Advanced Management Accounting



Advanced Management Accounting

Question 1

The below table shows cash flows on annual basis;

Cash Flow Analysis

Particulars

Years

1st Year

2nd Year

3rd Year

12-Apr

Sales (in units)

£6000

£12000

£15000

£18000

Sales (in pounds) (@ £70 each)

£420000

£840000

£1050000

£1260000

Less: variable expenses (@ £15 each)

£90000

£180000

£225000

£270000

Contribution Margin

£330000

£660000

£825000

£990000

Less: fixed expenses;

Salaries and Other Expenditures*

£220000

£220000

£220000

£220000

Advertising Expense

£360000

£360000

£300000

£240000

Total Fixed Expenses

580000

£580000

£520000

£460000

Net cash Inflow / outflow

(£250000)

£80000

£305000

£530000

Additional Notes and Computations: With respect to salaries and other expenses, the amount of depreciation is eradicated mainly because as per the accounting standards, depreciation is not counted as a cash expense. The calculation with respect to the depreciation amount includes;

(£630000 - £30000 = £600000) ÷ 12 years = £50000 - depreciation

£270000 total expense - £50000 - depreciation = £220000

Note: Kindly refer to the attached excel sheet for detailed calculations.

Question 2

Particulars

Year (s)

Amount

14% Factor

PV

Investment-equipment

Present

-£630000

1

-£630000

Working capital necessary

Present

-£120000

1

-£120000

Cash Flows-Yearly (see above)

1

-£250000

0.877

-£219250

Cash Flows-Yearly (see above)

2

£80000

0.769

£61520

Cash Flows-Yearly (see above)

3

£305000

0.675

£205875

Cash Flows-Yearly (see above)

12 - Apr

£530000

3.338

*£1769140

Salvage Value-Equipment

12

£30000

0.208

£6240

Issue of Working Capital

12

£120000

0.208

£24960

Net Present Value(NPV)

 

 

 

£1098485

The * Present value factor for 12 periods is 5.66 while the PV factor for nine periods comes to be 3.338, where four periods starting in the future.

Interpretation and Recommendations

Net Present Value one of the most popular methods to analyze investments. The present value is the value that the future payments have in the present. It is computed by discounting the future cash flows and then summing up the determined values (White, 2005). There is also the concept of the actuarial present value, which is a generalization of the actuarial present value (Marshall, 2012). It is the best known method when evaluating investment projects in the long term (Hwang, 2010). Net present value determines whether an investment complies with the basic financial objective i.e. to maximize investment. The change in the estimated value can be positive, negative, or remain the same. If it is positive it means that the value of the firm will have an increase equal to the amount of Net Present Value. Negative value means that the firm will reduce its wealth in the value yielding the NPN. If the result is zero NPV, the company will not have any change in the amount of their value.

Considering the case of Smart Electronics Plc, we can say that the project is feasible and will lead to positive returns since its net present value is positive. Its inflows are greater than that of outflows from the second year of operations.

Question 3

Critically evaluate, from the top management perspective how Return on Investment (ROI) can be used both to define future strategic options and measure managerial performances within the organization.

Return on Investment (ROI) shows the profitability and economic efficiency of operations regardless of the sources used. The rate of return on investment (ROI) is a useful economic tool that deals with the profitability of an investment, that is, the relationship between net income and gain realized, and investment (Gee, 1986). ROI is an indicator that measures the performance of a going concern. A positive ROI value accentuates that the business is profitable (higher ROI reveals an efficient use of capital in the generation of ...