Essays on Accounting Information for Business: Fresh IT Plc Case Study

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The paper "Accounting Information for Business: Fresh IT Plc" is a perfect example of a case study on finance and accounting.   Investment appraisal techniques are the methods that are used in any company to make a decision due to a firm investment of its current funds in long-term projects most efficiently expecting future benefits to flow to business over some years. Good investment appraisal should consider the time value of money of the cash flows related to a project by discounting. It should have an option about whether to accept or reject any project.

It should also provide a ranking of various projects and be flexible to enhance the economic desirability. Also, it should use cash flows whether inflow or outflows. Furthermore, it must have a preference for the largest cash flows than the smaller ones. There are various investment appraisal techniques, these include, net present value (NPV), Profitability Index (PI), Payback period (PBP), internal rate of return (IRR), and the accounting rate of return (ARR) (Almarri 2014, p. g 856). The choice of any method of appraising differs from one enterprise to another, but some methods are considered superior to others.

From the example, the primary investment appraisal techniques will apply. Financial Analysis Operating Cashflow Operating Cashflows                       Year 1 2 3 4 5 Sales units 170000 185000 200000 195000 180000   £ £ £ £ £ Sales (Selling price*sales units) 102000 111000 120000 117000 108000 Variable costs:           Raw materials 25500 27750 30000 29250 27000 Packaging 8500 9250 10000 9750 9000 Bonus 8500 9250 10000 9750 9000 Marketing 10000 5000 5000 5000 3000 Distribution cost 8000 16000 24000 32000 40000 Contribution 41500 43750 41000 31250 20000 Less Fixed Costs           Depreciation 8000 8000 8000 8000 8000 Profit before interest and tax 33500 35750 33000 23250 12000 Less Tax (20%) 6700 7150 6600 4650 2400 Profit After Tax 26800 28600 26400 18600 9600 Add Depreciation back 8000 8000 8000 8000 8000 Cash flow 34800 36600 34400 26600 17600 Schedule of Cash Flow Schedule of cash flow             Year 0 1 2 3 4 5   £ £ £ £ £ £ Operating cash   34800 36600 34400 26600 17600 The initial cost of the project:   0 0 0 0 0 Appointment cost 15000 0 0 0 0 0 Branding and production 8000 0 0 0 0 0 Working capital 15000 0 0 0 0 15000 Machinery 50000 0 0 0 0 0 Salvage value   0 0 0 0 10000               Total cash flow 88000 34800 36600 34400 26600 42600 Net Present Value Year Cash Flows (£ ) Discounting Factor (12%) Present Value (£ ) 1 34800 0.893 31076.4 2 36600 0.797 29170.2 3 34400 0.712 24492.8 4 26600 0.636 16917.6 5 42600 0.567 24154.2     Total present value 125811.2     Cost of the project 88000     Net Present Value 37811.2  

References

Almarri, K., & Blackwell, P. 2014. Improving risk sharing and investment appraisal for PPP procurement success in large green projects. Procedia-Social and Behavioral Sciences, 119, 847-856.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

Cuthbert, J.R. and Magni, C.A., 2016. Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR. International Journal of Production Economics, 179, pp.130-140.

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Shu, S.B., Zeithammer, R. and Payne, J.W., 2016. Consumer preferences for annuity attributes: Beyond net present value. Journal of Marketing Research, 53(2), pp.240-262.

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