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MGT200 - Management Accounting and Finance Assignment - Tai Poutini Polytechnic, New Zealand

Learning Outcomes -

• Apply capital budgeting practices and evaluate investment decisions.
• Apply knowledge of working capital to effectively manage a business for a given situation.
• Compare and contrast financing options for a given situation and make recommendations.
• Discuss the principles of capital structure and cost of capital, and calculate the cost of capital.
• Apply management tools to assist in the planning and control of business operations.
• Use management accounting information to assist decision-making in a given business situation.

Capital Budgeting Question -

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Q1. Calculate the payback period for the proposed investment.

Answer - The following are the relevant calculations:

 Years Particulars 0 1 2 3 4 5 6 7 Cash outflows: Purchase of machine 5,13,000.00 Total cash outflow -5,13,000.00 Cash inflow: Savings 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 Total cash inflow 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 Payback period -4,03,000.00 -2,93,000.00 -1,83,000.00 -73,000.00 37,000.00 4.5 years

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Q2. Calculate the net present value of the proposed investment, assuming a discount rate of: (i) 8%, (ii) 10%, (iii) 12%.

Answer - The following are the relevant calculations:

 Years Particulars 0 1 2 3 4 5 6 7 Cash outflows: Purchase of machine 5,13,000.00 Total cash outflow -5,13,000.00 Cash inflow: Savings 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 Total cash inflow 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 1,10,000.00 Payback period -4,03,000.00 -2,93,000.00 -1,83,000.00 -73,000.00 37,000.00 4.5 years NPV: At 8% 1.00 0.93 0.86 0.79 0.74 0.68 0.63 0.58 -5,13,000.00 1,01,851.85 94,307.27 87,321.55 80,853.28 74,864.15 69,318.66 64,183.94 59,700.71 At 10% 1.00 0.91 0.83 0.75 0.68 0.62 0.56 0.51 -5,13,000.00 1,00,000.00 90,909.09 82,644.63 75,131.48 68,301.35 62,092.13 56,447.39 22,526.07 At 12% 1.00 0.89 0.80 0.71 0.64 0.57 0.51 0.45 -5,13,000.00 98,214.29 87,691.33 78,295.83 69,906.99 62,416.95 55,729.42 49,758.41 -10,986.78

Q3. What can you conclude from your answers to requirements A & B about the limitations of the payback method?

Answer - On the basis of the above calculations, since the payback period of the project is 4.5 years (which means that the bank would be able to recover its initial investment of \$513,000 within 4.5 years), it is recommended that the machine be purchased.

On the basis of the calculation of the NPV, if the cost of capital of the company is 8%, then it would be able to get more profit when compared with the cost of capital 10% or 12%.

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