MANAGEMENT ACCOUNTING

Management Accounting



Management Accounting

This assignment relates to calculating the future investment values of Smart Electronics Plc. It is very important to signify how the business runs in the long run, and how does it cater towards the incoming future investments for its growth and sustainability. We would take about this paper, in terms of calculating the major investments values for the company, over the years. This would help us formulate a comprehensive analysis and recommendations about the company, which will be helpful in the long run. Future investments are a great technique to project a company's earnings in the long run. However, while we compute these values, it is important that a company keeps a sight on the future earnings that will acquire or obtain from a number of financial resources.

1.The net cash inflow from sales of the device for each year would be:

Year

1

2

3

4-12

Sales in units

      6,000 

   12,000 

   15,000

   18,000

Sales in pounds (@ £35 each)

£ 210,000 

£420,000 

£525,000

£630,000

Less variable expenses (@ £30 each)

    90,000 

 180,000 

 225,000

 270,000

Contribution margin

   120,000 

 240,000 

 300,000

 360,000

Less fixed expenses:

Salaries and other*

110,000 

110,000 

110,000

110,000

Advertising

   180,000 

 180,000 

 150,000

 120,000

Total fixed expenses

   290,000 

 290,000 

 260,000

 230,000

Net cash inflow (outflow)

£ (170,000)

£ (50,000)

£ 40,000

£130,000

2.The net present value of the proposed investment would be:

Item

Year(s)

Amount of Cash Flows

14% Factor

Present Value of Cash Flows

Investment in equipment

Now

£(630,000)

1.000

£(630,000)

Working capital needed

Now

£(60,000)

1.000

(60,000)

Yearly cash flows (see above)

1

£(170,000)

0.877

(149,090)

Yearly cash flows (see above)

2

£(50,000)

0.769

(38,450)

Yearly cash flows (see above)

3

£40,000 

0.675

27,000 

Yearly cash flows (see above)

4-12

£130,000 

3.338

*

433,940 

Salvage value of equipment

12

£15,000 

0.208

3,120 

Release of working capital

12

£60,000 

0.208

    12,480 

Net present value

£ (86,000)

*

Present value factor for 12 periods

5.660

Present value factor for 3 periods

2.322

Present value factor for 9 periods, starting 4 periods in the future

3.338

Decision based on above Analysis

Since the net present value is negative, the company should not accept the device as a new product. A negative net present value indicates that the device would not be a profitable option for the company in the long run, because it is not culminating into profits that the company must undertake it as a permanently new division, offering or product.

A sound choice of accepting or rejecting a certain new product holds long-run consequences to a firm's profitability. In the long run, sustained business decisions may make a business appear to be somewhat trickier in projecting its position against the competitors; but in the long run, such decisions would refrain the company from facing chaotic issues or crises (Hawken & Lovins, 1999, 134-165).

The movement of money in an out of the business or any other financial product is recorded in the cash flow. The measurement of these changes in cash is done over a period, a fiscal year or any finite period. Its measurement is helpful in calculating various aspects and is helpful in valuing the company. It helps the manager, shareholder, potential investor and directors in understanding the liquidity of the company, the rate of return of the company, the potential dividends to be paid, and the idle cash in the company, which can be invested or paid as dividend.

If a profitable company chooses to remain profitable by shunning or rejecting some of the options in the short run; it can do so in order to gain sustainability. Major stakeholders of the company might not like the ...