Financial Analysis: Income Statement, BEP, and NPV Calculations

This document presents a comprehensive solution to a finance homework assignment. The solution addresses several key financial concepts, starting with the preparation of an income statement and balance sheet. It then proceeds to calculate the contribution per unit and determines the break-even point (BEP) in both units and monetary value, along with the margin of safety. The assignment also delves into investment appraisal techniques, calculating the payback period, average rate of return (ARR), and net present value (NPV) of a project. Detailed calculations are provided for each method, including the computation of depreciation, discounted cash flows, and the application of relevant formulas. The solution offers a step-by-step approach to solving financial problems, making it a valuable resource for students studying finance and related fields.

Question 1
Income statement
Balance sheet
Question 2
a. Calculation of contribution per unit
Particul
ars
Figur
es (in
£)
Material
s 5.25
Labour 2.95
Variable
overhead
s
1.85
Total
variable
cost per
unit 10.05
Particul
ars
Figu
res
(in £)
Selling
price per
unit 13

Total
variable
cost per
unit 10.05
Contribut
ion per
unit 2.95
Assessment of total fixed cost
Particul
ars
Figur
es (in
£)
Producti
on
5900
0
Selling
etc.
4760
0
Total
fixed
cost
1066
00
b.
BEP calculation
Particulars Formula Figures (in £)
Total fixed
cost 106600
Contribution
per unit 2.95
BEP in
units
Total fixed
cost /
Contributio
n per unit 36136
BEP in
GBP
BEP in units
* Selling
price per
unit 469763

Margin of safety: actual sales – BEP sales
Particula
rs
Actua
l
BEP
level
Margi
n of
safety
Tables in
terms of
units
70000 36136 33864
Tables in
terms of
monetary
value
91000
0
46976
8
44023
2
c.
Particula
rs
Figur
es
Figur
es (in
£)
Produces
and Sells
48000
tables
62400
0
BEP
36136
units
46976
3
Profit
15423
7
Question 3
Calculation of payback period

Year
Cash
inflow
Cumulativ
e cash
inflows
1
1060000
0 10600000
2
1060000
0 21200000
3
1060000
0 31800000
4
1060000
0 42400000
5
1060000
0 53000000
Payback period: 3 + 8200000 / 10600000
= 3.8 years or approx 3 years and 8 months
Calculation of average rate of return
Year
Cash
inflow
1 10600000
2 10600000
3 10600000
4 10600000
5 10600000
Average profit 10600000
Average
investment 22500000
ARR 47.11%
Average rate of return: Average Earnings after tax / Average investment * 100
ARR = 47.11%
Average investment: (40000000 + 5000000) / 2

= 22500000
Computation of depreciation
Particulars Figures
Cost of new
machine 40000000
Scrap value 5000000
Expected life
(in years) 5
Depreciation 7000000
Computation of NPV
Yea
r
Cash
inflow
Less:
Cash
outflo
w
Less:
depreciati
on
Gross
cash
inflow
Add:
depreciati
on
Cash
inflow
PV
facto
r @
7%
Discount
ed cash
inflows
1 17000000
64000
00 7000000
36000
00 7000000
106000
00
0.934
6
9906542.
06
2 17000000
64000
00 7000000
36000
00 7000000
106000
00
0.873
4
9258450.
52
3 17000000
64000
00 7000000
36000
00 7000000
106000
00
0.816
3
8652757.
5
4 17000000
64000
00 7000000
36000
00 7000000
106000
00
0.762
9
8086689.
25
5 17000000
64000
00 7000000
36000
00 7000000
106000
00
0.713
0
7557653.
5
Total
discounte
d cash
inflows
43462092
.8
Less:
initial
investmen
t 40000000
NPV
(Total
discounte
d cash
inflow –
3462092.
82

initial
investme
nt)