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Budgeting Techniques

Task 1

Write a 400-word introduction on the need for budgeting, the process for preparing budgets and their limitations.

Task 2

Prepare the following documents for the first six (6) months of the hotel’s operation:

A cash budget

A budgeted income statement

A budgeted statement of financial position

Task 3

Calculate the payback period using both the payback method (8 marks) and the discounted payback method (12 marks), as well as the NPV of the project (15 marks), assuming the following:

A cost of capital of 7%, using four decimal points on the discount factor;

Net cash flow will grow 3% on a year basis compared to previous year; and

John hopes to sell the hotel at the end (October 1) of the tenth year for £3,200,000.

This Report is intended to analyze the investment proposal to invest in the hotel industry. (Donovan, 2006)To analyze, initially budgeting techniques such as preparation of cash budget, budgeted income statement and budgeted balance sheet.

A budget is an arrangement for your future pay and uses that you can use as a rule for spending and sparing. Albeit numerous Americans as of now utilize a budget to arrange their spending, the greater part of Americans likewise routinely spends more than they can bear. The way to spending inside of your methods is to know your costs and to spend short of what you make. A decent month to month budget can guarantee you pay your bills on time, have assets to cover startling crises, and achieve your money related objectives.

The greater part of the data you need is as of now readily available. To make or revamp your budget, take the basic steps sketched out underneath to get an unmistakable photo of your month to month funds. (Hammonds, 2006)You can likewise utilize our free internet budgeting number crunchers underneath to budget for certain particular buys or occasions. (Hammonds, 2006)

The cash budget contains a separation of the anticipated sources and employments of cash in a future period. This budget is utilized to determine whether organization operations and different exercises will give an adequate measure of cash to meet anticipated cash prerequisites. If not, administration should discover extra subsidizing sources.

The inputs to the cash budget originate from a few different budgets. The aftereffects of the cash budget are utilized as a part of the financing budget, which orders ventures, obligation, and both premium wage and premium cost.

Cash Budget

The cash budget is contained two fundamental regions, which are Sources of Cash and Uses of Cash. The Sources of Cash area contains the starting cash parity, and also cash receipts from cash deals, records of sales accumulations, and the offer of advantages. (Sinclair, 1934)The Uses of Cash area contains all arranged cash uses, which originates from the immediate materials budget, direct work budget, fabricating overhead budget, and offering and managerial cost budget. It might likewise contain details for altered resource buys and profits to shareholders.

The budgeted income statement is an important part of a business's financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them.

A budgeted balance sheet is a report that administration uses to anticipate the levels of advantages, liabilities, and value taking into account the budget for the present bookkeeping period. As such, the budgeted balance sheet demonstrates where the greater part of the records would be toward the end of a period if the genuine organization execution coordinated the budgeted gauges. Setting up this report is generally the last stride in finishing an expert budget arrangement. (Reilly & Brown, 1997)

Toward the end of every period, administration for the most part begins arranging an expert budget for the following period. The expert budget is comprised of a huge amount of littler budgets for deals, cash, offering costs, and general costs. These budgets are consolidated to make one major, thorough money related arrangement.

A budgeted balance sheet is a report that administration uses to anticipate the levels of advantages, liabilities, and value taking into account the budget for the present bookkeeping period. As such, the budgeted balance sheet demonstrates where the greater part of the records would be toward the end of a period if the genuine organization execution coordinated the budgeted gauges. Setting up this report is generally the last stride in finishing an expert budget arrangement.

Toward the end of every period, administration for the most part begins arranging an expert budget for the following period. The expert budget is comprised of a huge amount of littler budgets for deals, cash, offering costs, and general costs. These budgets are consolidated to make one major, thorough money related arrangement.

Balance Sheet

         

 Assets

           

 Fixed assets

 April

 May

 June

 July

 August

 September

 Lease Hold Property

         1,600,000

         1,600,000

         1,600,000

         1,600,000

         1,600,000

         1,600,000

 Furniture and fittings

             150,000

             150,000

             150,000

             150,000

             150,000

             150,000

 Kitchen Equipment

               50,000

               50,000

               50,000

               50,000

               50,000

               50,000

 Laundry equipment

               25,000

               25,000

               25,000

               25,000

               25,000

               25,000

 Gym equipment

               15,000

               15,000

               15,000

               15,000

               15,000

               15,000

 China, glass and cutlery

               10,000

               10,000

               10,000

               10,000

               10,000

               10,000

 Bed linen and towels

               15,000

               15,000

               15,000

               15,000

               15,000

               15,000

 Accumulated Depreciation

               (4,875)

               (9,750)

             (14,625)

             (19,500)

             (24,375)

             (29,250)

 

         1,860,125

         1,855,250

         1,850,375

         1,845,500

         1,840,625

         1,835,750

 Current Assets

           

 Cash

             127,430

             150,515

             182,645

             236,240

             303,065

             368,270

 Inventory

               15,000

               10,000

               10,000

               10,000

               10,000

               10,000

 Account receivable

               28,350

               49,950

               82,350

             113,400

             121,500

             102,600

 

             170,780

             210,465

             274,995

             359,640

             434,565

             480,870

 Current Liabilities

           

 payable (COGS)

                  6,480

               10,260

               17,280

               23,220

               24,300

               19,980

 Payable OH

                  2,025

                  2,700

                  4,725

                  6,075

                  6,075

                         -  

 

                  8,505

               12,960

               22,005

               29,295

               30,375

               19,980

 Equity

           

 Capital

         2,000,000

         2,000,000

         2,000,000

         2,000,000

         2,000,000

         2,000,000

 Retained Earning

               17,400

               42,225

               89,325

             151,275

             213,225

             260,325

 

         2,017,400

         2,042,225

         2,089,325

         2,151,275

         2,213,225

         2,260,325

The budgeted income statement is an important part of a business's financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them.

 

 April

 May

 June

 July

 August

 September

 Sales

               40,500

               54,000

               94,500

             121,500

             121,500

               94,500

 Cost of sales

                  8,100

               10,800

               18,900

               24,300

               24,300

               18,900

 Labor Cost

                  8,100

               10,800

               18,900

               24,300

               24,300

               18,900

 Overhead Costs

                  2,025

                  2,700

                  4,725

                  6,075

                  6,075

                  4,725

 Depreciation Per Month

                  4,875

                  4,875

                  4,875

                  4,875

                  4,875

                  4,875

 Income

               17,400

               24,825

               47,100

               61,950

               61,950

               47,100

The cash budget contains a separation of the anticipated sources and employments of cash in a future period. This budget is utilized to determine whether organization operations and different exercises will give an adequate measure of cash to meet anticipated cash prerequisites. If not, administration should discover extra subsidizing sources.

The inputs to the cash budget originate from a few different budgets. The aftereffects of the cash budget are utilized as a part of the financing budget, which orders ventures, obligation, and both premium wage and premium cost.

The cash budget is contained two fundamental regions, which are Sources of Cash and Uses of Cash. The Sources of Cash area contains the starting cash parity, and also cash receipts from cash deals, records of sales accumulations, and the offer of advantages. The Uses of Cash area contains all arranged cash uses, which originates from the immediate materials budget, direct work budget, fabricating overhead budget, and offering and managerial cost budget. It might likewise contain details for altered resource buys and profits to shareholders.

Cash Budget

 April

 May

 June

 July

 August

 September

 Opening

             125,000

             127,430

             150,515

             182,645

             236,240

             303,065

 Sales

               12,150

               44,550

               66,150

             102,600

             121,500

             113,400

 COGS

                  1,620

                  8,640

               12,420

               19,980

               24,300

               23,220

 Labor cost

                  8,100

               10,800

               18,900

               24,300

               24,300

               18,900

 Overhead expenses

 

                  2,025

                  2,700

                  4,725

                  6,075

                  6,075

 Closing

             127,430

             150,515

             182,645

             236,240

             303,065

             368,270

Net Present Value

 

                               -  

                                1

                                2

                              3

                              4

                              5

                              6

                              7

                              8

                              9

                            10

 Investment

             (2,000,000)

 Cash Inflows

               1,401,624

               1,443,673

              1,486,983

              1,531,592

              1,577,540

              1,624,866

              1,673,612

              1,723,821

              1,775,535

              1,828,801

 Cash Outflows

                 (595,690)

                 (613,561)

               (631,968)

               (650,927)

               (670,455)

               (690,568)

               (711,285)

               (732,624)

               (754,603)

               (777,241)

 Disposal

              3,200,000

 Net cashflow

             (2,000,000)

                   805,934

                   830,112

                 855,015

                 880,666

                 907,086

                 934,298

                 962,327

                 991,197

              1,020,933

              4,251,561

 Net Present Value

               5,616,951


Since the Net Present Value is positive, an investment is recommended.

Payback

 Cash Flow

 Cumulative

 Year 0

             (2,000,000)

             (2,000,000)

 Year 1

                   805,934

             (1,194,066)

 Year 2

                   830,112

                 (363,954)

 Year 3

                   855,015

 

 Year 4

                   880,666

 

 Year 5

                   907,086

 

 Year 6

                   934,298

 

 Year 7

                   962,327

 

 Year 8

                   991,197

 

 Year 9

               1,020,933

 

 Year 10

               4,251,561

 

 Payback Period

   
 

                          1.00

 
 

                          0.43

 

 Payback Period

                          1.43

 


As per the above analysis, the payback period would be 1.4 years thus an investment is recommended.

Discounted  payback

 Cash Flow

 Discount rate

 Discounted Cash flow

 Year 0

             (2,000,000)

                        1.000

             (2,000,000)

 Year 1

                   805,934

                        0.935

             (1,194,066)

 Year 2

                   830,112

                        0.873

 

 Year 3

                   855,015

                        0.816

 

 Year 4

                   880,666

                        0.763

 

 Year 5

                   907,086

                        0.713

 

 Year 6

                   934,298

                        0.666

 

 Year 7

                   962,327

                        0.623

 

 Year 8

                   991,197

                        0.582

 

 Year 9

               1,020,933

                        0.763

 

 Year 10

               4,251,561

                        0.763

 

 Payback Period

     
 

                          1.00

   
 

                          1.40

   

 Discounted Payback Period

                          2.40

   


As per the above analysis, the discounted payback period would be 2.4 years thus an investment is recommended.

References

Donovan, S. (2006). Budgeting. Minneapolis: Lerner Publications Co.

Elton, E., & Gruber, M. (1995). Modern portfolio theory and investment analysis. New York: Wiley.

Hammonds, H. (2006). Budgeting. North Mankato, MN: Smart Apple.

Prime, J. (1967). Investment analysis. Englewood Cliffs, N.J.: Prentice-Hall.

Reilly, F., & Brown, K. (1997). Investment analysis and portfolio management. Fort Worth, Tex.: Dryden Press.

Sinclair, P. (1934). Budgeting. New York: Ronald Press Co.

Weaver, D. (1971). Investment analysis. London: Longman [for] the Society of Investment Analysts.

Williams, E., & Findlay, M. (1974). Investment analysis. Englewood Cliffs, N.J.: Prentice-Hall.

Wiseman, B. (2010). Budgeting. New York, NY: Weigl Publishers.

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