital £ 180,000.00
(+) Net profit £ 281,400.00 £ 461,400.00
Total equity funds £ 461,400.00
Total equity & liabilities £ 858,600.00
Table 2: Financial position statement
(Source: Learner)
Notes:
(1) Inventories = Purchase of inventories (credit + cash) - Sale of inventories (credit + cash) =
£39000 + £486000 - £243000 - £54000 = £228000
(2) Trade receivable = Amount of trade receivable + Total amount of bad debts = £438000 -
£1500 = £436500
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(3) Total value of non-current assets = Delivery van = Delivery Van - Amount of depreciation on
delivery van = £60000 - £9600 = £50400
(4) Total value of current assets = Inventories + Trade receivable + Bank + Prepaid expenditures
= £228000 + £436500 + £120075 + £23625 = £808200
(5) Total value of non-current liabilities = 0
(6) Total value of current liabilities = Total outstanding expenditures + Trade payable = £4200 +
£393000 = £397200
(7) Total value of equity funds = Equity capital + Net profit = £180000 + £281400 = £461400
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Part B - Philly Ltd
(a) What is the contribution that each shelf makes towards covering fixed costs if it is sold
for £13?
Contribution margin
= Selling prices charged for each unit of good - Variable expenditure needed being incurred for
each unit of good
= £13 - £ (1.85+2.95+5.25)
= £13 - £10.05
= £2.95
(b) What is the break-even point and margin of safety in terms of both units and revenue if
each shelf is sold for £13
Breakeven point determination -
In units = Total fixed expenditure level ÷ Contribution margin = (£47600 + £59000) ÷ £2.95 =
106600 ÷ 2.95 = 36135.59 or 36136 units (in approximate)
In revenue = Total fixed expenditure level ÷ (Contribution margin ÷ Selling prices charged for
each unit of good) = (£47600 + £59000) ÷ (£2.95 ÷ £13) = 106600 ÷ 0.2269 = £469810.48 or
£469810 (in approximate)
Conversely,
Margin of safety = (Sales budgeted - Sales for breakeven x 100) ÷ Sales budgeted = 53000 x 13 -
469810 x 100) ÷ 53000 x 13 = 31.8127 or 31.81%
(c) Calculate the profit the company makes if it produces and sells 48,000 shelves at £13 per
shelf.
Number of shelves to be sold now = 48000 units
Selling prices charged for each unit of shelf = £13
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Total fixed expenditure level = £106600
Variable expenditures spent for each unit of shelf production = £10.5
Thus, profits that will be made
= Sales - Costs
= (48000 x 13) - (48000 x 10.5 + 106600)
= 624000 - (504000 + 106600)
= 624000 - 610600
= 13400
(d) Philly Ltd is considering whether to spend £45,000 on marketing and advertising but
consequently raising the selling price by 9%. At this new sales price and with the
advertising, sales (in units) will increase by 17%. Analyse whether this is a good strategy
for Philly Ltd?
Total fixed expenditure level = 106600 + 45000 = 151600
Variable expenditures spent for each unit of shelf production = 53000 x 10.5 = 532650
Thus, total costs = 684250
On the other hand,
Selling prices charged for each unit of shelf = 9% of 13 + 13 = 14.17
Therefore,
Sales = 14.17 x 62010 = 878681.70
Profit = Sales - Costs = 878681.70 - 684250 = 194431.70
As a result, one can be deriving that in case if the organisation spends its money in marketing
and advertising, this expense will turn out as its fixed expenditure. It can be seen that that the
costs to be spent for its shelves would increase due to this expense. However, as costs will rise,
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the selling prices charged for each unit of shelf will also be rising, thereby resulting to increase in
the total sales value of the company. It can also be observed that the profits that the company
will be achieving would be considerable in nature. Hence, one could opine that if the increase of
fixed expenditures of the company Philly Ltd. by an amount of £45000 for marketing and
advertisement takes place, it would prove being beneficial and an effectual strategy for it both in
the short run as well as in the long run since both sales and profits would be considerable in
nature.
(e) Identify and explain the underpinning assumptions attached to the break-even model
including analysing whether the model can successfully be utilised by a range of differing
businesses
One of the most significant factors related to an effectual business planning and sustainable
operations is the breakeven analysis, as it is advantageous for the deriving of cost structures as
well as the volume of units that require being sold for covering costs and making profits
(Svensson, 2016). However, there are varying assumptions underpinned in the model of
breakeven analysis. These assumptions are unrealistic and cannot often be possible to implement
it in organisational contexts (Calabro, 2017). The points underneath describe the underpinned
assumptions in the breakeven model -
 The functions in sales and expenses are linear by nature
 There does not take place any change or alteration in the prices of selling products
 There is only a single mix of goods or services in entities and this product mix do not
undergo any change
 Fixed expenditures also stay unaltered
 There is no stock left behind in hand - “goods sold = goods manufactured”
 Costs incurred within entities are divisible only in two categories - fixed and variable,
and semi-variable expenses are absent
 The costs that can undergo changes whenever the breakeven model is applied are the
variable costs. However, these costs can be undergoing changes only if they are directly
proportionate to the units that have been sold within it.
However, despite of being a widely used and applied model for business planning and financial
analysis in organisational contexts, the breakeven analysis model has a number of limitations,
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which are the above stated assumptions (Cafferky, 2017). Due to the presence of these
assumptions, the model often does not turn out being suitable for every organisational context.
For example, in order to be competitive in the marketplace, acquire larger amount of revenue and
have a strong customer base, companies in the present scenario focus towards enlargement of its
product mix. A very limited number of companies consist of a single product mix. However, the
breakeven analysis is applicable only when a single product mix exists (Malozyomov et al.,
2018). At the same time, in almost every company, it is not possible to ensure that all the units
that it has manufactured will be sold off at the end of every year or period. Due to this reason, the
breakeven analysis does not prove out being a suitable model for the organisations wherein there
are inventories left over in hand at the end of a certain period or year. In these ways and for these
reasons, the model of breakeven analysis does not prove out being suitable for a range of
different organisations. Its suitability and effectiveness of utilisation keeps differing from one
organisation to another.
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Part C - Sankrust Ltd.
(a) Calculate the Payback Period, the Accounting Rate of Return, and the Net Present
Value of the machine, and provide recommendations as to whether Sankrust should buy
the machine.
Payback period calculations
Year 0 Year 01 Year 02 Year 03 Year 04 Year 05
Cash flows for and from
the machine
-
4000000
0
+ 10600000 +
1060000
0
+
1060000
0
+
1060000
0
+
1060000
0
Cumulating the cash flow
amounts
-
4000000
0
- 29400000 -
1880000
0
-
8200000
+
2400000
+
1300000
0
Table 3: Table used for payback period calculations
(Source: Learner)
From the above done calculations, the following details can be determined -
Last period wherein negative cumulating cash flow amounts has been achieved (i) = 3
Absolute valuation of the cumulating cash flow amount during year 3 (ii) = 8200000
Next period’s actual cash flow from the machine (iii) = 10600000
Therefore, the payback period = (i) + (ii) / (iii) = 3 + 8200000/10600000 = 3+0.77358 = 3.77
years
Accounting rate of return calculations
Year 01 Year 02 Year 03 Year 04 Year 05
Cash flows for and from the
machine
1060000
0
10600000 1060000
0
1060000
0
1060000
0
Less: Depreciation taking place in - - 7000000 - - -
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