Accounting and Finance will send you fquestions file - Essay Example

ACCOUNTING QUESTIONS ACCOUNTING QUESTIONS ANSWERS Task two Calculation of the cash flow for each ofthe five yearsAnnual cash flowyear 0-100,000year 120,000year 240,000year 360,000year 460,000year 540,000Calculation of Cash Flows:Sale price per unit = £ 12Variable Cost per unit = £ 8Contribution = £ 4Cash flow of 1st Year = £ 4 * 5,000 = £ 20,000Cash flow of 2nd Year = £ 4 * 10,000 = £ 40,000Cash flow of 3rd Year = £ 4 * 15,000 = £ 60,000Cash flow of 4th Year = £ 4 * 15,000 = £ 60,000Cash flow of 5th Year = £ 4 * 5,000 = £ 20,000In 5th year, there is termination value of machine which is £20,000, therefore there is additional cash flow of £20,000 during 5th year. 2. Using the investment appraisal methods to calculate the ARR, Payback, NPV and IRR2.

1 Calculation of Accounting Rate of Return (ARR)Accounting Rate of Return = Average Annual Cash Flow / Average Investment = [£ 24,000 / £ 60,000] *100 = 40%Average Investment = Cost of Machine + Disposal Value / by twoTotal Cash Flow during useful life of machine = £ 200,000Average annual cash flow = £ 200,000 / 5 = £ 40,000Average Investment = £ 100,000 + £20,000/2Average Investment = £ 60,0002.2 Calculating the paybackInitial Investment100,000 Accumulative Cash FlowCash Flow Year 120,000 20,000 Cash Flow Year 240,000 60,000 Cash Flow Year 360,000 120,000 The Accumulative cash flow up to year 2 is £ 60,000, initial investment required is £ 100,000 thus cash flow required during year 2 is £ 40,000.

The cash flow during year 3 is £ 60,000. Therefore calculation will be:Cash flow required during year 3 = £ 60,000Time required to generate required amount =£ 40,000 / £ 60,000 =0.67 years i.e. 8 months (0.67 * 12)Therefore, the machine will take two years and 8 months to generate cash flow of amount equal to initial investment i.e. £ 100,000.2.3 Calculating the NPVYearsNet Cash FlowsPV0(100,000)120,000 17,860240,000 31,880360,000 42,720460,000 38,160540,000 22,680Total153,3000 Sum of PV 1-5Yrs based on COC = £153,3000Initial Investment required to get machine operational = £100,000Net Present Value = £153,3000 - £100,000 = £ 53,300Therefore, the Net Present Value calculated is £ 53,300, which is highly positive. 2.4 Calculating the Internal Rate of Return:YearsNet Cash Flows0(100,000)120,000 240,000 360,000 460,000 540,000 The IRR calculated through MS Excel is 29.16%. Calculations based on Trial & Error method is summarized as shown belowYearsNet Cash FlowsPV @ 25%PV @ 30%PV @ 28%PV @ 29%120,00016,00015,38515,62515,504240,00025,60023,66924,41424,037360,00030,72027,31028,61027,950460,00024,57621,00822,35221,667540,00013,10710,77311,64211,197Total110,00398,144102,643100,355The table above is showing present value of estimated cash flows at different rates while it is clear that present value of estimate cash flows at 29 percent and 30 percent are respectively nearest greater and less to initial investment therefore the IRR will lie between 30% and 29%.

Exact value will be calculated through interpolation, as below. Present Value of Estimated Cash Flows @ 30% = £98,144Present Value of Estimated Cash Flows @ 29Nd% = £100,355Initial Investment = £100,000Internal Rate of Return = 29% + (100,000 – 98,144) / 100,000 = 29% + 0.1656 = 29.165Therefore, the IRR calculated through Trial & Error method is 29.165% approximately at which the present value of estimated cash flows is £99,996 which is approximately equal to initial investment i.e. £100,0003.

Advising the client to either accept or reject the projectThe customer should take the project because the payback period is two years and eight months, besides, the IRR calculated through Trial & Error method is 29.165% approximately at which the present value of estimated cash flows is £99,996 that gives an approximately equal to initial investment i.e. £100,000. Task three1. Cash budget for the months of august to November 2014Pedrosa PlcCash BudgetFor the period from August 2014 to November 2014Opening Cash BalanceAugustSepOctNov15,40037,24043,39048,930Sales67,65060,40058,50055,500Cash Sales27,06024,16023,40022,2001 Month39,18040,59036,24035,100Rent Income9,0009,0009,0009,000Cash Receipt75,24073,75068,64066,300Net Cash Inflow90,640110,990112,030115,230YPurchases33,60032,60034,75035,650Cash Payments35,40033,60032,60034,750Wages18,00018,00018,00019,080Dividend16,000 Machine  12,5006,250Cash Payments53,40067,60063,10060,080     Ending Cash Balance37,24043,39048,93055,150The ending cash balance during month of August is £37,240 while the expected cash balance during September is £43,390.

Similarly the expected cash balance during October and November are £48,930 and £55,150 respectively as shown in the table above.2. Benefits of the budget to a business Organisations need budget to help in the evaluation of its performance. Without a financial planning that makes use of the budget, they would not be in a position to assess their progress and institute appropriate measures. Besides, they need budgeting for efficient coordination of the organisational activities. The budget acts like a blueprint that provides the roadmap and the expectation of the activities like sales, expenditures, and other costs.

When organisations do not use budgets to address these issues, they are at risk of running down the organisation because of unplanned activities that are likely to exceed the expectations. Budgeting helps organisations to take control of their finances, hence keeping focused on the goals they laid down when beginning the financial year. A budget helps the organisation plan savings and makes decisions in advance when expecting or not expecting any costs related to the activity of the organisation hence controlling debts (Young, 2003).2.1 What can be done to enhance budgeting process?

Budgeting process can be very challenging especially when there is poor communication between the team tasked with the making of decisions. Therefore, enhancing communication and reducing the number of people involved in the making of budget will help improve the process (Young, 2003). Besides, it is important to have time and iterate the budget because handling the process at the last minute may hamper the process. It is also crucial to have time to review and improve areas that may not represent the expectations of the organisation (Young, 2003).

BIBLIOGRAPHYYoung, R.D. (2003). Performance-Based Budget Systems - Public Policy & Practice, p. 12, available online from ww.iopa.sc.edu/ejournal/assets/performance%20based%20budgets.pdf [21st June 2015)