Capítulo III: Sustento Pedagógico
3.9 Guía de observación
Working paper for the financial appraisal of a new machine for the production department
DISCOUNTED CASH FLOW
Year Cash Flow Discount Factor Discounted
at 10% Cash Flow
3 31,000 8,000 £23,000* required
4 28,000 36,000
* £31,000 – £8,000
Payback period = 2 years + (£23,000/£31,000) =
2 years and 8.9 months/2 years and 38.6 weeks/2 years and 270.8 days
16.6 (a) The net cash flows are:
£
year 0 (110,000)
year 1 20,000
year 2 60,000
year 3 80,000
year 4 80,000
year 5 85,000
payback period
The development costs are recovered in the first half of year 3: £20,000 + £60,000 + (£30,000/£80,000). Thus the payback period is 2 years and 4.5 months/2 years and 19.5 weeks/2 years and 136.9 days. Note that these assume even cash flows during the year.
net present value
Year Cash Flow Cumulative
Cash Flow
£ £
0 (110,000) (110,000)
1 20,000 (90,000)
2 60,000 (30,000)
3 80,000 50,000 ∴ £30,000 required
4 80,000 135,000
5 85,000 220,000
Year Cash Flow Discount Factor Discounted
Cash Flow
£ £
0 (110,000) x 1.000 (110,000)
1 20,000 x 0.909 18,180
2 60,000 x 0.826 49,560
3 80,000 x 0.751 60,080
4 80,000 x 0.683 54,640
5 85,000 x 0.621 52,785
Net Present Value 125,245
(b)
REPORT To: Managing Director
From: A2 Accounting Student Date: Today
Development of new product: ‘Zelahcold’
This report carries out an appraisal of the project, based on the information provided.
It would be relevant to know:
1. whether there are any additional cash flows beyond year 5
2. whether the introduction of ‘Zelahcold’ will affect sales of our existing products
The net present value technique relies on discounting relevant cash flows at an appropriate rate of return – 10 per cent for this project.
The proposal to develop the new product is acceptable from a financial viewpoint because it returns a positive net present value of £125,245 at a discount rate of 10 per cent. This calculation assumes that all cash flows occur at the end of each year.
The payback period is 2 years and 4.5 months/19.5weeks/136.9 days. These calculations assume even cash flows during the year.
Both project appraisal methods show that the project meets with the company’s criteria of:
• a positive net present value at a discount rate of 10 per cent, and
• a maximum payback period of three years
These show that, from a financial viewpoint, the project should be carried out.
16.7 (a) Net cash inflow per month:
£
14,000 units at £90 each 1,260,000
less total costs 1,130,000
cash inflow per month 130,000
∴ cash inflow per year £130,000 x 12 1,560,000
Payback period:
cost of machinery = £2,400,000 x 365 days = cash flow per year £1,560,000
561.54 days = 1 year, 196.5 days
Tutorial note: the examiner will also accept the answer given in weeks, 1 year and 28 weeks, and months, 1 year and 6 months.
(b) Any two limitations of payback:
• all cash flows after the payback period are ignored
• within the payback period the timing of receipts and payments is not considered
• the effects of inflation are ignored
• the time value of money is ignored
• the life of the asset is not considered
16.9 (a)
current production (units) per year x 120% x profit per unit = cash flow per year 6,000 units per year x 120% x £20 profit (£80 – £60) = £144,000 per year
(b) On the basis of net present value, the new machine should be purchased.
Advantages:
– There is a positive net present value over the four years for which information is given.
– There is a further six years when, subject to economic conditions, cash flow should continue to be generated.
– Payback is 2 years and 157 days, leaving a further 7.5 (approx) years to generate cash flow.
Disadvantages:
– Can purchase of the new machine be justified when the old machine has four years’ economic life remaining?
– Will the quality of the output from the new machine be as good as/better than from the old machine?
– Will Roberta be able to sell the increased output of 1,200 units per year? If not, and output/sales continue at 6,000 units per year, cash flow will be £120,000 per year. This gives a payback of 2 years and 335 days, and a negative net present value of £440 at the end of year 4.
– Will the market continue for the product over the next ten years?
– The new machine will need financing – is this available?
– Will there be any proceeds from the sale of the old machine?
– The cost of capital is high at 14% – is lower cost finance available?
– Borrowing will increase the gearing of the business and may make it less attractive to investors.
– The estimates of cash flows may be inaccurate.
– Staff may need to be retrained.
16.12 (a) Year Machine A Machine B
£ £
0 (30,000) (80,000)
1 *18,000 †30,000
2 *18,000 †30,000
3 – †30,000
Expected total net cash flow 6,000 10,000
* 12,000 cakes x (£3.00 – £1.50) = £18,000
† 15,000 cakes x (£3.00 – £1.00) = £30,000
Net present value of new machine
Year Cash Flow Discount Factor Discounted
Cash Flow
£ £
0 (350,000) x 1.000 = (350,000)
1 144,000 x 0.877 = 126,288
2 144,000 x 0.769 = 110,736
3 144,000 x 0.675 = 97,200
4 144,000 x 0.592 = 85,248
Net Present Value = 69,472
(b) Net present value
(c) On the basis of net present value, Machine A should be purchased and Machine B should be rejected because of its negative net present value.
Reason:
Machine A has a positive net present value and the initial cost is much less than Machine B. However, – the net present value is not large and the estimates of revenues and costs may be inaccurate.
– if the cost of capital increases, the positive net present value could disappear.
– will there be any proceeds from the sale of the old machine?
– if Beard Bakeries Ltd needs to borrow to finance the machine, the company’s gearing will increase and may make the company less attractive to investors.
17.1 (a) Benefits of budgetary control
• planning – using a formal framework of budgets to predict future activities and potential problems
• co-ordination – individual budgets are integrated into the master budget
• control – comparison of actual results against the budget
• communication – between the owner and staff to achieve the objectives of the business
• motivation – of staff to ensure that budgets are met
• evaluation of performance – to see where improvements can be made
• decision-making – about production, sales and costs
(b) Any three budgets
• sales budget
The most likely three budgets for a small business such as AggieSurf would be cash, sales and production
(c) Relevant factors when implementing budgetary control
• costs and benefits – benefits must exceed the cost of budgetary control
• accuracy – of information used
• demotivation – of staff may occur if they have not been involved in planning the budget and/or where budgets are set at too high a level
• disfunctional management – ensure that the budgets co-ordinate
• set too easy – ensure that budgets are set at realistic levels to enable the business to use its resources to best advantage
• may restrict activities – budgets may be inflexible so that staff are unable to take advantage of opportunities CHAPTER 17 Further aspects of budgeting
Year Cash Flow Discount Factor Discounted
Cash Flow
Machine A Machine B Machine A Machine B
£ £ £ £
0 (30,000) (80,000) x 1.000 = (30,000) (80,000)
1 18,000 30,000 x 0.909 = 16,362 27,270
2 18,000 30,000 x 0.826 = 14,868 24,780
3 – 30,000 x 0.751 = – 22,530
Net Present Value = 1,230 (5,420)
17.3 (a)
purchases budget
April June August and October and December February
and May and July September November and January and March
£000 £000 £000 £000 £000 £000
Sales 40.0 35.0 30.0 20.0 10.0 10.0
Margin 10.0 8.75 7.5 5.0 2.5 2.5
Purchases 30.0 26.25 22.5 15.0 7.5 7.5
(b) (i) Debtor collection period
Formula: Debtors x 365 days (or 52 weeks or 12 months) Credit sales
Year ended 31 March 2003:
£12,000 x 365 days = 29.2 days
£150,000 Year ended 31 March 2004:
£14,000 x 365 days = 35.2 days
£145,000*
* (£20,000 x 3 months) + (£15,000 x 4 months) + (£5,000 x 5 months)
(ii) Creditor payment period
Formula: Creditors x 365 days (or 52 weeks or 12 months) Credit purchases
Year ended 31 March 2003:
£11,000 x 365 days = 36.5 days
£110,000 Year ended 31 March 2004:
£10,000 x 365 days = 33.6 days
£108,750*
* see purchases budget
(c) Debtor collection period:
• debtor days have increased by six days
• this means that customers are taking longer to pay Creditor payment period:
• creditor days have reduced by almost three days
• this means that suppliers are being paid earlier Recommendation:
• encourage debtors to pay quicker
• delay payments to creditors
17.4 (a)