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Investment one

Discuss about the Business Investment Of Mark and Paul.

Investment means uses the money in the present with the hope of deriving benefits in the future. The main features included in the investment are the future benefits and current sacrifice of money. Investment is made in various securities but the reason behind the investment in securing the future welfare of an individual or a company. Investment decisions are based on the important assumption that the person who invests in any security or business is rational and he has the knowledge of risk in the investment. Before making an investment decision know the process of investment and the steps in it like determine the goals of investment, do security analysis, make a portfolio, review that portfolio and check the performance of a portfolio(Schmidt, 2017).

Mark and Paul want to invest in a new restaurant so they have to decide the risk and return on the investment. In the current case they want to invest in a restaurant and from the information it is a short-term investment and the risk in the investment is low but return in the short-term investment is also low but if they continuously invest in the business in the near future than they can earn some good return but the probability of risk also increases.

(a) Sales Budget

Sales Budget

Products

June

July 

August

September

Meal

Sales(units)

20000

18000

18000

22000

Average Selling Price

45

45

45

45

Sales ($)

900000

810000

810000

990000

Drinks

Sales(units)

60000

54000

54000

66000

Average Selling Price

6

6

6

6

Sales ($)

360000

324000

324000

396000


(b) Labour Budget

Labour Budget

Months

Total Hours

Rate Per hour

Total Labour Cost

June

36

23

2484

July 

36

23

2484

August

36

23

2484

September

36

23

2484

(c) Cash Budget

Cash Budget

Particulars

June

July 

August

September

(A) Opening Balance

80000

1111516

2216032

3271548

Receipts

Sales:

Meals

900000

810000

810000

990000

Drinks

360000

324000

324000

396000

Total (A)

1340000

2245516

3350032

4657548

(B) Payments

Purchase of Machinery

110000

0

0

0

Purchase of Furniture

30000

0

0

0

Purchase of Vehicle

43000

0

0

0

Purchase of Utensils

18000

0

0

0

Payment to suppliers:

Meals

0

0

40000

40000

Drinks

0

2000

11000

20000

Salary to Staff

2484

2484

2484

2484

Drawings

20000

20000

20000

20000

Overhead cost

5000

5000

5000

5000

Total (B)

228484

29484

78484

87484

Closing Balance (A-B)

1111516

2216032

3271548

4570064

(i) Payment to Suppliers for Produce

Payments of Suppliers(Produce)

Months

Purchases

June

July 

August

September

June

-

-

-

-

-

July 

-

-

-

-

-

August

40000

-

-

40000

-

September

40000

-

-

-

40000

Total

80000

0

0

40000

40000

(ii) Payment to Suppliers for Drinks

Payments of Suppliers(Drinks)

Months

Purchases

June

July 

August

September

June

-

-

-

-

-

July 

20000

-

2000

9000

9000

August

20000

-

-

2000

9000

September

20000

-

-

-

2000

Total

60000

0

2000

11000

20000

One of the most important budgets which have to be made by the every business is sales budget and the reason behind this is that every business wants to earn money and a sales budget shows the ways of money and from where the money will come. It reflects the target of revenue by making the sales of goods. The Company sets goals and objectives and it shows a way to achieve these objectives. It is the first component of budgetary control because it affects all other budgets(Bragg, 2013). It is helpful in allocating the resources of the company in different products. It also shows the areas where the position of the company is not good.  But it has certain limitations; it cannot effectively predict the future trends of uncertain events. Too much time of management took by the preparation of sales budget.

Labour budget is made to determine the cost incurred on labour. Labour budget helps in finding the idle time of labour and determine the total time and cost incurred on labour. It helps in determining the efficiency of labour.

Calculation of Different Budgets

Cash budget shows the amount of cash required in order to pay all the short term obligations, daily operations. In short, it describes the budgeted flow of cash through the business. The reason behind the preparation of cash budget is that it can forecast the future value of cash; it forecast the surplus or deficit in cash in upcoming months. To authorizes the proper utilization of cash. It helps in selecting the correct and proper source of financing to fulfill the requirements of cash. If the firm has not sufficient cash flow then it is hard to determine cash needs in upcoming months. If required cash is not available to the firm in time then it can put the firm in precarious position (Jan, 2013). Cash Budgets are easily manipulated by the management. It is forecasted information about the cash and it affects from the future uncertain events and sometimes it affects the business. It only describes the position of cash but other non-financial factors also affect the decisions of the business.

Mark and Paul have to analyze the budget and consider how much risk they can take because risk and returns are inseparable. In the current case sales budget shows it can easily cover all the expenses incurred in the restaurant business and cash budget shows a strong position of cash and they might invest in the restaurant business.

An investment decision is made by considering the various possibilities like how much return it can give, the nature of risk, current position of investment in which they want to invest and how much reserve fund they have in case there is any uncertainty. Investment decision also affected when business is new, because if the product offer by the company is not competitive in the market then they have to suffer loss. Before making any investment decision, Mark and Paul have to consider all the issues explained above(Crom, 2011).

  1. Calculation of different methods of capital budgeting

Initial Cash Outflow = 390000

     

YEAR

Cash Inflow

Present Value Factor@12%

Present Value of Cash Inflow

Cumulative  Present Value Of Cash Inflow

1

100000

0.893

89300

89300

2

230000

0.797

183310

272610

3

190000

0.712

135280

407890

4

140000

0.636

89040

496930

        Total

660000

 

496930

 

Net Present Value = Present Value of Cash Inflow – Present Value of Cash Outflow

Net Present Value = 496930-390000 = 163070

Payback Period = 2 + {(390000-272610/407890-272610)*(3-2)}

Payback Period = 2.868 Years      

Average Cash Inflow = 660000/4 = 165000

Accounting  Rate of Return = Average Cash Inflow/Initial Investment

Accounting Rate of Return = 42.31%

Net present value is the difference of the present value of cash inflow subtracts the present value of cash outflow. It helps in determining that whether the investment opportunity is a smart financial decision.  It determines the time value of money. This method tells that whether this investment will create money for the investors and how much will it create. It also considers the cost of capital and the risk before making any projections in the near future. The main disadvantage of this method is it is hard to calculate and it requires some guesswork. This method is not helpful when the comparison is made between the projects of two different sizes. In the current case, NPV shows that the business will create money in the near future (Juhász, 2011).

Working Notes

Payback period is that time period in which the cost of investment will recover. It is an important tool to determine whether to take a project or not. The first benefit of the Payback period is its simplicity. It is used where quick evaluation of projects is made for the short-term investment. It also helps in finding the risk inherent in the project. The major drawback of payback period is it ignores the time value of money which is very important before making any investment decision (Salehi, 2009). The Payback period of the investment made by the Mark and Paul is 2.86 which mean that the cost of investment will be covered in nearly 3 years which is good.

Accounting Rate of Return is that rate of return an individual can expect on the investment he made. This method is easy to calculate and it is simple to understand it is based on the  accounting profit hence it calculates the profitability of an investment (Salehi, 2009). This method offers unique benefits. One of the main disadvantages of this method is it overlooks the time value of money it also overlooks the cash flow from the investment and this method does not consider the terminal value of the investment. Accounting rate of return from the investment is 42.31 and it is very good because the cost of the funds is only 12%. It shows that business will grow in the future and leads to the success.

the two investment opportunities given in the question is not comparable but even if we compare both the opportunities then we can make decision on the basis of their characteristics. If the Mark and Paul want to invest for a short period then they have to invest in the investment one but if they want more return and if they are ready to bear more risk they can invest in the investment which also a good option(Crom, 2011).

Course, M.A., n.d. Return on Capital Employed. [Online] Available at: https://www.myaccountingcourse.com/financial-ratios/return-on-capital-employed [Accessed 27 July 2017].

Crom, F.d., 2011. Impact of capital structure choice on investment decisions. [Online] Available at: https://arno.uvt.nl/show.cgi?fid=129433 [Accessed 16 Aug 2017].

Juhász, L., 2011.Net Present Value Versus Internal Rate Of Return. [Online] Available at: https://www.economics-sociology.eu/files/05%5B8%5D.pdf [Accessed 24 Sept 2017].

Salehi, M., 2009. Study of the Relationship between Capital Structure Measures and Performance: Evidence from Iran. [Online] [Accessed 16 Aug 2017].

SELVANAYAKI, S. & SIVAKUMAR, S.D., 2015. Study on capital investment decisions and impact of capital structure on profitability of rice milling firms. [Online] Available at: https://www.researchjournal.co.in/upload/assignments/6_49-53.pdf [Accessed 16 Aug 2017]

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