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AfinancialanalysisreportforTricolplc

Outcome3and4

Class;10E6

Name:Maboda

SCN:125099297

CandidateNum:22

Introduction

Tooperatebetterinfinancialaspect,themanagementofTricolplcaskedmetoanalyzetheirfinancialconditionthenmakerecommendationsforthem.

Findings

PartA

(ⅰ)Flexbudgetinlinewithactualactivity

TricolplcFlexedBudgetforJune

Originalbudget

Flexedbudget

Actualresults

Variance

2000units

1600units

1600units

F/A

￡

￡

￡

￡

Directmaterial

80,000

64,000

61,600

2,400

F

Directlabor

36,000

28,800

35,200

6,400

A

Variableproductionoverhead

4,000

3,200

3,200

0

Fixedcost

Depreciation

1,500

1,500

1,500

0

Rentandrates

2,500

2,500

2,500

0

Administrationoverhead

2,000

2,000

2,200

200

A

Insurancecosts

2,200

2,200

2,400

200

A

Total

128,200

104,200

108,600

4,400

A

(ⅱ)Variancescalculation

Directmaterialtotalvariance

(Standardunitsofactualproduction*standardprice)－(actualquantity*actualprice)

(4kg*1,600*￡10)－￡61,600=￡2,400(F)

Rateofsignificance:(3.75%)

Directmaterialusagevariance

Standardprice*(standardunitsofactualproduction－actualquantity)

obviouslyadverse.Thecompanyupgradingtheproductionmachinerymayneedtimeforemployeestoadoptit.Also,employeesneedtrainingtime.Therebuildprocessofmachineryconsumedtimetoo.Inaword,thechargeablehourshaveincreased.

Thebudgetdirectlaourhoursrateis￡9perhour,theactualhoursrateis￡10perhour.Itisadversethatonepoundhigherthanbudgeted.Itispossiblecausedbybothinternalandexternalfactors.Higher-than-expectedwagesettlementmaybeinternalreasonforthevariance,andnewmachinerymaybeneededtorecruitnewemployeestooperatethemachinery,whichalsocanincreasetheexpense.Forexternalfactors,thechangingoflabourmarketmayincreaselabourcost;thegovernmentlegislationalsocanincreasethelabourcost,forexampleminimumpay.

Bothdirectlabourefficiencyanddirectlabourratevariancesareadverse,sothedirectlabourtotalvarianceisadverse.

Overheadvariance

Ascalculatedabove,totaloverheadvarianceiscausedbyadministrationandinsurance.Eachfactorhas￡200variance,sothetotaloverheadvarianceis￡400anditisadverse.Duringtheprocessofchangingsupplier,thecompanyneededmoreexpenseonpublicrelationshipornegotiation,inaddition,inordertomaintainthenewmachinery,administrationcostwillbeincreasedtoo.Forinsuranceaside,theimprovementofmachinerywillneedmoreinsurancefeestocover,whichalsocontributestotheincreaseofinsurancefeeofnewemployees.

PartB

Selectionandapplicationoftwoinvestmentappraisaltechniques

Asthecompanyiskeentorecoupthecostoftheinvestmentwithinfiveyears,IwillchoosePaybackperiodandNetPresentValuetohelpmecompletetheappraisal.

Inordertofulfilltheappraisaleasily,therearesomeassumptionslistedbelowshouldbeconsideredbeforetheappraisal.

⑴Allrevenueandinflowareassumedcashflow

⑵Allinvestmentcostincurredinyear0

⑶Nouncertaintyisconsidered

⑷Donotconsiderinflationandtaxation

⑸Marketrateofreturnisexpectedrateofreturn

⑹Rateofreturnisvaryingalongwithtime

TricolplcPaybackperiodforprojectdistributionarm

YearNetcashflow

CumulativeCashFlow

￡

￡

CashFlow

Year0

(1,000,000)

(1,000,000)

CashInflow

Year1

160,000

(840,000)

Year2

160,000

(680,000)

Year3

320,000

(360,000)

Year4

320,000

(40,000)

Year5

320,000

280,000

NetCashBenefit

Year5

280.000

Note:require40,000/320,000inyear5=1/8*year=1.5moths

Payback=4years1.5moths

TricolplcNetPresentValueforprojectdistributionarm

Annualcashflow

Presentvaluefactorsat10%

Present

Value

￡

￡

￡

Year0

(1,000,000)

1.000

(1,000,000)

Year1

160,000

0.909

145,440

Year2

160,000

0.826

132,160

Year3

320,000

0.751

240,320

Year4

320,000

0.683

218,560

Year5

320,000

0.621

198,720

935,200

NPV

(64,800)

Recommendationaboutinvestment

AccordingtoPaybackPeriodanalysis,theinvestmentcostcanberecoupedinyear4and1.5moths.Inotherwords,theperiodisundercompany’sexpectation.Theprojectcanbeexecuted.However,accordingtoNetPresentValueanalysis,intermsofpresentvalue,withinfiveyears,whattheNPVwillbringnetresultisnetcashlossbutnotnetcashsurplus.Ingeneral,thecompanyshouldconsidertimevalueandotherfactors,sotheprojectshouldnotbeexecuted.

Factorsimpactontheinvestmentshouldbeconsidered

Variousfactorswillimpactonresultofinvestment.Iwilloutlinefactorsshouldbeconsideredwhenthemanagementreviewingmyrecommendationinfinancialandnon-financialfactors.

Financialfactor

Asdistributionarmisfinanciallong-termbeneficialproject,itcanbeusedin

long-termperiodandbringbenefitscontinuous.Theinvestmentcostis￡1,000,000,whichcanbeconsideredalargeinvestment.Soitmorelikelyneedslongperiodpaybackperiod.Themanagementshouldfocusonlongercashflowsforlongerperiodoffuture.Ontheotherhand,NetPresentValueinyearfiveis(28,000)onlytake2.8%percentsoftheinvestmentcost,itismorelikelysurplusinyearsix.Anotherfinancialfactorissourceofmillionpounds.Ifitisinternalsource,themanagementmainlyconcentrateonopportunitiescost.Ifitiscostofcapitalorcostofcapitaltakingmuchweightofthesource,themanagementmustpaycostofthesource