Managerial Accounting - assignment number 1 - projected answers
1) Cargills (Ceylon) PLC was used for this study. Current operations and products/services of Cargills (Ceylon) PLC.
Reference report link - https://cdn.cse.lk/cmt/upload_report_file/457_1596616183737.pdf
· Retail outlets , brand names of 'Food City', 'Food City Express' and 'Food Hall'.
· Manufacturing and distributing ice cream and other dairy products under the brand names of ‘Cargills Magic’, ‘Heavenly’ and ‘Kotmale’
· Fruit based products under ‘Kist’ Brand processed and fresh meat products under the brand names of 'Goldi', 'Cargills Finest' and 'Sams'
· Biscuit Products , brand name of ‘Kist’
· Operating , ‘KFC’ and ‘TGIF’ restaurants under franchise agreements
· Distribution of international brands such as ‘Kodak’, ‘Kraft’, ‘Cadbury’, ‘Bonlac’, ‘Tang’ ‘Oreo’, ‘Lotte’, ‘Loacker’, ‘Toblerone’, ‘Energizer’, ‘Bega’, ‘Langnese’, and ‘Indomie’ etc.
· Production, importation and distribution of agricultural seeds.
2) The company has identified growth opportunities in the Fast-moving consumer goods (FMCG) market sector, and the Group plans to capitalize on those opportunities through far-sighted investments. The FMCG division of the company has seen strong growth since last year and was primarily based on the activity of the dairy sub-sector and established itself as the leading milk collector in Sri Lanka within the third quarter, sourcing approximately 150,000 liters per day. As a result of this success, the company aims to further expand its market presence by investing heavily in the dairy sector. The dairy division of the company manufactures cheese, butter, ice cream and flavored RTD dairy products under the brands 'Cargills Magic', 'Heavenly' and 'Kotmale'.
Details of this investment prospect are given in the Chairman's Message heading the annual report of Cargills (Ceylon) PLC. Thus, for the future growth of the FMCH sector, it can be assumed that it will invest in new machinery to increase its production capacity.
3) Nature of the project -
The company expects to invest in the growth of the dairy sector, according to its annual report. As a result, a project to invest in modern machinery to increase production in that sector is assumed here. The project aims to increase production capacity and thereby increase profits.
Benefits of project
· Revenue and sales and production increases
· customer satisfaction due to enhanced production
· Competitive advantage or market share gained
Costs of project
· Cost of purchasing machinery
· Electricity costs incurred in operating the machinery
· depreciation
· cost of repair
· insurance and tax cost of machine
4) methods that can be used for financial analysis of the project
· Pay Back Period (PBP) :
The payback period method takes into account the time taken to recover the money invested through the annual cash flow. Thus the project with the time covered by the invested money very quickly is selected as good.
· Discounted Payback Period:
The discounted payback period is the number of years spent in recovering the investment cost based on present value basis.
· Net present value
The NPV is the difference between the present value of future cash inflows and the present value of the initial cash outlay, discounted at the firm’s cost of capital.
If NPV = + the project will be accepted, If NPV = - the project will be rejected
If NPV = 0, the project will be optimistic.
· Accounting rate of return
This method focuses more on the return on investment rather than trying to cover the investment.
There are numerous methods for calculating ARR. The general method of computing ARR is given below.
×100
5) To evaluate this hypothetical project, the company has used 5 years as the effective lifespan of the machine and 20 % as depreciation rate, based on the information provided in its annual report on depreciation. Furthermore, information about the cost of the machine and future cash flow is also based on assumptions.
year | income | expenditure | Net cash flow |
0 | - | (200,000) | (200,000) |
1 | 150,000 | ( 50,000) | 100,000 |
2 | 250,000 | (100,000) | 150,000 |
3 | 350,000 | (100,000) | 250,000 |
4 | 500,000 | (200,000) | 300,000 |
5 | 500,000 | (200,000) | 300,000 |
ye years | 0 | 1 | 2 | 3 | 4 | 5 | Simple PBP | Discounted PBP |
Cacash floflow | (200,000) | 100,000 | 150,000 | 250,000 | 300,000 | 300,000 | 1 year 8 months |
|
pv@20%(P pv |
| 0.83 | 0.69 | 0.57 | 0.48 | 0.40 |
|
|
pvPV |
| 83,000 | 71,415 | 142,500 | 144,000 | 120,000 |
|
|
c Cumu: ; pv of cash flow |
| 83,000 | 154,415 | 296,915 | 440,915 | 560,915 |
| 2 years and 4months |
Thus the value of NPV = Cumulative present value of cash flow ̶ Initial investment
NPV = 560,915 ̶ 200,000 = 360,915
Accounting/Average Rate of Return (ARR):
×100
×100
ARR = 220%
*It is proposed to implement this project on the basis of positive net present value. Also, under the Payback Period method, this can be described as a low risk investment as the cost is covered in a short period of time.
Reference - (https://www.cse.lk/home/financial-announcement-details/35864#st-35864)
