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Question:
table
Answer:

After-tax cash flows

Statement Showing After-tax Cash Flows for the proposed Investment project

Amount in million

Particulars/ Years

1

2

3

4

5

6

7

8

9

10

Sales in units

16.00

16.00

16.00

16.00

16.00

16.00

16.00

16.00

16.00

16.00

Sales Price per Unit

1.25

1.28

1.31

1.34

1.37

1.40

1.44

1.47

1.51

1.54

Total Sales

 $20.00

 $20.47

 $20.95

 $21.44

 $21.95

 $22.46

 $22.99

 $23.53

 $24.08

 $24.65

 

 

 

 

 

 

 

 

 

 

 

Raw Material cost

 $7.00

 $7.00

 $7.00

 $7.00

 $7.00

 $7.00

 $7.00

 $7.00

 $7.00

 $7.00

Fixed  Cost

 $ 5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

Variable  Cost

 $ 1.40

 $1.40

 $1.40

 $1.40

 $1.40

 $1.40

 $1.40

 $1.40

 $1.40

 $1.40

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 $ 6.00

 $6.47

 $6.95

 $7.44

 $7.95

 $8.46

 $8.99

 $9.53

 $10.08

 $10.65

Depreciation

 $ 1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

Profit Before Tax

 $ 4.05

 $4.52

 $5.00

 $5.49

 $6.00

 $6.51

 $7.04

 $7.58

 $8.13

 $8.70

Tax (rate 30%)

 $ 1.22

 $1.36

 $1.50

 $1.65

 $1.80

 $1.95

 $2.11

 $2.27

 $2.44

 $2.61

Profit After Tax

 $ 2.84

 $3.16

 $3.50

 $3.85

 $4.20

 $4.56

 $4.93

 $5.31

 $5.69

 $6.09

Depreciation

 $ 1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

Cash flow from Salvage Value

 $ -

 $-

 $ -

 $ -

 $ -

 $ -

 $ -

 $ -

 $ -

 $5.00

Cash Flows after Tax

 $ 4.79

 $5.11

 $5.45

 $5.80

 $6.15

 $6.51

 $6.88

 $7.26

 $7.64

 $13.04

Payback period

Formula

last year with negative cumulative cash flow+(absolute value of cumulative cash flow at the end year with a negative cumulative cash flow / total cash flow during the yearafter a negative cumulative cash flow

Payback Period =

3 + (4.65) / 5.80

 

3.8017241

Table 1: Statement showing cumulative cash flow

Computation of Payback Period

Years

Cash Flows (In Million )

Cumulative Cash Flow(In Million )

0

$      (20.00)

$     (20.00)

1

$           4.79

$     (15.22)

2

$           5.11

$     (10.10)

3

$           5.45

$       (4.65)

4

$           5.80

$         1.15

5

$           6.15

$         7.29

6

$           6.51

$       13.80

7

$           6.88

$       20.68

8

$           7.26

$       27.94

9

$           7.64

$       35.58

10

$         13.04

$       48.62

Net present value

Amount in million

Particulars/ Years

1

2

3

4

5

6

7

8

9

10

Cash Flows after Tax

 $ 4.79

 $5.11

 $5.45

 $5.80

 $6.15

 $6.51

 $6.88

 $7.26

 $7.64

 $13.04

Present Value Factor @ 20%

0.833

0.694

0.579

0.482

0.402

0.335

0.279

0.233

0.194

0.162

Present Value of Cash Flows

 $3.99

 $3.55

 $3.15

 $2.79

$2.47

 $2.18

 $1.92

 $1.69

 $1.48

 $2.11

Total Present Value of Cash Flows

 $25.33

Initial Capital Outlay

 $20.00

Net Present Value

$5.33

Profitability index

Profitability Index

Present Value of Cash Inflows / Initial investment

 

25.33/20.00

 

1.267

After tax cash flows

Years/

 Particulars

1

2

3

4

5

6

7

8

9

10

Sales in units

16.80

16.80

16.80

16.80

16.80

16.80

16.80

16.80

16.80

16.80

Sales Price per Unit

$1.25

$1.28

$1.31

$1.34

$1.37

$1.40

$1.44

$1.47

$1.51

$1.54

Total Sales

$21.00

$21.49

$22.00

$22.52

$23.04

$23.59

$24.14

$24.71

$25.29

$25.88

 

                   

Raw Material cost

$7.07

$7.07

$7.07

$7.07

$7.07

$7.07

$7.07

$7.07

$7.07

$7.07

Fixed  Cost

$5.60

$5.60

$5.60

$5.60

$5.60

$5.60

$5.60

$5.60

$5.60

$5.60

Variable  Cost

$1.47

$1.47

$1.47

$1.47

$1.47

$1.47

$1.47

$1.47

$1.47

$1.47

 

                   

Gross Profit

$6.86

$7.35

$7.86

$8.38

$8.90

$9.45

$10.00

$10.57

$11.15

$11.74

Depreciation

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

Profit Before Tax

$4.91

$5.40

$5.91

$6.43

$6.95

$7.50

$8.05

$8.62

$9.20

$9.79

Tax (rate 30%)

$1.47

$1.62

$1.77

$1.93

$2.09

$2.25

$2.42

$2.59

$2.76

$2.94

Profit After Tax

$3.44

$3.78

$4.14

$4.50

$4.87

$5.25

$5.64

$6.03

$6.44

$6.85

Depreciation

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

$1.95

Cash flow fromSalvage Value

$-

$-

$-

$-

$-

$-

$-

$-

$-

$5.00

Cash Flows after Tax

$5.39

$5.73

$6.09

$6.45

$6.82

$7.20

$7.59

$7.98

$8.39

$13.80

Net present value

Amount in million

Years/ Particulars/

1

2

3

4

5

6

7

8

9

10

Cash Flows after Tax

$5.39

$5.73

$6.09

$6.45

$6.82

$7.20

$7.59

$7.98

$8.39

$13.80

Present Value Factor @ 20%

0.833

0.694

0.579

0.482

0.402

0.335

0.279

0.233

0.194

0.162

Present Value of Cash Flows

$4.49

$3.98

$3.52

$3.11

$2.74

$2.41

$2.12

$1.86

$1.63

$2.23

Total Present Value of Cash Flows

$28.08

Initial Capital Outlay

 $20.00

Net Present Value

$8.08

B

After tax cash flows

Particulars/years

1

2

3

4

5

6

7

8

9

10

Sales in units

15.20

15.20

15.20

15.20

15.20

15.20

15.20

15.20

15.20

15.20

Sales Price per Unit

 $  1.25

 $1.28

 $1.31

 $1.34

 $1.37

 $1.40

 $1.44

 $1.47

 $1.51

 $1.54

Total Sales

 $19.00

 $19.45

 $ 19.90

 $ 20.37

 $ 20.85

 $ 21.34

 $ 21.84

 $ 22.35

 $ 22.88

 $ 23.42

 

 

 

 

 

 

 

 

 

 

 

Raw Material cost

 $  6.93

 $6.93

 $6.93

 $6.93

 $6.93

 $6.93

 $6.93

 $6.93

 $6.93

 $6.93

Fixed  Cost

 $  5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

 $5.60

Variable  Cost

 $  1.33

 $1.33

 $1.33

 $1.33

 $1.33

 $1.33

 $1.33

 $1.33

 $1.33

 $1.33

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 $  5.14

 $5.59

 $6.04

 $6.51

 $6.99

 $7.48

 $7.98

 $8.49

 $9.02

 $9.56

Depreciation

 $  1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

Profit Before Tax

 $  3.19

 $3.64

 $4.09

 $4.56

 $5.04

 $5.53

 $6.03

 $6.54

 $7.07

 $7.61

Tax (rate 30%)

 $  0.96

 $1.09

 $1.23

 $1.37

 $1.51

 $1.66

 $1.81

 $1.96

 $2.12

 $2.28

Profit After Tax

 $  2.23

 $2.55

 $2.87

 $3.19

 $3.53

 $3.87

 $4.22

 $4.58

 $4.95

 $5.33

Depreciation

 $  1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

 $1.95

Cash flow fromSalvage Value

 $ -

 $  -

 $  -

 $  -

 $  -

 $  -

 $  -

 $  -

 $  -

 $5.00

Cash Flows after Tax

 $  4.18

 $4.50

 $4.82

 $5.14

 $5.48

 $5.82

 $6.17

 $6.53

 $6.90

 $ 12.28

Net present value

Particulars/years

1

2

3

4

5

6

7

8

9

10

Cash Flows after Tax

 $4.18

 $4.50

 $4.82

 $  5.14

 $  5.48

 $  5.82

 $  6.17

 $  6.53

 $  6.90

 $12.28

Present Value Factor @ 20%

0.833

0.694

0.579

0.482

0.402

0.335

0.279

0.233

0.194

0.162

Present Value of Cash Flows

$3.49

$3.12

$2.79

$2.48

$2.20

$1.95

$1.72

$1.52

$1.34

$1.98

Total Present Value of Cash Flows

$22.59

Initial Capital Outlay

$20.00

Net Present Value

$2.59

C

By considering the above calculations, it can be noticed that the project should be accepted as even by consideration of decline project is generating a positive return, i.e. positive net present value. Therefore, even if the projection of cash flows are not as per expectations, the proposed investment will provide benefit to the company.

(iii)

In both the investment options, the life of the project is different. Therefore evaluation of both the projects will be done by considering annualised cost so that NPV of both the projects can be compared.

Option A

Years

Option A

Present Value Factor @ 6%

Discounted Cash Flows

0

 $  475,000.00

1.000

 $     (475,000.00)

1

 $  100,000.00

0.943

 $          94,339.62

2

 $  100,000.00

0.890

 $          88,999.64

3

 $  100,000.00

0.840

 $          83,961.93

4

 $  100,000.00

0.792

 $          79,209.37

5

 $  100,000.00

0.747

 $          74,725.82

6

 $  100,000.00

0.705

 $          70,496.05

 

Total

5.917

 $          16,732.43

Annualised Yield

NPV of the Project / Cumulative Present Value Annuity Factor

 

$16,732.43/5.917

 

$2827.70

Option B

Option B

Present Value Factor @ 6%

Discounted Cash Flows

 $   475,000.00

1.000

 $      475,000.00

 $     80,000.00

0.943

 $         75,471.70

 $     80,000.00

0.890

 $         71,199.72

 $     80,000.00

0.840

 $         67,169.54

 $     80,000.00

0.792

 $         63,367.49

 $     80,000.00

0.747

 $         59,780.65

 $     80,000.00

0.705

 $         56,396.84

 $     80,000.00

0.665

 $         53,204.57

 $     80,000.00

0.627

 $         50,192.99

 $     80,000.00

0.592

 $         47,351.88

 

7.802

 $   69,135.38

Annualised Yield

NPV of the Project / Cumulative Present Value Annuity Factor

 

$1,019,135.38 /7.802

 

$8861.59

By considering both the options, it can be noticed Annual yield of the second option is higher. Therefore, option B should be considered for the purpose of replacement.

Executive summary

Financial analysis is considered as the procedure of assessing business, budgets, projects and another financial related business enterprise to identify the validity and performance. It is employed to evaluate if or if not the business entity has enough profitability, solvency, stability and liquidity to ensure a monetary investment. The prevailing study is based on the financial analysis of the AMP limited to assess the involved risks and estimate the performance of the company. The present study shows that the company has maintained an effective financial structure, by raising balanced equity and debt and fixing the returns of shareholders.

Introduction

The present study aims to evaluate and analyze the Annual Report of AMP Limited critically; so as to conduct the comparative analysis of WAACC and capital structure, as well as the study also covers the evaluation of key financial ratios of the AMP limited, to assess the financial performance of the company. Following to this, the study also intends to consider the major changes held in the capital structure of AMP limited in the past three years, with the consideration towards the material risks identified in the annual report supported by the appropriate mitigation strategies adopted by the company.

Comparative analysis of WAACC and capital structure

Table 2: Statement showing capital structure of AMP limited

 

Amount 

Weight

Equity

$7202

26%

Long-term debt

$21009

74%

Total

$28211

100%

Table 3: Statement showing WACC of AMP Ltd

 

Weight

Cost of finance

Weighted Cost

(Cost of finance * weight)

Equity

26%

9.73% Note 1

2.53%

Long term debt

74%

1.95% Note 2

1.46%

 

100%

 

3.99%

 

Cost of equity

Cost of debt

   

=.29/3.22+8%

*2.79%* (1-.3)

=9.73%

1.95%

Calculation of Interest cost

Interest cost/long term debt*100

585/21009

2.79%

Table 4: Statement showing calculation of CAPM

Risk free rate of interest + beta (Return of market - Risk free rate of interest)

2.26%+  1.47*(8.54-2.26%)

=11.49%

Risk free rate of interest is yield provided by Australian government bond

As per the computed CAPM, return provided by company is lower than market performance. However, company is in their growth stage therefore it is expected that return rate will be increase in near future.

 

Commonwealth bank

Weight

AMP Limited

Weight

Equity

18726

23%

7202

26%

Long term debt

63,716

77%

21009

74%

 

82,442

100%

28211

100%

By considering capital structure of both the companies it can be noticed that both the companies had considered similar strategy for maintaining capital structure. It is because; both the banking organisations are profit making entities therefore to ensure optimum capital cost it is viable to keep the portion of debt higher than equity.

Financial analysis of AMP Limited

(Source: MacroTrends, 2018)

 

2017

2016

2015

2014

2013

Liquidity ratios

Current ratio

0.6744

0.6517

07756

0.8581

0.8521

Solvency ratios

Long term debt

0.4595

0.4542

0.5496

0.5162

0.4781

Debt/equity ratio

0.8835

0.864

1.2439

1.0886

0.9701

Profitability ratios

Operating margin

20.58%

15.67%

20.99%

23.43%

20.1%

Net profit margin

12.30%

11.23%

12.83%

13.19%

11.91%

Efficiency ratios

Asset turnover ratio

0.0816

0.0836

0.0837

0.0824

0.0775

Receivable turnover ratio

2.079

2.2026

2.3075

2.4404

2.4293

Investment ratios

Return on Equity (ROE)

24.67%

22.88%

20.13%

21.51%

16.01%

Return on Assets (ROA)

1.00%

0.93%

1.16%

1.34%

1.02%

Return on Investment (ROI)

13.33%

11.39%

9.06%

10.40%

8.35%

By considering financial ratios of company it can be noticed that financial performance of company has been improved in 2017 in comparison to 2016. However, it is having fluctuating over five years. Company is generating profits but they are required to stabilise their returns further liquidity of company is required to be improvised as it is lower than ideal ratio i.e. 2:1. Therefore, for better working capital management company should enhance their current assets. Investor ratios are constantly increasing which shows improvising shareholder wealth of business and stabilised efficiency ratio shows, company had maintained their capacity over the years to make optimum use of available assets.

Major changes held in the capital structure of AMP limited in past three years

AMP Limited

 

2017

Weight

2016

Weight

2015

Weight

Debt

21009

74%

5241

41%

6664

44%

Equity

7202

26%

7462

59%

8519

56%

 

28211

100%

12703

100%

15183

100%

By considering the table, it can be articulated that in the last three years, the company is more committed towards equity and raising more finance for it to take benefit of profit stabilization. On the other hand, at present company raised consideration towards the debt and the main rationale for raising this concern is they can have more benefit of proceeds and will not be forced to offer higher shareholder returns due to the fixation of their total returns. Thus, with this decision company can have a better competitive edge and can generate profits with the maintenance of suitable financial system (Annual Report of AMP Limited, 2016). 

Hence, the debt raising resulted beneficial for the company, and the same step taken by the company was more strategic and future-oriented, as the company’s performance is developing over time, thereby stabilizing profits and strengthening the financial position (Liu, 2018).

AMP Limited’s Risk analysis

The management of AMP Limited is liable for the determining, detecting and managing the material risk emerging in the business (AMP Limited, 2018). In addition, the business unit teams are held liable to make decisions and execute the same in the regular business course, while mitigating the risks and the ultimate profit and loss in agreement with the strategy and appetite of risks. Further, the ERM management teams, which are led by the head of the group, are liable for developing, executing and managing the procedures to assess and overcome with the material risks while offering suitable recommendations and supervision on the business decisions based on material risks (Aven, 2015).

On and on, the team also offers objective and strategic advice while giving a challenge to the decisions of the first line and offers a guarantee to the board that there is a proper alignment of the risk profile with the expectations of the board.  A summarization of the key business challenges of the AMP and the material risks can be held in the report of the directors (Annual Report of AMP Limited, 2017). Further, the proper risk strategies are adopted by AMP to effectively describe the material risk and manage the Risk appetite statement, while describing the amount and risk tolerance nature in compliance with the corporate strategy. The seven determined materials risks in the annual report of AMP are:

Table 5: Risks identified by AMP Limited

1.      Concentration risk

2.      Credit risk

3.      Insurance risk

4.      Liquidity risk

5.      Market risk

6.      Operational risk

7.      Strategic risk

AMP limited has classified risks in seven key material risks types which are mitigated, considered and documented to the board and reliable committees to make sure that the risk is mitigated sufficiently. The business and the group of the AMP maintains the capital targets stating their material risks inclusive of the risk appetite of the AMP, financial risks, product risks, insurance risk, and operations risk (Henisz and Zelner, 2015). The company considered risk mitigation strategies and maintained a management guide to the level of surplus capital to make a reduction in the concerned risks.

Conclusion

Based on the above analysis, it can be concluded that the AMP limited has maintained an effective financial structure lately, and has considered the strategy of altering capital to ensure optimum financial costs. Thus, it can be said that the company had presently implemented risk mitigation strategies to reduce risks and raise benefits.

References

Liu, Z., (2018). Financial Situation Assessment of a Selected Company.
Aven, T., 2015. Risk analysis. John Wiley & Sons.

Henisz, W.J. and Zelner, B.A., (2015). The hidden risks in emerging markets. In International Business Strategy (pp. 646-654). Routledge.

Annual Report of AMP Limited, (2017). 

Annual Report of AMP Limited, (2016). 

Annual Report of Commonwealth Bank, (2016). 

MacroTrends, (2018). Ameriprise Financial Financial Ratios 2005-2018 | AMP (Online). 

AMP Limited, (2018). Risk management.

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