Comprehensive Report on Investment Appraisal and Budgeting Analysis

This report provides a detailed analysis of accounting and finance principles, focusing on investment appraisal techniques, break-even analysis, and budgetary control. It includes an examination of Tom and Jerry Limited's financial statements, calculating key metrics such as gross profit, net profit, and financial position. The report also assesses Fidel & Ana Limited's break-even point in units and revenue, margin of safety, and profitability with and without advertising. Furthermore, it evaluates investment appraisal techniques like Net Present Value (NPV), payback period, and Accounting Rate of Return (ARR), discussing their merits and demerits. Finally, the report explores the benefits and drawbacks of using budgetary tools for strategic planning, emphasizing the importance of financial management in achieving organizational goals. Desklib provides access to this and other solved assignments to aid students in their studies.

Introduction to
Accounting and Finance

Contents
INTRODUCTION...........................................................................................................................................3
QUESTION 1 Tom and Jerry Limited............................................................................................................3
Income statement of Tom and Jerry Ltd for the year ended 31st December 2020................................3
Financial Position of Tom and Jerry Ltd as at 31 December 2020............................................................4
QUESTION 2.................................................................................................................................................5
a).............................................................................................................................................................5
b).............................................................................................................................................................6
c)..............................................................................................................................................................8
d).............................................................................................................................................................9
e) Explaining the assumptions of break even model and its utilization................................................10
QUESTION 3...............................................................................................................................................11
a) Calculating investment appraisal techniques....................................................................................11
b) Explaining key merits and demerits of investment appraisal techniques..........................................13
c) Explaining the benefits and drawback of budgetary tool for strategic planning................................15
CONCLUSION.............................................................................................................................................17
REFERENCES..............................................................................................................................................18

INTRODUCTION
Every firm must have a finance department. Finance is necessary since it oversees the other
aspects and operations of a company. It is impossible to run an analysis of working unless the
financial component is taken care of properly. Budgetary control necessitates the use of a
number of principles and strategies. The managing money at several research report firms will be
discussed in this research (Xie, Chen and Liu, 2021). The project will demonstrate how money
planning may be carried out from many viewpoints, such as the creation of financial accounts,
the examination of financial feasibility utilizing investment assessment methodologies, and the
computation and assessment of the breakeven point.
QUESTION 1 Tom and Jerry Limited
Income statement of Tom and Jerry Ltd for the year ended 31st December 2020
Particulars Amount
Net sales 633000
Less: Cost of goods sold 297000
Wages 119175
Gross profit 216825
Less: Indirect expenses
Rent 90000
Electricity bills 7725
Van running expenses 33600
Bad debt 1500
Depreciation on van 9600

Tax 5775
Net profit 68625
Based on the analysis of the above-mentioned income statement, it can be concluded that
the firm is profitable. It may be stated that the corporation has expended low costs in terms of
achieving the potential to produce profits through operational practices. The gross profit margin
calculated reflects Tom and Jerry Ltd's ability to reduce the cost of products supplied, resulting
in increased profit from sales revenue. The resulting net income indicates a reasonable
assessment of the potential to produce revenue through the sale. Furthermore, the determined
result concludes, indicating that major operational activities were conducted by implementing
costs in order to achieve an outcome. Based on the examination of the above-mentioned table, it
can be concluded that the firm is performing well (Kyriakopoulos, Ntanos and Asonitou, 2020).
Financial Position of Tom and Jerry Ltd as at 31 December 2020
Assets Amount
Current assets
Prepaid rent 22500
Prepaid tax 1125
Inventory 39000
Trade receivables 436500
Fixed asset
Van 50400
Total 642675
Liabilities
equity 180000

net profit 67500
Out sanding wages 2175
Trade payable 393000
Total 642675
The statement of income shown above is for the purpose of summarizing resources,
obligations, and ownership. The accounting policy wherein assets equate h to total liabilities
equity is used to illustrate the company's financial situation. Inventories, accounts receivable,
van, and other current and fixed assets are included on the assets side of the balance sheet
generated for Tom and Jerry Ltd. Trade payables, net earnings, and other liabilities & equity
items are included in this section. Based on the information provided, it can be concluded that
the firm has a sufficient quantity of assets to meet its current commitments in a timely and
efficient manner. There is also optimal resource use, which is beneficial to the business and, as a
result, increased income is achievable. Here on criterion, it may be deduced that Tom and Jerry's
financial situation is sound (Hasan, Hassan and Aliyu, 2020).
QUESTION 2
a)
Particulars Amount £
Selling price 13
Variable Costs (per unit)
Materials 5.25
Labor 2.95

Variable overheads 1.85
Contribution per unit 2.95
From the computed figure it can be said that contribution per unit for each electric kettle is
£2.95.
b)
Break-even point (In units) = fixed cost / (selling price cost per unit- variable cost unit)
Particulars Amount £
Fixed costs 106600
SP per unit 13
VC per unit 10.05
Break-even point (In units) 36135.59
The preceding table shows that Fidel & Ana Limited needs to sell 36136. This might be
useful in a circumstance when there are no gains or losses. The break-even point in units
indicates the number of units required to recoup the marked fixed costs and variable costs. On
this premise, it may be calculated that by delivering this quantity of items, the firm will be able
to attain industry equilibrium (Bui, Moses and Houqe, 2020).
Break even points (In revenue) = Fixed cost / contribution margin per unit
Particulars Amount £
Total revenue 689000

Variable cost 53265
Contribution margin 29.35%
The above articulated that table is reflecting contribution margin of 29%.
Particulars Amount £
Fixed costs 106600
Contribution margin 29.35%
Break even points (In revenue)= fixed
cost / contribution margin per unit
363202.73
The acceptable level of income that the given business must produce is £363203. It will enable
the designated organisation to recoup both fixed and variable expenditures. Generating this much
break even income is useful in achieving the goal of achieving a scenario where there is no loss
or gain.
Margin of safety
In revenue = currents sales — break even sales
= 689000 – 363202.73
= £325797.27
In units= Currents sales units – break even units
= 53000-3636
= 49364 units

From the projected data on margin of safety, which is directly associated with predicting
the overall sales or units that surpass the breakeven point. The sales margin of safety indicates
that income from breakeven sales exceeds revenues. Furthermore, the sum indicated in terms of
quantity represents more individuals than the breakeven equivalents. It is mostly carried out to
ensure that market pressures are met with safety.
c)
Particulars Amount £
Sales 624000
Less Variable Costs
Materials 252000
Labor 141600
Variable overheads 88800
Contribution per unit 141600
Less Fixed costs:
Production 59000
Selling etc 47600
Profit 35000
The profit shown in the table above was calculated using the margin statements. The obtained
result is £35000, indicating that after deducting both variable and fixed costs from the current

sales income, Fidel & Ana Limited would be able to achieve such advantages, resulting in
increased flexibility to align with current conditions.
d)
Particulars Amount
(after advertising)
Amount
(Before
advertising)
Sales 878681.7 689000
Less Variable Costs
Materials 325552.5 278250
Labor 182929.5 156350
Variable overheads 114718.5 98050
Contribution per unit 255481.2 156350
Less Fixed costs:
Production 59000 59000
selling etc. 47600 47600
Profit 148881.2 49750
Deep insights may be drawn from the estimated data about before and after alterations. Due to a
increase in the sales price and advertising costs, the income of the mentioned business will grow
from 689000 to 878681.7. The contributions per unit has been raised from 156350 to 255481.2
as a result of the calculated results, indicating that enhanced sales price and advertising costs are

advantageous. The key reason for this is that it has permitted the operating cash flow to increase
from 49750 to 148881.2. It's an indication of progress and growth.
e) Explaining the assumptions of break even model and its utilization
The break even model enables a company to determine when it will be capable of
achieving a revenue or loss-free state. It enables an organisation to develop successful planning,
allowing it to achieve the company's specified goals. The break-even approach has a few
drawbacks that must be understood in order to produce a new strategy for identifying and
reducing the gaps (Bui and de Villiers, 2021).
This model is constructed on numerous hypotheses in order to achieve the goal effectively.
The fixed and variable costs are separated in this paradigm. Furthermore, the model assumes that
fixed costs would stay unchanged when output levels rise or fall. However, it has been
discovered that the company's variable cost would change over time as the quantity of products
changes. It is also expected that the pricing of overall strategy would remain constant, which is
not true in today's economic climate. There is a presumption that the sale value of the offered
items would stay unchanged, which is impossible to achieve in the marketplace. The
fundamental explanation being that the company's sales price is determined by market factors
including producers and consumers. Based on this evidence, the break-even model may be
considered to present these types of constraints that might impact the firm's judgment procedure.
There are various more advantages that must be considered in order to improve the
efficiency of the firm's management. One of the major advantages that might help you make
strategic decisions is the capacity to monitor earnings and expenditures just at production stage.
It is commonly used to forecast the impact of productivity and time improvements on revenue so
that appropriate initiatives to sophisticated processing may be implemented. The break even
method is used to assess the connection among fixed and variable, allowing for a more efficient
method to reaching the goals. All of information makes it feasible for a certain firm to estimate
costs, profits, and anticipate selling prices, among other things. They help the organisation
achieve its overall goals by defining applicable business processes and implementing
organizational strategies. On this premise, it may be concluded that organizations are capable of
successful preparation and design, resulting in improved production and better coordination with
stated goals (Tokic, 2020).

QUESTION 3
a) Calculating investment appraisal techniques
Calculation of Net cash flow
Year Cash
inflows (in
£)
Less:
Cash
outflows
(in £)
Less:
Depreciation
EAT (in
£)
Add:
Depreciation
Net cash
inflows (in
£)
1 17,000,00
0
6,400,00
0
7000000 3,600,00
0
7000000 10,600,000
2 17000000 6,400,00
0
7000000 3,600,00
0
7000000 10,600,000
3 17000000 6,400,00
0
7000000 3,600,00
0
7000000 10,600,000
4 17000000 6,400,00
0
7000000 3,600,00
0
7000000 10,600,000
5 17000000 6,400,00
0
7000000 3,600,00
0
7000000 15,600,000
Net Present value
Year Net cash inflows
(in £)
PV factor @
7%
PV of cash flows (in £)
1 10,600,000 0.935 9906542
2 10,600,000 0.873 9258451
3 10,600,000 0.816 8652757
4 10,600,000 0.763 8086689
5 15,600,000 0.713 11122584
Total discounted cash inflows 47027024
Less: initial investment 40,000,000
NPV 7,027,024

The net present approach is beneficial for gaining significant information about the discount rate,
which in this case is favourable. It reflects that the machinery's net present value is good.
Payback period
Year Net cash inflows (in £) Cumulative cash
inflows (in £)
1 10,600,000 10,600,000
2 10,600,000 21,200,000
3 10,600,000 31,800,000
4 10,600,000 42,400,000
5 15,600,000 58,000,000
3 + (40000000 –
31800000) /
10600000
= 3 years and 8
months
According to the payback period estimate, the company will recoup its original investment
capital in 3.8 years.
Accounting rate of return
ARR = (Average EAT / Average investment) * 100
Average investment = (£40000000 + £5000000) / 2
= £22500000
Year Net cash inflows (in £)
1 10600000
2 10600000
3 10600000
4 10600000
5 15600000
Average 11600000
= (11600000 / 22500000) * 100

= 51.56%
According to the statistics provided, the accounting rate of return is 51.56 percent, which is a
favourable indicator that the machinery should be accepted.
Recommendations
• It is advised that the company invest in gear that generates positive cash flows, allowing it to
accomplish its goals more effectively.
• It is recommended that the company concentrate on adopting machinery that would enable it to
recoup its original investment and achieve efficiency improvements. The rationale for having
such a system willing to return the initial contributed cash is to achieve a greater level of
efficiency in carrying out the objective of investment assessment.
b) Explaining key merits and demerits of investment appraisal techniques
Investment evaluation is focused with offering in-depth knowledge into the critical variables
that must be considered in order to make more successful decisions. Net present value, payback
time, internal and accounting rate of return are among the investment assessment approaches.
Net Present Value (NPV): It is one of the most important methods for obtaining
information about the current worth of future revenues generated by the project for a given term.
It assists in determining whether or not a specific investment choice is lucrative.
Pros
• It takes into account the temporal worth of money, allowing for more great decision.
• It enables the capacity to spot the delivered value by providing an objective metric from which
a simple computation can be made (Hassan and et.al, 2021).
Cons
• There seem to be a number of drawbacks that must be considered, including neglecting sunk
costs, which does not increase EPS or ROE.

• It makes determining the needed rate of interest challenging.
Internal rate of return: It is the monetary criteria that the firm considers when evaluating the
desirability of certain investment possibilities. Organizations use it to improve their capacity to
recognize the expected rate of return that the organisation will receive from the project proposal.
Pros
• It concentrates on the business's temporal structure so it can be easily interpreted, resulting in
increased revenue and long-term viability.
• It enables a more accurate estimation of the interest rate, resulting in improved decisions.
Cons
• Scale economies are overlooked in this technique of capital assessment (NGUYEN, 2020).
• It diverts the firm's attention away from the actual aspect, which may make it difficult for the
business to extract crucial data, which can be troublesome for mutually exclusivity investing.
Payback period: It is focused with assuring that the investment evaluation alternatives chosen
pertain to repaying capital invested in a shorter period of time. It highlights the importance of
having the capacity to guarantee that the right approach is chosen in order to achieve more profit
in very little timeframe.
Pros
• It is straightforward to use and comprehend, making it a rapid option for prioritizing liquid.
• It is an important technique that helps you to achieve results even when there is ambiguity.
Cons
• Neglects the value of money and fails to account for all financial flows that may prevent a
productive solution.
• It is not a practical method since it overlooks economics and does not allow for consideration
of return on the investment.

Accounting rate of return: It is a frequently used capital budgeting approach that aids in the
gathering of important data. A larger result indicates that the project should be chosen; whilst a
lower figure indicates that the choice should be ignored (Jorge, Lopez-Valeiras and Gonzalez-
Sanchez, 2020). The following are some of the advantages and disadvantages of this technique:
Pros
• It makes use of the cash flow for the whole financial year in order to adequately capture the
complete life cycle of assets.
• Clearly understood by analyzing the result that leads to the capacity to achieve profitability
targets.
Cons
• Unachievable forecasts, particularly for the far ahead, might have a negative impact on the
firm's decision-making procedure.
• It forecasts cash flow that has not been discounted, which prevents correct observations and, as
a result, increased productivity.
c) Explaining the benefits and drawback of budgetary tool for strategic planning
In today's competitive market, it's critical for a firm's operations strategy to focus on
obtaining the right data. Budgetary control tools such as cash, flexibility, activity, zero based,
capital expenditure, and others are frequently used by businesses to get meaningful, reliable, and
fair information so that better decisions may be made to fulfill the mission. There are various
advantages and disadvantages of adopting budgetary control in a firm's operation, which must be
understood before suitable approaches to reduce extraneous elements can be used (Chang and
et.al, 2021).
Advantages
There are various benefits of having the appropriate capacity to employ resources available via
strategy development that may be realized by the company. It gives the organisation a road plan
for effectively utilizing available resources, resulting in increased profit and long-term viability.

• It promotes productivity by lowering costs and ensuring proper communication for total
computation management. This might help the company guarantee that commodities are used to
their full potential in order to maintain revenue (Bansal and Kumar, 2021).
• Budget management tools also aid in optimizing profit by lowering costs by anticipating credit
demands. Furthermore, firms functioning in a competitive setting might allow the organisation to
transfer the legitimacy as well as accountability for holding people responsible in order to inspire
them.
• It becomes feasible to establish awareness by having precise goals that must be reached and by
enhancing the search agency's precision.
• Schedule orientations via performance evaluation for assessing bottlenecks so that unnecessary
components related to current situations can be removed and suitable personal finance for
meeting the aims can be performed (Kim, Saha and Bose, 2021).
• It makes it easier to provide precise, impartial, and relevant data in order to have a substantial
capability to adjust conditions and maintain a leading place in the field.
Disadvantages
The instruments of planning contort are thought to be non-essential given to the unpredictable
type of business, which prevents having enough knowledge to satisfy the goal of executing
operating processes.
• It has the potential to cause friction between the firms’s many divisions. The cause for this is
that the operational domains' requirements are not appropriately assigned and identified,
resulting in a feeling of disparity.
• Performing budgeting control techniques for the goal of strategy development necessitates a
high level of top-level assistance, after which proper assigning, evaluating, and satisfying the
responsibilities and duties allocated may be accomplished.

• It can demotivate a company's most valuable workforce, which can have a negative impact on
the productivity of those who work there. It is necessary to do a re-investigation, describing the
present data to earlier data, which might have a negative effect on the functioning with which the
allotted work is completed. It also occupies the individual, which can contribute to the formation
of an inefficient work environment (Hsu, Owen and Suchard, 2020).
• Time consuming and difficult to integrate with the actual status, which is one of the negative
aspects that must be addressed because a better review can be made.
Based on the analysis of the information presented, it can be concluded that there are numerous
benefits and limits that have had a significant impact on the company's operations. This data may
be used to help with strategic planning by focusing on strengthening advantages and lowering
weaknesses.
CONCLUSION
Accounting information is used by any corporate entity that has available funds, like
currency, machinery, and structures. Accounting is known as the "business language" for with
this purpose. Accounting is also the word used by non-profit organisations including such
ministries, religions, organizations, universities, and schools to communicate financial data. Such
organizations, though, are not companies even though they do not function for profit.

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