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Let’s solve the multiple-choice questions.
The answer of i): d. Business Entity Convention
The answer of ii): a. 1-year period
The answer of iii): c. Sales/Revenue
The answer of iv): d. Statement of Financial Position
The answer of v): a. A statement that measures what the entity owns and also what it owes in a set period.
The answer of vi): a. Return on Capital Employed
The answer of vii): b. Makes it difficult to disenfranchise vulnerable/non-digital savvy stakeholders.
The answer of viii): d. Cost driver
ix) Calculation:
Break-even point = Fixed Costs / (Selling Price per Unit - Variable
Cost per Unit)
= £500.00 / (£11.0 - £7.0) = £500.00 / £4.00
= 125.
Answer of ix): b. 125 Cars
The answer of x) a. Contribution per car: Selling price - Variable costs = £12.0 - (£3.0 + £5.0) = £4.00
b. Break-even point in sales: Fixed Costs / Contribution per car = £450.0 / £4.0 = 112.50 (or 113 cars to cover all costs).
xi) Calculation: Depreciation = (Cost - Residual Value) / Useful Life = (£20,000.00 - £4,000.00) / 4.00 = £4,000.00
The answer of xi): a. £4,000.00
The answer of xii): b. Payment in advance
The answer of xiii): b. Managers tend to self-serve and put their own wishes and needs ahead of the organization.
The answer of xiv): b. Short term finances
The answer of xv): d. More security and less likelihood of lenders not recovering funding
The answer of xvi): a. £600 (since fixed costs do not change with output)
The answer of xvii): b. Market focus, Team focus, and Long term approach
The answer of xviii): d. Profit
xix) Calculation: Average annual investment = (Initial Cost + Residual Value) / 2 = (£10,000 + £4,000) / 2 = £7,000.
The answer of xix): c. £7,000
The answer of xx): a. They use incentives and consensus to promote accuracy
Let’s go through each ratio calculation for Amazon Ltd. based on the information provided.
1. i Ratio Calculations
a. Gross Profit Ratio
The Gross Profit Ratio specifies the percentage of revenue that overdoes the cost of goods sold, which reflects Amazon Ltd’s profitability after its activities.
Gross Profit Ratio=Gross Profit / Revenue×100
Using the values given:
Gross Profit = £25,200.00
Revenue = £42,000.00
Gross Profit Ratio=25,200/42,000×100=60%
b. Net Profit Ratio
The Net Profit Ratio tells the percentage of revenue that remains as profit after all operating expenses are deducted.
Net Profit Ratio=Operating Profit/Revenue×100
Using the values given:
Operating Profit = £13,200
Revenue = £42,000
Net Profit Ratio=13,200/42,000×100=31.43%
c. Current Ratio
The Current Ratio evaluates the company’s ability to pay off its short-term liabilities with its short-term assets.
Current Ratio=Current Assets/Current Liabilities
Using the values given:
Current Assets = £9,300
Current Liabilities = £3,900
Current Ratio=9,300/3,900=2.38
d. Quick Ratio (Acid-Test Ratio)
The Quick Ratio measures the company's immediate liquidity by not including inventory from current assets.
Quick Ratio=Current Assets?Inventory/Current Liabilities ?
Using the values given:
Current Assets = £9,300
Inventory = £1,400
Current Liabilities = £3,900
Quick Ratio=9,300?1,400/3,900 =7,900/3,900 = 2.025
e. Trade Receivable Turnover Ratio
This ratio reflects how professionally the company collects its receivables within the period.
Trade Receivable Turnover Ratio=Revenue Trade / Receivables
Using the values given:
Revenue = £42,000
Trade Receivables = £7,900
Trade Receivable Turnover Ratio=42,000 / 7,900=5.316
f. Trade Payable Ratio
The Trade Payable Ratio indicates the number of times Amazon Ltd. pays off its trade payables in the period.
Trade Payable Ratio=Cost of Sales/Trade Payables
Using the values given:
Cost of Sales = £16,800
Trade Payables = £3,400
Trade Payable Ratio=16,800/3,400=4.94
g. Stock Turnover Ratio
The Stock Turnover Ratio measures how efficiently Amazon Ltd. uses its inventory or the number of times inventory is sold and replaced over a period.
Stock Turnover Ratio = Cost of Sales/Inventory
Using the values given:
Cost of Sales = £16,800
Inventory = £1,400
Stock Turnover Ratio=16,800/1,400=12
1. ii Profitability Analysis
Gross Profit and Net Profit Ratios
Amazon Ltd's Gross Profit Ratio of 60% and Net Profit Ratio of 31.43% reflect that there has been effective control exercised on both the cost of sales along operating expenses so that its profit structure is sound. This would further translate the situation in terms of the company's ability to exhibit profitability by managing costs and cost accumulations efficiently and through effective operations.
Liquidity Ratios: Current Ratio and Quick Ratio
Amazon Ltd demonstrates excellent liquidity, as the current ratio is at 2.38 and the quick ratio is at 2.03, both significantly above the industry benchmark of 1. This high liquidity would suggest that the company is highly comfortable in meeting its short-term obligations without having a dependency on selling inventory and provides a stable financial position in which short-term liabilities are managed appropriately (Husna and Satria, 2019).
Efficiency Ratios: Trade Receivable Turnover, Trade Payable Ratio, and Stock Turnover Ratio
The Trade Receivable Turnover Ratio of 5.32 indicates that Amazon Ltd is collecting its receivables efficiently, though the cash flow can be improved by collecting on the accounts more rapidly. The Trade Payable Ratio of 4.94 shows that payment practices have been consistent; this type of practice is likely to promote good relations with suppliers and result in lenient payment terms. The Stock Turnover Ratio of 12 indicates that Amazon Ltd is managing its inventory efficiently since inventory is being cycled quickly, thus reducing holding costs and the chances of obsolescence (Tissen and Sneidere, 2019). Recommendations
Improve Receivables Collection: Despite Amazon Ltd having pretty good trade receivable turnover, streamlining the collection process even further can strengthen cash flows and increase working capital. Credit terms or stricter follow-up on collected payments might be implied (Stender, 2023).
Optimise Inventory Management: Despite a healthy Stock Turnover Ratio, actively monitoring and adjusting the stock levels to match the demand will help avoid overstocking or stockouts for consistency in product delivery while keeping inventory costs minimal.
Utilise Strong Liquidity for Growth: Amazon Ltd. - With a position of high liquidity could use it as a source to invest in growth opportunities like increasing product lines or entering new markets. This strategic utilisation of cash reserves would help promote long-term growth and enhance the market position (Chikwira and Mohammed, 2023).
Here is the analysis of Amazon Ltd's profitability.
Let’s go through each investment appraisal technique step-by-step for the three proposals.
2. i Investment Appraisal Calculations
For each proposal, we will calculate:
Average Rate of Return (ARR)
Payback Period
Net Present Value (NPV)
Proposal 1
Initial Investment = £120,000.0
Cash Flows over 5 Years
= £80,000.0, £60,000.0, £40,000.0, £20,000.0, £40,000.0
Scrap
Value = £4,000.0
Cost of Capital = 15.0%
a. Average Rate of Return (ARR)
The Average Rate of Return (ARR)= (average annual profit/initial investment) *100
Depreciation per Year:
Depreciation=Investment?Scrap Value/Useful Life=120,000?4,000/5=23,200
Total Profit over 5 Years: Profit for each year = Cash flow - Depreciation
Year 1: 80,000.0?23,200.0=56,800.0000
Year 2: 60,000.0?23,200.0=36,800.00
Year 3: 40,000.0?23,200.0=16,800.00
Year 4: 20,000.0?23,200.0=?3,200.00
Year 5: 40,000.0?23,200.0=16,800.00
Total profit over 5 years = 56,800+36,800+16,800?3,200+16,800=124,000.00
? Average Annual Profit:
Average Annual Profit=Total Profit over 5 years /5
=124,000.0/5.0=24,800.00
? ARR:
ARR=Average Annual Profit / Initial Investment×100
= 24,800/120,000×100 =20.67%
b. Payback Period
The Payback Period is the time it takes for the project to recover the initial investment.
Cumulative Cash Flows:
Year 1: £80,000.00
Year 2: £80,000 + £60,000 = £140,000.00
The initial investment (£120,000) is recovered during Year 2.0.
Exact Payback Calculation:
Payback Period=1+Amount Needed to Reach Investment/Cash Flow in Year 2 =1+120,000?80,000 / 60,000.00
=1+40,000 / 60,000 =1.67 years
c. Net Present Value (NPV)
To calculate NPV, we discount each cash flow at the cost of capital (15%).
NPV Formula:
NPV=?Cash Flow t / (1+r) t ? Initial Investment
For each year’s cash flow:
Year 1: 80,000.0 / (1+0.15)1 = 69,565.22
Year 2: 60,000.0 / (1+0.15)2 = 45,368.62
Year 3: 40,000.0 / (1+0.15)3 = 26,300.64
Year 4: 20,000.0 / (1+0.15)4 = 11,435.06
Year 5: 40,000 + 4,000/ (1+0.15)5= 19887.06
NPV Calculation:
NPV=69,565.22+45,368.62 +26,300.64 +11,435.06 +19887.06?120,000=52556
Proposal 2
Initial Investment = £95,000.0
Cash Flows over 5 Years = £10,000, £40,000,
£40,000, £60,000, £50,000
Scrap Value =
£5,000
a. Average Rate of Return (ARR)
Depreciation per Year:
Depreciation=Investment?Scrap Value/Useful Life = 95,000?5,000 / 5=18,000
Total Profit over 5 Years: Profit for each year = Cash flow - Depreciation
Year 1: 10,000?18,000=?8,000.00
Year 2: 40,000?18,000=22,000.00
Year 3: 40,000?18,000=22,000.00
Year 4: 60,000?18,000=42,000.00
Year 5: 50,000?18,000=32,000.00
Total profit over 5 years = ?8,000+22,000+22,000+42,000+32,000=110,000.00
? Average Annual Profit:
Average Annual Profit=Total Profit over 5 years/5 = 110,000/5=22,000
? ARR:
ARR=Average Annual Profit/Initial Investment×100
=22,000/95,000×100=23.15%
b. Payback Period
Cumulative Cash Flows:
Year 1: £10,000
Year 2: £10,000 + £40,000 = £50,000
Year 3: £50,000 + £40,000 = £90,000
Year 4: £90,000 + £60,000 = £150,000
The initial investment (£95,000) is recovered during Year 4.
Exact Payback Calculation:
Payback Period=3+Amount Needed to Reach Investment/Cash Flow in Year 4 =3+95,000?90,000/60,000 =3+5,000/60,000=3.08 years
c. Net Present Value (NPV)
To calculate NPV, we discount each cash flow at the cost of capital (15%).
NPV Formula:
(NPV=?Cash Flow t / (1+r) t ? Initial Investment)
For each year’s cash flow:
Year 1: 10,000.0 / (1+0.15)1 = 8,695.65
Year 2: 40,000.0 / (1+0.15)2 = 30245.75
Year 3: 40,000.0 / (1+0.15)3 = 26,300.65
Year 4: 60,000.0 / (1+0.15)4 = 34305.2
Year 5: 50,000 + 5,000/ (1+0.15)5= 27344.72
NPV Calculation:
NPV=8695.65+30245.75+26300.65+34305.2+27344.72=118196.3186
Proposal 3
Initial Investment = £80,000
Cash Flows over 5 Years
= £30,000, £40,000, £30,000, £30,000, £20,000
Scrap
Value = £8,000
Cost of Capital = 15%
a. Average Rate of Return (ARR)
Depreciation per Year:
Depreciation=Investment?Scrap Value/Useful Life=80,000?8,000/5=14,400
Total Profit over 5 Years: Profit for each year = Cash flow - Depreciation
Year 1: 30,000?14,400=15,600.0000
Year 2: 40,000?14,400=25,600.00000
Year 3: 30,000?14,400=15,600.00000
Year 4: 30,000?14,400=15,600.000000
Year 5: 20,000?14,400=5,600.00000
Total profit over 5 years = (15,600+25,600+15,600+15,600+5,600 = 78,000)
Average Annual Profit:
Average Annual Profit=Total Profit over 5 years / 5.0= 78,000 / 5 =15,600
ARR:
ARR=(Average Annual Profit/Initial Investment×100)
=15,600 / 80,000×100 =19.50%
b. Payback Period
Cumulative Cash Flows:
Year 1: £30,000.00
Year 2: £30,000 + £40,000 = £70,000.00
Year 3: £70,000 + £30,000 = £100,000.00
The initial investment (£80,000) is recovered during Year 3.
Exact Payback Calculation:
Payback Period=2+Amount Needed to Reach Investment/Cash Flow in Year 3 =2+80,000?70,000/30,000
=2+10,000/30,000=2.33 years
c. Net Present Value (NPV)
To calculate NPV, we discount each cash flow at the cost of capital (15%).
NPV Formula:
NPV=?Cash Flow t / (1+r) t ? Initial Investment
For each year’s cash flow:
Year 1: 30000/ (1+0.15)1 = 26,086.96
Year 2: 40,000 / (1+0.15)2 = 30245.75
Year 3: 30,000 / (1+0.15)3 = 26,300.65
Year 4: 30,000 / (1+0.15)4 = 17152.6
Year 5: 20,000 + 8,000/ (1+0.15)5= 13920.95
NPV = 26086.96+30245.7467+26300.6493+17152.5998+13920.9499=87619.9457
2. ii Recommendation
Analysis of Proposals: ARR, Payback Period, and NPV
Proposal 1 has a Net Present Value of £52,556; therefore, it holds the highest return based on money time value. For long-term profitability and net gain, the most promising project would be Proposal 1.
Proposal 2 had the highest ARR of 23.16%, which, about the investment cost, had outstanding returns.
The payback period is the shortest at 2.33 years in Proposal 3. The payback period is short. A short payback period ensures early capital recovery and reduces the risk of the company from exposure to financial matters (Gorshkov et al., 2018).
Recommendation: Since the NPV of the proposal is the highest, Recommendation 1 should be taken as the best financial decision for Vipers Ltd. This proposal promises the greatest scope for shareholder value maximisation. This would be good for the long-term growth and profitability of the company.
References
Chikwira, C. and Mohammed, J.I., (2023). The impact of the stock market on liquidity and economic growth: Evidence of volatile market. Economies, 11(6), p.155.
Gorshkov, A.S., Vatin, N.I., Rymkevich, P.P. and Kydrevich, O.O., (2018). Payback period of investments in energy saving. Magazine of Civil Engineering, (2 (78)), pp.65-75.
Husna, A. and Satria, I., (2019). Effects of return on asset, debt to asset ratio, current ratio, firm size, and dividend payout ratio on firm value. International Journal of Economics and Financial Issues, 9(5), pp.50-54.
Stender, S., (2023). Improvement of accounting and tax accounting of receivables. Scientific Bulletin of Mukachevo State University. Series “Economics”, 2(10), pp.42-53.
Tissen, M. and Sneidere, R., (2019). Turnover ratios and profitability ratios calculation methods: the book or average value.
