Note : the Answer should be computerized on word document and pasted in the answ

Question

Note : the Answer should be computerized on word document and pasted in the answer slot

The directors have the opportunity to invest in a new project. This involves the acquisition of new machinery. The figures for the project are shown in the table below Cost of machine £10,000 Estimated life Estimated future cash flows Year 1 years £2,000 ear 2 Year 3 Year 4 Year 5 Estimated residual value 35000 £5,000 For the project, calculate the accounting rate of return and the payback period. In your report, explain the significance of these values and indicate how such values can be used to determine the viability of a project. The board think that they might like to raise money to enable them to invest in the project. Explain to the board how they might obtain finance for a business project. In addition discuss the components of working capital and describe the importance of effective working capital management as part of the process of making funds available for projects.

Explanation / Answer

Calculation of Accounting Rate of Return

Step 1: Annual Depreciation = (Initial Investment - Estimated Residual Value) / Estimated Life

= (10000 - 3000) / 5

= 1400

Step 2:

Step 3: Average Accounting Income = (600 + 1600 + 1600 + 3600 + 6600) / 5

= 14000 / 5

= 2800

Step 4: Average Investment = (Initial Cost + Residual Value) / 2

(10000 + 3000) / 2 = 6500

Step 5: Accounting Rate of Return = Average Accounting Income / Average Investment

= 2800 / 6500

= 43.0769%

Calculation of Payback Period

Cumulative Cash Flow

Payback Period = Years before full recovery + (Unrecovered cost at start of the year / Cash Flow during the year)

= 3 + ( 2000 / 5000)

= 3 + 0.4

= 3.04 years

How Average Rate of Return and Packback Period is used to determine the viability of the project?

Average Rate of Return

Payback Period

How to obtain finace for a business project?

Working Capital

Working Capital = Current Assets - Current Liabilities

The components of working capital management are:

Importance of effective working capital management:

Year 1 2 3 4 5 Cash Inflow 2000 3000 3000 5000 5000 Residual Value 3000 Depreciation -1400 -1400 -1400 -1400 -1400 Accounting Income 600 1600 1600 3600 6600

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