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International Financial Management Of Microsoft Dynamics Add in library

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Question:

Describe about the International Financial Management of Microsoft Dynamics?

 

Answer:

Investment Appraisal

The report on investment appraisal for Cagoo Clothing PLC is prepared. The company is thinking of purchasing a new shop in London, which costs for £7 million. The investment appraisal method consists of two features, which are-

To assess the expected returns level earned from the expenditure level.

To estimate the future benefits and future costs from the purchase of the shop.

From the new shop, Cagoo Clothing PLC is likely to earn cash flows for the next 10 years which are-

Year

 Cash Inflow £

Cash Outflow £

Cumulative Cash Flow

PVF

PV

0

 

 £ 7,000,000.00

-£             7,000,000.00

1.0000

 

1

 £    1,000,000.00

 

-£             6,000,000.00

0.9091

 £                909,090.91

2

 £    1,000,000.00

 

-£             5,000,000.00

0.8264

 £                826,446.28

3

 £    1,500,000.00

 

-£             3,500,000.00

0.7513

 £             1,126,972.20

4

 £    1,000,000.00

 

-£             2,500,000.00

0.6830

 £                683,013.46

5

 £    1,000,000.00

 

-£             1,500,000.00

0.6209

 £                620,921.32

6

 £    1,500,000.00

 

 £                                 -  

0.5645

 £                846,710.90

7

 £    2,000,000.00

 

 £             2,000,000.00

0.5132

 £             1,026,316.24

8

 £    2,000,000.00

 

 £             4,000,000.00

0.4665

 £                933,014.76

9

 £    2,000,000.00

 

 £             6,000,000.00

0.4241

 £                848,195.24

10

 £    2,000,000.00

 

 £             8,000,000.00

0.3855

 £                771,086.58

 

 £ 15,000,000.00

 £ 7,000,000.00

 

NPV of inflow

 £             8,591,767.88

       

NPV of outflow

 £             7,000,000.00

       

NPV

 £             1,591,767.88


Not getting what does 5 cash flows means in project management.

The total outlay is £ 7,000,000, the total return is £ 15,000,000, and the net return is £             8,000,000 (Arnold, 2013).

Average Annual Return= Net Return/ Number of years=£8,000,000/10 = £800000

NPV of the project, which is used to assess the summation of the present value of all the cash inflows and outflows, can be calculated as-

NPV= Cash Flow/ (1+r)t

Here r is the discounted rate and t is the time period.

So, the NPV = £1,591,767.88

The discounted rate is assumed as 10%.

Payback Period is the number of years during which the company is successful in obtaining the entire value of the investment from the cash flows. The payback period of Cagoo Clothing PLC from its investment in the new shop in London is 6 years (Barrow, 2011).

Cost Of Capital

The sources of finance of the company for its new project are both the equity and debt capital. Therefore, the equity capital used here is £4 million and the debt capital is £3 million. The cost of equity is assumed 12.5% and the debt capital is assumed 8%.

Therefore the weighted average cost of capital or WACC is-

WACC=Cost of equity*Weighted value of equity+ Cost of debt*Weighted value of debt

= 0.125*4/7+0.08*3/7= 10.57%

 

Sensitivity Analysis

The sensitivity analysis of the investment includes the variation in the cash inflow generated from the shop.

Year

Cash Inflow £

Sensitivity

1

 £    1,000,000.00

 

2

 £    1,000,000.00

0%

3

 £    1,500,000.00

50%

4

 £    1,000,000.00

-33%

5

 £    1,000,000.00

0%

6

 £    1,500,000.00

50%

7

 £    2,000,000.00

33%

8

 £    2,000,000.00

0%

9

 £    2,000,000.00

0%

10

 £    2,000,000.00

0%

(Bekaert and Hodrick, 2012)

Sales Statement

July £

August £

September £

October £

November £

December £

4500

4590

4681.8

4775.436

4870.94472

4968.363614

 £           40.00

 £           40.00

 £           40.00

 £           42.00

 £           44.10

 £           46.31

 £ 180,000.00

 £ 183,600.00

 £ 187,272.00

 £ 200,568.31

 £ 214,808.66

 £ 230,060.08


Sales in October have been increased by 5% and the calculation is correct. The sales value is collected as per the questions.

Closing Inventory Statement

Particulars

July £

August £

September £

October £

November £

December £

Opening Inventory

100000

 £      30,000.00

 £        1,400.00

-£      55,872.00

-£    136,440.31

-£        191,248.97

Add: Purchase

110000

155000

130000

120000

160000

175000

Less: Sales

180000

183600

187272

200568.31

214808.66

230060.68

Closing Inventory

 £           30,000.00

 £             1,400.00

-£          55,872.00

-£        136,440.31

-£        191,248.97

-£             246,309.65


The suppler gave a month credit due to which the purchase for June is shown in July and so on.

Cash Flow Budget

Particulars

July £

August £

September £

October £

November £

December £

Gross Profit (40% of Sales)

 £    720,000.00

 £    734,400.00

 £    749,088.00

 £    802,273.00

 £    859,235.00

 £          92,040.00

Interest

 £         1,000.00

 £         1,000.00

 £         1,000.00

 £         1,000.00

 £         1,000.00

 £            1,000.00

Net Profit

 £    719,000.00

 £    733,400.00

 £    748,088.00

 £    801,273.00

 £    858,235.00

 £          91,040.00

Electricity Cost

 £                     -  

 £                     -  

 £         4,000.00

 £                     -  

 £                     -  

 £            4,000.00

 Insurance

 £         750.00

 £         750.00

 £         750.00

 £         750.00

 £         750.00

 £            750.00

 Rent

 £      2,000.00

 £      2,000.00

 £      2,000.00

 £      2,000.00

 £      2,000.00

 £         2,000.00

Cash from operations

 £    716,250.00

 £    730,650.00

 £    741,338.00

 £    798,523.00

 £    855,485.00

 £          84,290.00

Repayment of loans

 £              4,000

 £              4,000

 £              4,000

 £              4,000

 £              4,000

 £                 4,000

Total cash flow

 £         715,000

 £         729,400

 £         740,088

 £         797,273

 £         854,235

 £             911,240


(Brigham and Houston, 2012)

Budgeted Income Statement

Particulars

Amount £

Sales

 £ 1,196,309.05

COGS

 £     717,785.43

Gross Profit

 £     478,523.62

Electricity Costs

 £               8,000

Operating Profit

 £     470,523.62

Interest

 £         1,000.00

Net Profit

 £     469,523.62


Rent is adjusted in the COGS.

Not getting why a budgeted income statement would be shown for 6 months.

Budgeted Balance Sheet Statement

Particulars

 Amount £

 Amount £

 Assets

   

 Bank Balance

 

 £    250,000.00

Inventory

 

£    246,309.65

 Total Assets

 

 £   496309.65

 Liabilities

   

 Bank Loan

 £     150,000.00

 £    126,000.00

 Installments

 £       24,000.00

 

 Total Liabilities

 

 £   126,000.00

 Equity

   

 Capital

 

 £      90,000.00

 Retained Earnings

 

 £      280309.65

 Total Equity

 

 £   370309.65


Total Assets= Total Liabilities and Equities=£ 496309.65 (Brooks, 2013)

Balance Sheet is for the period ending 31st December 2015.

Advantages of retained earnings-

While using retained earnings, the company does not have to bear acquisition cost, which makes it a cheap source of finance.

It improves the financial condition of the company and thus improves financial stability. If the amount of retained earnings is high then the company is likely to have a stronger financial position.

It maintains a steady dividend payment to the shareholders even if the company fails to make profit. During the poor financial performance of the company, the preference shareholders are paid dividends from the retained earnings.

Retained earnings improve the financial structure of the company, which in turn increases its market value of the company’s shares (Eun and Resnick, 2012).

Disadvantages of retained earnings-

The retained earnings may not be utilized correctly all the time, which may result in future financial stagnancy.

If the dividend policy of the company is conservative then the company may accumulate more retained earnings, which may result to over-capitalization.

Retained earnings sometimes lower the market value of the company’s shares due to fall in dividend rates (Grieve, 2013).

Other sources of Finance-

Internal Sources-

Sales of the assets of the company, which helps in generating, fund for the company.

Cutting down the total level of the inventory of the company helps in improving the financial position.

External Sources-

Long-term external sources include the equity and preference shares, debentures, borrowings and long-term loans.

Medium term external sources include the leasing of properties, hire purchase and medium term loans.

Short-term external sources include the bank overdraft in the balance sheet, short-term loans, creditors and debt factoring funds.

Growright can think of using a combination of external and internal sources of finance for its business (Nicolàs, 2013).

 

References

Arnold, G. (2013). Corporate financial management. Harlow, England: Pearson.

Barrow, C. (2011). Practical financial management. London: Kogan Page.

Bekaert, G. and Hodrick, R. (2012). International financial management. Boston: Pearson.

Brigham, E. and Houston, J. (2012). Fundamentals of financial management. Mason, Ohio: South-Western Cengage Learning.

Brooks, R. (2013). Financial management. Boston: Pearson.

Eun, C. and Resnick, B. (2012). International financial management. New York, NY: McGraw-Hill.

Grieve, I. (2013). Microsoft Dynamics GP 2013 financial management. Birmingham, UK: Packt Pub.

Nicolàs, C. (2013). Microsoft Dynamics NAV Financial Management. Birmingham: Packt Publishing

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