Project: Financial Services Analysis, Profitability, and Cash Flow

This financial services project delves into various aspects of financial analysis, commencing with the calculation of the profit volume ratio to assess the profitability of a product. It proceeds to determine the break-even point under different sales scenarios, providing insights into when a company neither makes a profit nor incurs a loss. The project further explores a comprehensive financial analysis of a potential investment, evaluating its profitability, considering factors such as sales, variable and fixed costs, depreciation, salvage value, and tax implications. It then examines financial ratios, including liquidity, acid test, and debt ratios, comparing the company's performance with industry benchmarks. The project also assesses economic and financial profitability and investment turnover. Furthermore, it analyzes working capital management by calculating average storage, manufacturing, and sales periods, alongside the average collection period and economic maturity. Finally, the project employs net present value (NPV) analysis under various discount rates and cash flow scenarios to evaluate the viability of an investment, including the calculation of the internal rate of return (IRR) to determine the profitability of the investment.

Project Financial
Services

Table of Contents
TASK..................................................................................................................................3
Q1..............................................................................................................................3
Q2..............................................................................................................................3
Q3. ............................................................................................................................5
Q4..............................................................................................................................8
Q5..............................................................................................................................9
Q6............................................................................................................................10

TASK
Q1
A) The manager of ABC Limited needs to calculate profit volume ratio of the the
product for the purpose of identifying volume of profitability of the product. Profit volume
ratio describe the relationship between sales and contribution of the product.
Given Information:
Here sales = 25 per unit
Variable cost = 5 per unit
Fixed cost = 110000
Calculation of Profitability Threshold:
Profitability Threshold = Fixed cost / Contribution
= 110000 / 80% = 137500
Workings:
Contribution = Sales – variable cost
= 25- 5 = 20 per unit
P/V Ratio = Contribution per unit/sales per unit*100
P/v ratio = 20/25*100 = 80 %
B) Break even point : It is a point at which total cost and total revenue of the products
are equal at this stage company not earn profit and not suffering from any kind of loss.
Calculation of BEP when company sales 20000 unit:
Formula of BEP : Fixed cost / profit volume ratio
Here sales 20000 unit @ 25
Variable cost @5 per unit
Particular Amount
Sales 20000 units @ 25 per unit 500000
- Variable cost,20000@5 per unit 100000
Contribution 400000
- Fixed cost 110000
Profit 290000

Break-even point (Units) = Fixed cost / Contribution per unit = 110000 / 20 = 5500 units.
C) Thus from above calculations it has been analysed that sales value or turnover as
per threshold profitability would be € 137500 also in unit term at least 5500 units
required to be sold to attain break-even point where there would be a situation of no
profit and loss.
Q2
Given Information:
Initial Cost 200000
Useful Life 5 Years
Production Capacity 200000 units
Ist Year 70% capacity
2nd year and thereafter 100% capacity
Sales Price 2.5 Increase 4.00%
Variable costs 1.5 Increase 3.00%
Annual Fixed costs 60000 Increase 2.00%
Depreciation 25000 SLM
Salvage Value 30000
Discount Rate 8.00%
Tax 25.00%

Year Year1 2 3 4 5
Capacity
70%
capacity
100%
capacity
100%
capacity
100%
capacity
100%
capacity
Units
140000
Units
200000
Units
200000
Units
200000
Units
200000
Units
Sales € 350000 € 520000 € 540800 € 562432
€
584929.28
Variable costs € 210000
€
309000.00
€
318270.00
€
327818.10
€
337652.64
Contribution € 140000 € 211000 € 222530 € 234613.9
€
247276.63
7
Less: Fixed Costs € 60000 € 61200 € 62424 € 63672.48
€
64945.929
6
Less:Depreciation € 25000 € 25000 € 25000 € 25000 € 25000
€ 55000.00
€
124800.00
€
135106.00
€
145941.42
€
157330.71
Less: Tax@25% € 13750.00 € 31200.00 € 33776.50 € 36485.36 € 39332.68
Cash flows € 41250.00 € 93600.00
€
101329.50
€
109456.07
€
117998.03
Add: Depreciation € 25000.00 € 25000.00 € 25000.00 € 25000.00 € 25000.00
Add: Salvage Value of
Machine € 30000.00
Net cash flows € 66250.00
€
118600.00
€
126329.50
€
134456.07
€
172998.03
PV @ 8% 0.9259 0.8573 0.7938 0.7350 0.6806

Net present value of
cash flows € 61342.59
€
101680.38
€
100284.43 € 98829.22
€
117739.55
Total present value of
cash flows
€
4,79,876.1
8
Absolute Return =
100* (€ 4,79,876.18
– € 200000) / € 200000
= 139.94%
Year 1 Year 2 Year 3 Year 4 Year 5
Sales Price (Increase of
4%) € 2.50 € 2.60 € 2.70 € 2.81 € 2.92
Variable costs (Increase
of 3%) € 1.50 € 1.55 € 1.59 € 1.64 € 1.69
Fixed Costs (Increase
of 2%) € 60000.00 € 61200.00 € 62424.00 € 63672.48 € 64945.93
Q3.
Given Information:
General liquidity ratio 1.55
Acid test 1.2
Industry Information:
Debt ratio 1.25
Margin on sales 21.00%
Investment rotation 1.45 times
Economic profitability 23.00%

Financial profitability 29.00%
Sales 250000
Direct Costs 105000
Amortisation 70000
Long-term debt interest 5.00%
Short-term bank loans interest 7.00%
Corporation Tax 25.00%
Liquidity ratio:
Current Assets / Current Liabilities 180 / 95 1.89
Workings:
Current Assets: In thousands of €
Stocks of finished products 45
Clients 65
Banks 70
Total Current Assets 180
Current Liabilities:
Supplier 30
loans (Short term) 65
Total Current Liabilities 95
Acid Test:

Acid Test Ratio = Quick Assets / Current Liabilities
135 / 95
= 1.42
Workings:
Quick Assets = Current Assets less Inventories 180 - 45 135
Debt ratio
Debt Ratio = Total Liabilities/ Total Assets 200 / 350 0.57
Workings:
(in thousands of €)
Liabilities
External Resources 105
Loans 65
Supplier 30
Total Liabilities 200
Financial Profitability:
€
Sales 250000
Less: Direct Costs 105000
145000
Less: Indirect Costs
Interest on Long term debts 5250
Interest on Short term debts 4550
Net Profit Before Tax 135200
Less: Tax@25% 33800
Net profit after tax 101400

Add: Tax benefit on amortisation 17500
Net operating profit after tax 118900
Financial profitability (%) = 118900 / 25000 *100 = 47.56%
Economic profitability:
Economic profit = Revenues –
Explicit costs – Implicit Costs
250000 – 105000 (Direct Costs) –
4550 (Interest on long term debts) –
5250 (Interest on short term debts) 135200
Economic profitability (%) 135200 / 250000 * 100 54.08%
Sales Margin Ratio:
Sales Margin Ratio =
(Sales – Direct Costs)/ Sales (250000 – 105000) / 250000 58.00%
Investment Turnover Ratio = Revenues / (Stockholders'
Equity + Debt)
250000 /
( 150000 +
105000)
250000/32
0000
= 0.98 times
Comparison:
Company Industry
Liquidity 1.89 1.55
Acid test 1.42 1.2

Debt ratio 0.57 1.25
Economic Return 54.08% 23.00%
Financial Returns 47.56% 29.00%
Margin on sales 58.00% 21.00%
Investment Rotation 0.98 times 1.45 times
Q4.
Net Present Value:
With Inflation:
Year PV@3% PV of Cash Flows
1 € 1500000 0.9709 € 1456310.68
2 € 3700000 0.9426 € 3487604.86
3 € 4100000 0.9151 € 3752080.80
Total PV of
cash flows € 8695996.35
Less: Initial
disbursement € 2500000
NPV € 6195996.3467545
Without Inflation:
Year PV@8% PV of Cash Flows
1 € 1500000 0.9259 € 1388888.89
2 € 3700000 0.8573 € 3172153.64
3 € 4100000 0.7938 € 3254712.19

Total PV of
cash flows € 7815754.71
Less: Initial
disbursement € 2500000
NPV € 5315754.71
IRR =
3% + € 6195996.347/ (€ 6195996.347 – € 5315754.712) *
(8% - 3%)
= 3.35%
Q5.
1. Calculation of average storage period:
Average stock of raw material /Average daily consumption of raw material.
Here cost of raw material = 105000,
Average stock of raw material=9250
Average daily consumption of raw material: Cost of raw material / Number of days in
year
105000/ 365 = 287.16
Average storage period: 9250/287.67= 32.15
2. Calculation of average manufacturing period:
Average stock of Production* Average daily consumption of manufacturing product
Here cost of annual production = 198000
Average value of product: 11000
Average cost of daily consumption of product: Cost of products/Number of days in year
198000/365 = 542.46
Average manufacturing period: 11000/542.46 = 20.27
3. Calculation of average sales period: Average stock of finished goods * Average
daily cost of goods sold
Here cost of goods sold : 198000

Average value of finished goods: 18500
Average cost of goods sold : Cost of product / Number of days in a year
198000/365 = 542.67
Average sales period: 18500/542.67 = 34.25
4.Calculation of average collection period: 365 /Average receivables turnover ratio
Here annual sales: 290000
Average receivables amount: 17000
Average receivable ratio: Net credit sales /Average account receivables
It has been assumed that all products are sold in the basis of credit.
ARR: 290000*17000 = 17.05
Average receivable period = 365 / 17.05 = 21.
5. Average period of economic maturity: (32.15 + 20.27 + 34.25 + 21.04)/4 = 26.93
days
Q6.
Years Collection (€) Payments (€)
Net Cash
Flow
Initial disbursement -2000000.00 -2000000.00 -2000000
1 Year 4500000.00 3800000.00 700000
2 Year 5500000.00 4500000.00 1000000
3 Year 6000000.00 5000000.00 1000000
4 Year 4000000.00 3200000.00 800000
NPV at rate of 20%
Year PV@20% PV of Cash Flows
1 700000 0.8333 583333.33
2 1000000 0.6944 694444.44