Describe about the International Financial Management of Microsoft Dynamics?
The report on investment appraisal for Cagoo Clothing PLC is prepared. The company is thinking of purchasing a new shop in London, which costs for £7 million. The investment appraisal method consists of two features, which are-
To assess the expected returns level earned from the expenditure level.
To estimate the future benefits and future costs from the purchase of the shop.
From the new shop, Cagoo Clothing PLC is likely to earn cash flows for the next 10 years which are-
|
Year |
Cash Inflow £ |
Cash Outflow £ |
Cumulative Cash Flow |
PVF |
PV |
|
0 |
£ 7,000,000.00 |
-£ 7,000,000.00 |
1.0000 |
||
|
1 |
£ 1,000,000.00 |
-£ 6,000,000.00 |
0.9091 |
£ 909,090.91 |
|
|
2 |
£ 1,000,000.00 |
-£ 5,000,000.00 |
0.8264 |
£ 826,446.28 |
|
|
3 |
£ 1,500,000.00 |
-£ 3,500,000.00 |
0.7513 |
£ 1,126,972.20 |
|
|
4 |
£ 1,000,000.00 |
-£ 2,500,000.00 |
0.6830 |
£ 683,013.46 |
|
|
5 |
£ 1,000,000.00 |
-£ 1,500,000.00 |
0.6209 |
£ 620,921.32 |
|
|
6 |
£ 1,500,000.00 |
£ – |
0.5645 |
£ 846,710.90 |
|
|
7 |
£ 2,000,000.00 |
£ 2,000,000.00 |
0.5132 |
£ 1,026,316.24 |
|
|
8 |
£ 2,000,000.00 |
£ 4,000,000.00 |
0.4665 |
£ 933,014.76 |
|
|
9 |
£ 2,000,000.00 |
£ 6,000,000.00 |
0.4241 |
£ 848,195.24 |
|
|
10 |
£ 2,000,000.00 |
£ 8,000,000.00 |
0.3855 |
£ 771,086.58 |
|
|
£ 15,000,000.00 |
£ 7,000,000.00 |
NPV of inflow |
£ 8,591,767.88 |
||
|
NPV of outflow |
£ 7,000,000.00 |
||||
|
NPV |
£ 1,591,767.88 |
Not getting what does 5 cash flows means in project management.
The total outlay is £ 7,000,000, the total return is £ 15,000,000, and the net return is £ 8,000,000 (Arnold, 2013).
Average Annual Return= Net Return/ Number of years=£8,000,000/10 = £800000
NPV of the project, which is used to assess the summation of the present value of all the cash inflows and outflows, can be calculated as-
NPV= Cash Flow/ (1+r)t
Here r is the discounted rate and t is the time period.
So, the NPV = £1,591,767.88
The discounted rate is assumed as 10%.
Payback Period is the number of years during which the company is successful in obtaining the entire value of the investment from the cash flows. The payback period of Cagoo Clothing PLC from its investment in the new shop in London is 6 years (Barrow, 2011).
The sources of finance of the company for its new project are both the equity and debt capital. Therefore, the equity capital used here is £4 million and the debt capital is £3 million. The cost of equity is assumed 12.5% and the debt capital is assumed 8%.
Therefore the weighted average cost of capital or WACC is-
WACC=Cost of equity*Weighted value of equity+ Cost of debt*Weighted value of debt
= 0.125*4/7+0.08*3/7= 10.57%
The sensitivity analysis of the investment includes the variation in the cash inflow generated from the shop.
|
Year |
Cash Inflow £ |
Sensitivity |
|
1 |
£ 1,000,000.00 |
|
|
2 |
£ 1,000,000.00 |
0% |
|
3 |
£ 1,500,000.00 |
50% |
|
4 |
£ 1,000,000.00 |
-33% |
|
5 |
£ 1,000,000.00 |
0% |
|
6 |
£ 1,500,000.00 |
50% |
|
7 |
£ 2,000,000.00 |
33% |
|
8 |
£ 2,000,000.00 |
0% |
|
9 |
£ 2,000,000.00 |
0% |
|
10 |
£ 2,000,000.00 |
0% |
(Bekaert and Hodrick, 2012)
|
July £ |
August £ |
September £ |
October £ |
November £ |
December £ |
|
4500 |
4590 |
4681.8 |
4775.436 |
4870.94472 |
4968.363614 |
|
£ 40.00 |
£ 40.00 |
£ 40.00 |
£ 42.00 |
£ 44.10 |
£ 46.31 |
|
£ 180,000.00 |
£ 183,600.00 |
£ 187,272.00 |
£ 200,568.31 |
£ 214,808.66 |
£ 230,060.08 |
Sales in October have been increased by 5% and the calculation is correct. The sales value is collected as per the questions.
|
Particulars |
July £ |
August £ |
September £ |
October £ |
November £ |
December £ |
|
Opening Inventory |
100000 |
£ 30,000.00 |
£ 1,400.00 |
-£ 55,872.00 |
-£ 136,440.31 |
-£ 191,248.97 |
|
Add: Purchase |
110000 |
155000 |
130000 |
120000 |
160000 |
175000 |
|
Less: Sales |
180000 |
183600 |
187272 |
200568.31 |
214808.66 |
230060.68 |
|
Closing Inventory |
£ 30,000.00 |
£ 1,400.00 |
-£ 55,872.00 |
-£ 136,440.31 |
-£ 191,248.97 |
-£ 246,309.65 |
The suppler gave a month credit due to which the purchase for June is shown in July and so on.
|
Particulars |
July £ |
August £ |
September £ |
October £ |
November £ |
December £ |
|
Gross Profit (40% of Sales) |
£ 720,000.00 |
£ 734,400.00 |
£ 749,088.00 |
£ 802,273.00 |
£ 859,235.00 |
£ 92,040.00 |
|
Interest |
£ 1,000.00 |
£ 1,000.00 |
£ 1,000.00 |
£ 1,000.00 |
£ 1,000.00 |
£ 1,000.00 |
|
Net Profit |
£ 719,000.00 |
£ 733,400.00 |
£ 748,088.00 |
£ 801,273.00 |
£ 858,235.00 |
£ 91,040.00 |
|
Electricity Cost |
£ – |
£ – |
£ 4,000.00 |
£ – |
£ – |
£ 4,000.00 |
|
Insurance |
£ 750.00 |
£ 750.00 |
£ 750.00 |
£ 750.00 |
£ 750.00 |
£ 750.00 |
|
Rent |
£ 2,000.00 |
£ 2,000.00 |
£ 2,000.00 |
£ 2,000.00 |
£ 2,000.00 |
£ 2,000.00 |
|
Cash from operations |
£ 716,250.00 |
£ 730,650.00 |
£ 741,338.00 |
£ 798,523.00 |
£ 855,485.00 |
£ 84,290.00 |
|
Repayment of loans |
£ 4,000 |
£ 4,000 |
£ 4,000 |
£ 4,000 |
£ 4,000 |
£ 4,000 |
|
Total cash flow |
£ 715,000 |
£ 729,400 |
£ 740,088 |
£ 797,273 |
£ 854,235 |
£ 911,240 |
(Brigham and Houston, 2012)
|
Particulars |
Amount £ |
|
Sales |
£ 1,196,309.05 |
|
COGS |
£ 717,785.43 |
|
Gross Profit |
£ 478,523.62 |
|
Electricity Costs |
£ 8,000 |
|
Operating Profit |
£ 470,523.62 |
|
Interest |
£ 1,000.00 |
|
Net Profit |
£ 469,523.62 |
Rent is adjusted in the COGS.
Not getting why a budgeted income statement would be shown for 6 months.
|
Particulars |
Amount £ |
Amount £ |
|
Assets |
||
|
Bank Balance |
£ 250,000.00 |
|
|
Inventory |
£ 246,309.65 |
|
|
Total Assets |
£ 496309.65 |
|
|
Liabilities |
||
|
Bank Loan |
£ 150,000.00 |
£ 126,000.00 |
|
Installments |
£ 24,000.00 |
|
|
Total Liabilities |
£ 126,000.00 |
|
|
Equity |
||
|
Capital |
£ 90,000.00 |
|
|
Retained Earnings |
£ 280309.65 |
|
|
Total Equity |
£ 370309.65 |
Total Assets= Total Liabilities and Equities=£ 496309.65 (Brooks, 2013)
Balance Sheet is for the period ending 31st December 2015.
While using retained earnings, the company does not have to bear acquisition cost, which makes it a cheap source of finance.
It improves the financial condition of the company and thus improves financial stability. If the amount of retained earnings is high then the company is likely to have a stronger financial position.
It maintains a steady dividend payment to the shareholders even if the company fails to make profit. During the poor financial performance of the company, the preference shareholders are paid dividends from the retained earnings.
Retained earnings improve the financial structure of the company, which in turn increases its market value of the company’s shares (Eun and Resnick, 2012).
The retained earnings may not be utilized correctly all the time, which may result in future financial stagnancy.
If the dividend policy of the company is conservative then the company may accumulate more retained earnings, which may result to over-capitalization.
Retained earnings sometimes lower the market value of the company’s shares due to fall in dividend rates (Grieve, 2013).
Internal Sources-
Sales of the assets of the company, which helps in generating, fund for the company.
Cutting down the total level of the inventory of the company helps in improving the financial position.
External Sources-
Long-term external sources include the equity and preference shares, debentures, borrowings and long-term loans.
Medium term external sources include the leasing of properties, hire purchase and medium term loans.
Short-term external sources include the bank overdraft in the balance sheet, short-term loans, creditors and debt factoring funds.
Growright can think of using a combination of external and internal sources of finance for its business (Nicolàs, 2013).
References
Arnold, G. (2013). Corporate financial management. Harlow, England: Pearson.
Barrow, C. (2011). Practical financial management. London: Kogan Page.
Bekaert, G. and Hodrick, R. (2012). International financial management. Boston: Pearson.
Brigham, E. and Houston, J. (2012). Fundamentals of financial management. Mason, Ohio: South-Western Cengage Learning.
Brooks, R. (2013). Financial management. Boston: Pearson.
Eun, C. and Resnick, B. (2012). International financial management. New York, NY: McGraw-Hill.
Grieve, I. (2013). Microsoft Dynamics GP 2013 financial management. Birmingham, UK: Packt Pub.
Nicolàs, C. (2013). Microsoft Dynamics NAV Financial Management. Birmingham: Packt Publishing
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