MGT200 Management Accounting And Finance
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Learning outcome: 1. Apply capital budgeting practices and evaluate investment decisions.
2. Apply knowledge of working capital to effectively manage a business for a given situation.
3. Compare and contrast financing options for a given situation and make recommendations.
4. Discuss the principles of capital structure and cost of capital, and calculate the cost of capital.
5. Apply management tools to assist in the planning and control of business operations.
6. Use management accounting information to assist decision-making in a given business situation.
Question 1: A. Prepare a schedule showing the incremental revenue, incremental operating expenses and incremental depreciation during each of the next 6 years.
B. Calculate the accounting rate of return on the dyeing machine, using the initial investment as the denominator.
Answer:
| |
0 |
1 |
2 |
3 |
4 |
5 |
6 |
| Incremental Revenue |
|
50,000 |
50,000 |
50,000 |
50,000 |
50,000 |
50,000 |
| Incremental Operating Expenses |
20,000 |
20,000 |
20,000 |
20,000 |
20,000 |
20,000 |
| Incremental Depreciation |
16,667 |
16,667 |
16,667 |
16,667 |
16,667 |
16,667 |
| Net Incremental Earnings (Investment) |
(1,00,000) |
13,333 |
13,333 |
13,333 |
13,333 |
13,333 |
13,333 |
Accounting Rate of Return
Initial Investment = PV of Earnings
PV of Earnings = 13333*PVAF(r%,6)
Therefore, r -6.03%
Accounting rate of return is the return calculated on accounting profit made through initial investment. Therefore, earnings will include the effects of depreciation.
Question 2: Identify the annual net relevant cash flows and use this information to assess the project on a net present value basis at 1 Jan 2014. Estimate the internal rate of return of the project.
Answer:
| |
2014
|
2015
|
2016
|
2017
|
|
Units produced & sold
|
400
|
600
|
500
|
200
|
|
Per Unit:
|
|
|
|
|
|
Sale Price
|
$1,400
|
$1,400
|
$1,400
|
$1,400
|
|
Costs: Variable Labour
|
$200
|
$200
|
$200
|
$200
|
|
Variable Material
|
$100
|
$100
|
$100
|
$100
|
|
Per Unit Contribution
|
$1,100
|
$1,100
|
$1,100
|
$1,100
|
|
Total Contribution
|
$4,40,000
|
$6,60,000
|
$5,50,000
|
$2,20,000
|
|
Less: Administrative costs
|
$90,000
|
$90,000
|
$90,000
|
$90,000
|
|
Lease Rental (advance for next year)
|
$1,00,000
|
$1,00,000
|
$1,00,000
|
$-
|
|
Total relevant Net Cash Inflows
|
$2,50,000
|
$4,70,000
|
$3,60,000
|
$1,30,000
|
|
Working Capital Outflow
|
$1,70,000
|
|
Plant purchased
|
$6,00,000
|
|
Advance Lease Rental
|
$1,00,000
|
|
Total Initial Outflow
|
$8,70,000
|
| |
2014-Beginning
|
2014-End
|
2015-End
|
2016-End
|
2017-End
|
|
|
Relevant Cash flows
|
$(8,70,000)
|
$2,50,000
|
$4,70,000
|
$3,60,000
|
$1,30,000
|
|
|
IRR
|
16%
|
|
|
|
|
|
|
Discount Rate
|
15%
|
|
|
|
|
|
|
Present Value
|
$(8,70,000)
|
$2,17,391
|
$3,55,388
|
$2,36,706
|
$74,328
|
$13,813
|
Therefore, Net Present Value = $13,813
Hence, the project shall be accepted and the company shall produce the new laptop by getting the factory on Lease.
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Question 3: You are required to evaluate the management of working capital for Healthy & Fresh Ltd, based on above reveal, changes in its operating cycle and financing scheme.
Answer: A current ratio of 2:1 or above indicates that the company has a strong liquidity position. In the given case, Healthy & Fresh ltd have a healthy current ratio in 2012 (2.61:1), which starts to decline in 2013 and further in 2014. This shows that the company's liquidity is not as strong as it was in 2012. Moreover, with an increase in settlement period for debtors (37 to 47 from 2012 to 2014) and inventory turnover days (48 in 2012 to 65 in 2014) decreases liquidity further for the company to meet its short-term obligations.
With an increase in the average settlement period to creditors beyond the 30 days period in 2014 (31 days), the company loses on the 2% discount it gets within 10 days of payment "With an increase in Non-current assets and long-term finance, it can be concluded that the company is funding its non-current assets from loans along with some liquid reserves of their own. "
Question 4: A. You, the financial manager of Cando Franchise Ltd, is asked for prepare an analysis of the three alternatives for the board members to consider.
B. As a financial manager, you are also expected to give your comments on above three alternatives.
Answer:
| Funds raised |
|
|
|
| Borrowing |
40,00,000 |
|
|
| Ordinary shares |
|
40,00,000 |
|
| Preference shares |
|
|
40,00,000 |
| |
|
|
|
| Annual NPBIT |
8,00,000 |
8,00,000 |
8,00,000 |
| Borrowing Interest |
4,40,000 |
- |
- |
| NPBT |
3,60,000 |
8,00,000 |
8,00,000 |
| Taxation |
1,08,000 |
2,40,000 |
2,40,000 |
| NPAT |
2,52,000 |
5,60,000 |
5,60,000 |
| Preference Dividends |
- |
- |
3,52,000 |
| Dividend available to Ordinary Shareholders |
2,52,000 |
5,60,000 |
2,08,000 |
| |
|
|
|
| Proportion of Dividend available to existing shareholders |
2,52,000 |
4,66,667 |
2,08,000 |
| Dividend to New Shareholders |
- |
93,333 |
- |
As per the above solution, it is clear that Cardo Franchise Ltd. should opt for issuing 100,000 ordinary shares for funding the growth plan, as Plan B offers the highest share of dividend to its existing shareholders as compared to the other two plans. Moreover, the control of the firm would stay as usual with the family (as they will own 500,000 ordinary shares out of the total 600,000 shares i.e. 83.33% control).
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