Discussion In Managerial Accounting Classes -Myassignmenthelp.Com

Question: Discuss About The Discussion In Managerial Accounting Classes? Answer: Introduction: In this particular assignment, there are two case study analyses. First part involves case about BLC limited that is a medium sized company based in United Kingdom. Company seeks to employ the technique of capital budgeting for evaluating its project of establishing office. Nest case is about discussion of discount cost and its influence of business. Detailed analysis of both the case study is done by explanations and calculations. Computing the net present value, internal rate of return and payback period: For the calculations of above these metrics, company has made the assumption of cost of capital at the rate of 10%. As per the rule, project generating higher net present value should be accepted compared to project generating lower net present value (Chittenden and Derregia 2015). Project evaluation based on IRR depicts that project generating IRR higher than cost of capital will be accepted and vice versa. Project that has higher payback period should be rejected as against lower payback (Andor et al. 2015). Property 1: Particulars 0 1 2 3 4 5 (000) (000) (000) (000) (000) (000) Cash Inflow/(Outflow) -2500 1000 500 600 1000 900 Cost of Capital 10% 10% 10% 10% 10% 10% Cumulative Cash Flow -2500 -1500 -1000 -400 600 1500 Discounted Cash Flow -2500.00 909.09 413.22 450.79 683.01 558.83 Net Present Value 514.9 Internal Rate of Return 17.67% Payback Period (years) 3.4 Property 2: Particulars 0 1 2 3 4 5 (000) (000) (000) (000) (000) (000) Cash Inflow/(Outflow) -2750 900 700 800 600 700 Cost of Capital 10% 10% 10% 10% 10% 10% Cumulative Cash Flow -2750 -1850 -1150 -350 250 950 Discounted Cash Flow -2750.00 818.18 578.51 601.05 409.81 434.64 Net Present Value 92.2 Internal Rate of Return 11.37% Payback Period (years) 3.58 The above table depicts the computation of net present value of property 1 and property 2 that the company is seeking. Net present value of property 1 is recorded at 514.9 while the internal rate of return is computed at 17.67%. When looking at figures of NPV for property 2, the computed figure is 92.2. On other hand, the value of IRR is computed at 11.37%. Comparing the figures for both the properties, it can be seen that NPV for property 1 is higher as against property 2. When looking at the figures of IRR, figures computed for property 2 is more than property 1. Therefore, from the IRR perspective, property 2 should be accepted and property 2 should be rejected. As per NPV, property 1 should be accepted and property 2 should be rejected. Now, looking at the figures for payback period, time taken for recovering the initial amount of property 1 is recorded at 3.4. On other hand, payback period for property 2 is 3.58. Therefore, comparing the figures of payback period for both the properties, property 1 has lower pay back period compared to property 2. From the analysis of all the budgetary techniques, property 1 should be accepted as against property 2. This is so because property 1 has higher NPV and lower payback period compared to property 2. Evaluation of qualitative factors influencing the decisions: One of the important roles that are played in investment decisions is social trends and has considerable impact of decision making of organization. It is of utmost important for BLC to analyze the social trends for marketing profitable investment decisions. Political factor is another qualitative factor that impacts investment decision of firms as role of government and political party determine the success of project to a considerable extent. Culture of company has also considerable impact of investment decisions and for generating better return, company should take into consider this particular factor (Batra and Verma 2014). Organization should select best alternative by conducting proper analysis. However, equal importance should be given to qualitative factors as the best investment decisions come in light of both the factors. Computation of approximate equivalent annual percentage cost: Particulars Details Current Credit Period (in days) 70 Proposed Credit Period (in days) 30 Reduction in Credit Period (in day) 40 Credit Cycle in a Year 9.125 Discount Rate 0.02 Discounted Receipts 0.98 Receipt after Deposit Fund @ 2% 1.020408163 Approximate Equivalent Annual Percentage Cost 19.30% Computation of value of trade receivables: Particulars Existing Scheme Proposed Scheme Total 30 Days 70 Days Total 30 Days 70 Days (m) (m) (m) (m) (m) (m) Revenue 500 150 350 500 400 100 Discount @ 2% -8 -8 Bad Debt -10 -3 -7 -5 -4 -9 Value of Trade Receivables 490 147 343 487 388 91 Evaluation of schemes of cost and benefits: With the implementation of this scheme, it would be possible to collect revenue from customers in time and there will not be any delay. Issue of over drafting will be eliminated, as the receivables will be collected in shorter period. Organization will also have favorable impact on current ratio and will experience improved receivable collected period (Graham and Sathye 2017). Saving bad debts to 5 million compared to 10 million is another advantage received by company with the implementation of this particular scheme. Details of savings of debt due to this policy are depicted in the table below. In the current scenario, amount of bad debt is standing at 5% of total revenue. New policy Existing policy Bad debts in million 5 10 Saved 5 million With the implementation of the new scheme, organization will be able to save 5 million compared to 10 million in the previous scheme. Scheme cost is depicted in terms of interest incurred on overdraft. Organization is required to take overdraft from the banks because of delay in receiving payments from customers. This particular schemes cost is at 20%. Therefore, in order to accept this scheme, it is required by BLC limited to make cost comparison and they are required to pay extra 5%. Moreover, it is also required by organization to compare discount with debt saving to that of cost. It can be seen from the analysis that total amount of discount that is provided to customers is more than the amount in terms of debt savings. After conducting the analysis, it can be inferred that cost of offering customers with discount schemes is more than total amount of benefits received on part of company. Acceptance of scheme should only be done when costs incurred in employing that scheme is lower than total benefits received. It would be suitable for BLC limited to continue with the existing schemes as costs is more than saving generated. Conclusions From the above discussion, it can be inferred that implementation of the schemes of providing customers with 2% discount within 30 days would not be suitable and does not generate positive impact on business. It is so because the cost incurred in employing such schemes is more than total amount of savings generated. Therefore, it would be appropriate for company to continue with existing scheme and not employing new scheme. References Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central and Eastern European firms.Emerging Markets Review,23, pp.148-172. Batra, R. and Verma, S., 2014. An Empirical Insight into Different Stages of Capital Budgeting.Global Business Review,15(2), pp.339-362. Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of rules of thumbin capital budgeting.The British Accounting Review,47(3), pp.225-236. Gornik-Tomaszewski, S., 2014. Capital Budgeting Simulation Using Excel: Enhancing the Discussion of Risk in Managerial Accounting Classes.Management Accounting Quarterly,15(4). Graham, P.J. and Sathye, M., 2017. Does National Culture Impact Capital Budgeting Systems?.Australasian Accounting Business Finance Journal,11(2). Meyer, K.S. and Kiymaz, H., 2015. Sustainability Considerations in Capital Budgeting Decisions: A Survey of Financial Executives.Accounting and Finance Research,4(2), p.1. Roy, D., Rudra, D. and Prasad, P., 2017. Capital Structure and Capital Budgeting: An Empirical and Analytical Study of the Relationship.Research Bulletin,42(4), pp.50-60. Shimizu, N. and Tamura, A., 2015. The Eff ects of Business Strategy on Economic Evaluation Techniques of Capital Investment.