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MGT200 - Management Accounting and Finance Assignment - Tai Poutini Polytechnic, New Zealand
Learning Outcomes -
- Apply capital budgeting practices and evaluate investment decisions.
- Apply knowledge of working capital to effectively manage a business for a given situation.
- Compare and contrast financing options for a given situation and make recommendations.
- Discuss the principles of capital structure and cost of capital, and calculate the cost of capital.
- Apply management tools to assist in the planning and control of business operations.
- Use management accounting information to assist decision-making in a given business situation.
Capital Budgeting Question -
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Q1. Calculate the payback period for the proposed investment.
Answer - The following are the relevant calculations:
|
|
Years
|
|
Particulars
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
|
|
|
|
|
|
|
|
|
Cash outflows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of machine
|
5,13,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash outflow
|
-5,13,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash inflow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
|
|
|
|
|
|
|
|
|
|
Total cash inflow
|
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
|
|
|
|
|
|
|
|
|
|
Payback period
|
|
-4,03,000.00
|
-2,93,000.00
|
-1,83,000.00
|
-73,000.00
|
37,000.00
|
|
|
|
|
|
|
|
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4.5 years
|
|
|
DO YOU WANT TO EXCEL IN MGT200 - MANAGEMENT ACCOUNTING AND FINANCE ASSIGNMENT - ORDER AT EXPERTSMINDS!
Q2. Calculate the net present value of the proposed investment, assuming a discount rate of: (i) 8%, (ii) 10%, (iii) 12%.
Answer - The following are the relevant calculations:
|
|
Years
|
|
|
Particulars
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash outflows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of machine
|
5,13,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash outflow
|
-5,13,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash inflow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings
|
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash inflow
|
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
1,10,000.00
|
|
|
|
|
|
|
|
|
|
|
|
|
Payback period
|
|
-4,03,000.00
|
-2,93,000.00
|
-1,83,000.00
|
-73,000.00
|
37,000.00
|
|
|
|
|
|
|
|
|
|
4.5 years
|
|
|
|
|
|
|
|
|
|
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NPV:
|
|
|
|
|
|
|
|
|
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At 8%
|
1.00
|
0.93
|
0.86
|
0.79
|
0.74
|
0.68
|
0.63
|
0.58
|
|
|
-5,13,000.00
|
1,01,851.85
|
94,307.27
|
87,321.55
|
80,853.28
|
74,864.15
|
69,318.66
|
64,183.94
|
59,700.71
|
|
|
|
|
|
|
|
|
|
|
|
At 10%
|
1.00
|
0.91
|
0.83
|
0.75
|
0.68
|
0.62
|
0.56
|
0.51
|
|
|
-5,13,000.00
|
1,00,000.00
|
90,909.09
|
82,644.63
|
75,131.48
|
68,301.35
|
62,092.13
|
56,447.39
|
22,526.07
|
|
|
|
|
|
|
|
|
|
|
|
At 12%
|
1.00
|
0.89
|
0.80
|
0.71
|
0.64
|
0.57
|
0.51
|
0.45
|
|
|
-5,13,000.00
|
98,214.29
|
87,691.33
|
78,295.83
|
69,906.99
|
62,416.95
|
55,729.42
|
49,758.41
|
-10,986.78
|
|
|
|
|
|
|
|
|
|
|
Q3. What can you conclude from your answers to requirements A & B about the limitations of the payback method?
Answer - On the basis of the above calculations, since the payback period of the project is 4.5 years (which means that the bank would be able to recover its initial investment of $513,000 within 4.5 years), it is recommended that the machine be purchased.
On the basis of the calculation of the NPV, if the cost of capital of the company is 8%, then it would be able to get more profit when compared with the cost of capital 10% or 12%.
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