UMADNJ-30-M Fundamentals of Accounting and Finance Assignment Sample
Introduction
Bradley Brewing plc has collected market data of beer companies to invest in a new beer company. Different kinds of accounting tools are taken into consideration to analyze risk for investing in this project.
Alternative sources of finance suitable for the project
Cash flow statement and balance sheet of the competitor company is suitable to understand the risk of investing in this project. As cited by Dedunu (2019), many accounting ratios like current ratio, liquid ratio, turnover ratio of debtors and creditors are analyzed to make decisions. As cited by Isnasari et al. (2020), various types of balance sheet ratios provide the overall financial and operating strength of a particular company.
Risk analysis
Investors have to evaluate the future uncertainties to reduce risk of investment in a particular project. As cited by Tariq and Khattak (2019), it is necessary to measure the working life of available resources and their effectiveness of work in a particular project. As cited by Malarkodi and Anisha (2019), investors may face a large amount of loss in upcoming future, and the payback period ensures the recovery time of their invested money in a particular project. Risk analysis is most important for Bradley Brewing plc to get a high rate of return on their investment in a beer company.
Compute the payback period for the project
Payback period helps to forecast the recovery of invested capital. As cited by Djamaludin et al. (2019), it is necessary to invest in a new project. Here payback period was estimated at 2.14 years that influences investors to invest in this project.
| Calculation of payback period | |
| Initial investment | £ 30.00 |
| Salvage value of machine and plant | £ 2.00 |
| Cost of materials | £ 8.00 |
| project life will be 5 | |
| sales | £ 22.00 |
| cash inflow for the year | |
| sales | £ 22.00 |
| Less: Cost of materials | £ 8.00 |
| cash inflow for the year | £ 14.00 |
| Payback period | 2.14 |
Table 1: Calculation of payback period
(Source: MS Excel)
Compute the Accounting rate of return for the project
| year | cash inflow | cumulative cash inflow | Depreciation | Cumulative depreciation for the year | Estimated annual profit |
| 1 | £ 14.00 | £ 14.00 | 5.6 | 5.6 | £ 8.40 |
| 2 | £ 14.00 | £ 28.00 | 5.6 | 11.2 | £ 16.80 |
| 3 | £ 14.00 | £ 42.00 | 5.6 | 16.8 | £ 25.20 |
| 4 | £ 14.00 | £ 56.00 | 5.6 | 22.4 | £ 33.60 |
| 5 | £ 14.00 | £ 70.00 | 5.6 | 28 | £ 42.00 |
| average profit per year (42/5) | 8.4 | ||||
| initial investment | 30 | ||||
| Accounting rate of return | 28% |
Table 1: Computation of the Accounting return rate
(Source: MS Excel)
Compute the net present value (NPV) and internal return rate for the project
| year | Cash inflow | Internal rate of return (20%)
(1+0.2)^t |
Net present value
(Cash inflow* Internal rate of return) |
| 1 | £ 14.00 | 1 | £ 14.00 |
| 2 | £ 14.00 | 1.2 | £ 16.80 |
| 3 | £ 14.00 | 1.44 | £ 20.16 |
| 4 | £ 14.00 | 1.728 | £ 24.19 |
| 5 | £ 14.00 | 2.0736 | £ 29.03 |
| 6 | £ 11.00 | 2.48832 | £ 27.37 |
| 7 | £ 11.00 | 2.985984 | £ 32.85 |
| 8 | £ 11.00 | 3.5831808 | £ 39.41 |
Table 3: Computation of net present value (NPV) and internal return rate for the project
(Source: MS Excel)
Outcomes Of calculation
It has been seen that internal return rate is positive and this project has the potential to give a good return on invested capital. As cited by Siziba and Hall (2019), investors use different accounting measures to estimate the most effective financial planning.
Accounting rate return of this company is almost 28%, this plan is appropriate. Payback period has been calculated that is almost 2.14 years, the least payback period is most effective to get back initial investment.
Riskiness of the project
NPV, IRR, and payback period of this project has been calculated and there is the least chance of losing money in this project. As cited by Septiana et al, (2021), various types of ration and analytics can be used in this project to make more return. Investors have to take risk to continue this project with the selected estimation but few changes in financial planning will reduce the risk.
Conclusion
Payback period, net value of present, internal return rate and accounting return rate was calculated to make the most effective investment planning. It can be concluded that this company has to increase productivity and make more sales for the company to get more return on invested capital. NPV, IRR, ARR, and payback period can be made better by implementing some new initiatives in this project. Accounting return rate and net present value have represented the picture of this project.
References
Dedunu, H., 2019. Management Accounting Practices in Srilanka: Investigation in Banking Sector. Int J Account Res, 7, p.201. Available at: https://pdfs.semanticscholar.org/4c0a/98ab399c49129cc0433117f432b98b430ad7.pdf
Djamaludin, A., Sukandari, B., Krisdiono, E. and Mashudi, A., 2019. FEASIBILITY STUDY OF THE RECEPTION FACILITY DEVELOPMENT OF TANJUNG PERAK BRANCH SURABAYA. JOURNAL ASRO-STTAL-INTERNATIONAL JOURNAL, 10(1), pp.17-26. Available at: http://www.asrojournal-sttal.ac.id/index.php/ASRO/article/view/87
Isnasari, Y., Nasution, S.Y. and Ratnasari, D., 2020, July. Techno-economic and Supply Chain Analysis of Nano Tea Made from Mangosteen Peel as Functional Food. In IOP Conference Series: Earth and Environmental Science (Vol. 528, No. 1, p. 012047). IOP Publishing. Available at: https://iopscience.iop.org/article/10.1088/1755-1315/528/1/012047/meta
Malarkodi, K. and Anisha, A., 2021. An Analysis of Capital Budgeting Practices in Textile Industry. Annals of the Romanian Society for Cell Biology, pp.1793-1801. Available at: http://annalsofrscb.ro/index.php/journal/article/view/4702
Septiana, Y., Sofiah, E., Mulyani, A. and Setiawan, R., 2021, March. Design of decision support system for business feasibility study using SMART method. In IOP Conference Series: Materials Science and Engineering (Vol. 1098, No. 3, p. 032069). IOP Publishing. Available at: https://iopscience.iop.org/article/10.1088/1757-899X/1098/3/032069/meta
Siziba, S. and Hall, J.H., 2019. The evolution of the application of capital budgeting techniques in enterprises. Global Finance Journal, p.100504. Available at: https://www.sciencedirect.com/science/article/pii/S1044028319301450
Tariq, M. and Khattak, S.R., 2019. Practices of Capital Budgeting Techniques: Evidence from the Corporate Sector of Pakistan. NUML International Journal of Business & Management, 14(1), pp.16-28. Available at: https://search.proquest.com/openview/4ac0bf19f9a84e2497a38a0f7318b93e/1?pq-origsite=gscholar&cbl=2050138
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