Finance and Financial Analysis: Investment Decisions Homework Solution

This document presents a comprehensive solution to a finance and financial analysis homework assignment. It addresses key concepts such as Net Present Value (NPV) calculation for investment project evaluation, break-even point analysis, and determining the auction price for zero net benefits. The solution also delves into the role and disadvantages of ratio analysis in management accounting and discusses the importance of considering debt in financial statements. Furthermore, it includes detailed calculations for NPV to assess project feasibility, providing a clear understanding of investment decision-making principles. Desklib offers similar resources to aid students in their studies.

FINANCEANDFINANCIAL
ANALYSIS

Table of Contents
Question 1....................................................................................................................................4
Question 2....................................................................................................................................4
Question 3....................................................................................................................................4
Question 4....................................................................................................................................5
Question 5....................................................................................................................................6
Question 6....................................................................................................................................6
REFERENCES................................................................................................................................7

Question 1
Revenue Discounted factor PV of cash inflow
950 0.8695652174 826.0869565217
Initial Investment 500
NPV 326.0869565217
This project should be accepted as the net present value of the project derive to be
positive in number. The concept of net present value favour such investment that can generate
the positive present value from the investment (Liu and et.al., 2019). The current investment
project will lead to a net benefit of 326 which is positive. The inflow is more than the outflow
from the investment that make the project favourable for the investor.
Question 2
Break even point
Fixed cost 800
Contribution per unit 5
Break even point 160
Contribution 5
Contribution margin ratio
Contribution / sales *100
Contribution 5
Sales 25
Margin ratio 2

Question 3
Net financial benefit
Sales 1750000
Less
Purchase cost 950000
Renovation 750000
Profit 50000
Sales 1750000
The auction price will be 1000000 in total in order to gain the zero net benefits out of the
investment is made in the project. At this price company will be able to recover the original
investment value or amount. The auction of per flat should be value of 242857. At this price
investor will be able to generate net return out of the investment is made in the project.
Renovation cost should be 800000 in order to make the net revenue to be zero. At this
price the company will be able to recover the total sales equivalent to the total cost over the
project. Company has to incurred more renovation cost in order to make zero profits out of the
investment is made in the project (Prutphongs and Sutivong, 2020). At this price the total
revenue will be equal to the total cost over the building which will eventually make the revenue
zero for the investor.
The sale price that should be charged in order to make revenue zero is 142857 (1600000 /
7). At this price company will be able to recover the original investment only. There will be not
profits that will derive out of the investment is made in the project. At this price structure the
venture will be capable to recover the original investment in the project. This sale price will
allow the investor to recover the original cost of investment.
Question 4
Ratio analysis is a practice that is adopted in management accounting. The technique
allows the management to analysis and interpret the performance of the v entire. The role of the
ratio analysis practice is to direct the management and board of director of company to evaluate

how effectively company is able to perform in the market (WANG and LIU, 2018). Ratio
analysis play a significant role for the company to identify the efficiency of all financial aspect of
the firm. This entire practice not only involve profitability rather it assesses the actual financial
position of the organisation in all aspects such as profitability, liquidity, efficiency and all other.
Disadvantage:
 Ratio analysis only consider the financial return company could generate.
 There are variety of factor that affect the performance but do not hold the quantitative
nature which is completely avoided in the ratio analysis practice followed by the
organisation.
 Ratio analysis technique only reflect so far the performance organisation has done but it
does not reflect the future aspect of the company.
Question 5
Debt is an important part of the organisation financial position. Every company take debt
in order to perform the business operations. In case the company do not consider the debt than it
will not be able to analysis and assess the financial position of the organisation completely. IN
order to prepare both the financial statements such as income statement as well balance sheet
considering debt is a very important. In case the debt is not considered while preparing the
income statement and balance sheet than the company will not be able to assess the liability
associated with the firm completely. Further, in the income statement the company will not be
able to record all expenses as interest expense might omit in such a process.
Question 6
Initial Investment 25000
Cash inflow Discounted value PV of cash inflow
1550 0.9090909091 1409.0909090909
1550 0.826446281 1280.9917355372
1550 0.7513148009 1164.5379413975
1550 0.6830134554 1058.6708558159
Total PV of cash inflow 4913.2914418414
NPV -20086.7085581586

The project generates the negative net present value which make this project non
favourable for investment purpose. The net present value method or technique do not allow the
investor to accept and approve the project if the investment is only generating the negative return
on the investment is made in project.
REFERENCES
Books and Journal
Liu, D. and et.al., 2019. Application of real options on the decision-making of mining investment
projects using the system dynamics method. IEEE Access. 7. pp.46785-46795.
Prutphongs, P. and Sutivong, D., 2020, December. Decision Support System for Power Plant
Improvement Investment Using Life-Cycle Cost. In 2020 3rd International Seminar on
Research of Information Technology and Intelligent Systems (ISRITI) (pp. 588-592).
IEEE.
WANG, X. H. and LIU, K., 2018. Research on Investment Decision-making of Experiential
Shopping Mode based on Risk Assessment. Special Zone Economy, p.04.

1