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Unit2-assignment2

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Unit2-assignment2

    Unit 2: Managing Financial Resources and Decisions Handout Date: ____________________ Hand In Date: ____________________

     Assignment 2 Making Financial Decisions

     Scenario

    You are a financial accountant of MC Co..

    Task 1

    In early January 2008 the Directors present you the cash flow forecast for the twelve months from January 2008 and the sales budget covering the twelve month period from July 2007 to June 2008 the first six months of

    which include actual sales figures and variances between budgeted and actual sales. The directors are concerned about the likely cash deficits shown in the cash flow forecast and the sales performance from July to December 2007. They are also concerned that they are very unlikely to meet their budgeted sales targets for January to June 2008.

    With this in mind they ask you to:-

    Check the cash flow forecast and the sales budget and identify the main problems that MC are faced with

     Identify the likely causes of the problems and how they might be remedied and avoided in the future

    • Make recommendations for improving the cash flow situation with a view to minimizing the cash deficit or, possibly, generating a cash surplus

    • Make recommendations for resolving the issues highlighted in the sales budget and decide what approach should

    be taken in relation to the January to June budget

Task 2

    The Directors of MC Company are considering two alternative business projects each of which involve an initial investment of ? 450,000. You are asked to advise the Directors which of the two projects would be the more financially viable.

    Project ‘A’ involves the introduction of modern, hi-tech machinery into the company’s main production unit. This in turn will result in a net increase in turnover to the company of:- Year 1 - ? 180,000

    Year 2 - ? 230,000

    Year 3 - ? 280,000

    Year 4 - ? 120,000

    Project ‘B’ involves an increase in the company’s marketing companies. In is anticipated that the net effect of their campaign would bring in additional annual turnovers of:- Year 1 - ? 60,000

    Year 2 - ? 120,000

    Year 3 - ? 250,000

    Year 4 - ? 250,000

    You are asked to carry out a full investment appraisal of the two projects. In order to fully assess the pros and

    cons of the two alternatives you decide to employ a number of appraisal techniques:- Payback

    • Accounting rate of return

    • Net present value

    • Internal rate of return

    For calculation purposes, you assume that the cost of capital will remain fairly static at around 5% per annum

    over the four year period

    Your appraisal should be presented in the form of a written report to the Directors and include all financial

    computations and a summary of the conclusions which can be drawn from the results of the appraisal including

    recommendations as to which project should be taken on board

    Turnover180.000+230.000+180.000+120.000=810,000 B:60,000+120,000+250,000+250,000=680,000 :deperciation450,000-20,000=430,000 450,000-20,000=430,000

    Total profit 380,000 250,000

    Average profit(4years)950,000 62,500

    value of interest initsally450,000-

    Eventual residual value20,000-

     Average value of investant 235,000-

    the Accounting rate of return =95,000/235,000=40.4% =62,500/235,000=26.6%(会计报酬率,选者大的!A...)

3,净限值法:NPR project B

    Year Cash flow? Present value factor% Present value ?

    0 -- 450,000/- -450,000/-

    1 180,000/60,000 0.952 /57,120

    2 230,000/120,000 0.907 /108,840

    3 280,000/250,000 0.864 /216,000

    4 140,000/270,000 0.823 /205,750

    MPV:13?,710 choose project A

4.IRR(内部报酬率) project B.......choose the larger!

Task 3(a)

    The Directors of MC Co. ask you to carry out a full costing and pricing review across the company’s product

    range and an assessment of the break-even figures for each item currently manufactured.

    One of the products is CAMD network device. You ascertain that the following costs are incurred in the

    production of each unit:-

    Material costs - ? 52.50

    Labour Costs - ? 35.75

    Variable Overheads ? 10.20

    The fixed costs of running the factory where the device is produced amount to ?120,000 per annum. The current

    selling price is ?120.

    You decide to use the device as the model for all your forthcoming calculations and decide to present your information in the following order:-

    • The contribution per unit and the contribution/sales ratio

    • The break-even point in unit and sales value

    • A break-even chart for the product

    • The margin of safety per unit and in sales value (unit sales for 2008 are expected to be 7,500)

    You also decide to calculate the profit or loss at various sales levels (e.g. 5,000, 8,000 and 10,000 units) and indicate what the following changes will have on the break-even point:-

    • A ?5 increase or decrease in the selling price

    • A ?5,000 increase or decrease in fixed costs

    • A ?5 increase or decrease in material or labour costs per unit

Task 3(b)

    Two customers have recently placed large orders for the MC Co. at substantially discounted prices. The Directors ask you to calculate the likely impact that either of these orders would have on the company’s profits. They are new customers and their business would push the sales levels well above the anticipated demand of 7,500:-

    • Southwood Electricals – an order for 500 units at a discount of 15% on the normal selling price • Westbrook Engineering – an order for 1000 units at a discount of 25% on the normal selling price You are asked to produce a computation for each order illustrating the likely impact on the profits for the MC Co. and a memorandum to the Directors making recommendations as to whether they should accept or reject either of the orders. The Managing Director has indicated that financial issues may not be the only consideration

    Sales Budget MC Co. July 2007 June 2008

    Month Monthly Cumulative Actual Monthly Actual Variance

     Budget Budget Cumulative

    July 230,000 230,000 215,000 215,000 (15,000)

    August 230,000 460,000 220,000 435,000 (25,000)

    September 270,000 730.000 245,000 680,000 (50,000)

    October 265,000 995,000 235,000 915,000 (80.000)

    November 265,000 1,260,000 237,000 1,152,000 (108,000)

    December 300,000 1,560,000 270,000 1,422,000 (138,000)

    January 250,000 1,810,000

    February 265.000 2,075,000

    March 300,000 2,375,000

    April 325,000 2,700,000

    May 325,000 3,025,000

    June 350,000 3,375,000

Look at the Sales Budget and identify the main issues for MC Co.

    • Identify the likely causes of those problems

    • Identify ways in which those problems could have been avoided

    Cash Flow Forecast for MC Co. -Jan 2008 - Dec 2008

    Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

    Brought forward 40,000 Sales 200,000 300,000 300,00300,00250,00260,00300,00260,00300,00325,00265,00265,000

     0 0 0 0 0 0 0 0 0

    240,000 300,000 300,00300,00250,00260,00300,00260,00300,00325,00265,00265,000 Total Income

    0 0 0 0 0 0 0 0 0

    Purchases 150,000 140,000 135,00135,00140,00130,00135,00145,00140,00140,00145,00145,000

    0 0 0 0 0 0 0 0 0 Wages 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000 55,000

    Rent & Rates 56,000 56,000 56,000 56,000 Light & Heat 55,000 55,000 55,000 55,000 Advertising 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 Insurances 55,000 52,000 Equipment 50,000 10,000 10,000 10,000 Vehicles 20,000 Directors Salaries 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 22,000 Motor Expenses 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 Sundry Expenses 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000 11,000

    432,000 251,000 291,00302,00293,00296,00292,00246,00296,00297,00246,00301,000 Total

    0 0 0 0 0 0 0 0 0 Expenditure

    Monthly (!92,000) 49,000 9,000 (2,000) (43,000(36,0008,000 14,000 4,000 28,000 19,000 (36,000) deficit/surplus ) ) Accumulative (192,000) (143,000) (134,00(136,00(179,00(215,00(207.00(193,00(189,00(161,00(142,00(178,000) deficit/surplus 0) 0) 0) 0) 0) 0) 0) 0) 0)

     Look at the Cash Flow Forecast and identify the main problems that the company are faced with

    • Identify the main causes of those problems

    • Suggest ways of improving cash inflows/outflows in order to minimize the cash deficit or generate a cash surplus

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