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Using Accounting for Decision Making#ACCT 11059#ASSIGNMENT #32016 T3He WangS0249389Step 1:BRISBANE BRONCOS LIMITEDRATIOSYears ended 31 December　　2015201420132012Profitability Ratios　　　　　Net Profit MarginNet profit after tax/sales136.39%57.19%154.39%216.07%Return on AssetsNet profit after tax/total assets6.48%2.37%5.74%6.23%　　　　　　Efficiency (or Asset Management) Ratios　　　　Days of InventoryInventory/av.daily cost of goods sold 58.69 76.82 117.94 99.52 Total Asset Turnover RatioSales/total assets0.050.040.040.03　 　　　　Liquidity Ratios 　　　　Current RatioCurrent assets/current liabilities2.402.492.412.50　　　　　　Financial Structure Ratios　　　　　Debt/Equity RatioDebt/equity34.66%28.74%31.30%29.60%Equity RatioEquity/total assets74.26%77.68%76.16%77.16%　　　　　　Market Ratios　　　　　Earnings per Share (EPS)Net profit after tax/nos of issued ordinary shares $ 0.03 $ 0.01 $ 0.02 $ 0.02 Dividends per Share (DPS)Dividends/number of issued ordinary shares $ 0.0050 $ 0.0050 $ 0.0175 $ 0.0100 Price Earnings RatioMarket price per share/earnings per share13.0130.6512.0610.49This table is from my company’s spreadsheet. Ratio AnalysisIn 2015, 2013, and 2012, the ratio amount of Brisbane Broncos Limited are not too much different. However, 2014 is with the lowest profit. Because of a profit before tax for the financial year ended 31 December 2014 of $1,322,000 (2013: $3,005,000), down 56% on 2013. The net profit after tax for the year decreased 59% to $831,700 (2013: $2,032,000). A number of one-o costs predominantly related to the football department, including a change of head coach and playing roster restructuring, significantly influenced the 2014 result.Economic profitAs I discussed in assessment #2, economic profit is a way of a company to measure of add value, it is based on the company’s accounting profit for a period compared to its cost of capital, and the formula is:Economic profit = (RNOA – cost of capital) × NOAThe formula to calculate return on net operating assets (RNOA) is:RNOA = OI/NOAEconomic profit is most useful when comparing multiple outcomes and making a decision between these outcomes. This is especially true for decisions with multiple variables that affect and do not affect accounting profit. For instance, one decision may result in a higher accounting profit, but after other variables are considered, the economic profit of another decision may be higher.Ratios Based on Reformulated Financial Statements2015　201420132012Return on Equity (ROE)Comprehensive Income (CI)/shareholders' equity8.72%3.05%7.54%8.07%Return on Net Operating Assets (RNOA)Operating income after tax (OI)/net operating assets (NOA)27.12%3.58%14.61%15.20%Net Borrowing Cost (NBC)Net fin. expenses after tax/net financial obligations (NFO)1.61%2.66%3.03%3.40%Profit Margin (PM)Operating income after tax (OI)/sales118.22%28.47%116.45%161.05%Asset Turnover (ATO)Sales/net operating assets (NOA)22.94%12.57%12.55%9.44%Economic profit (RNOA - cost of capital) x net operating assets (NOA)$ 1,401,792.84 ($ 743,208.98) $ 483,868.98 $ 548,426.97 This table is from my company’s spreadsheet. As you can see the economic profit of 2014 is negative amount, I go back to my restated financial statements to find the reason. Economic profit = total revenue - (explicit costs + implicit costs). Accounting profit = total revenue - explicit costs. Economic profit can be positive, negative, or zero. If economic profit is positive, there is incentive for firms to enter the market. If profit is negative, there is incentive for firms to exit the market. If profit is zero, there is no incentive to enter or exit.For a competitive market, economic profit can be positive in the short run. In the long run, economic profit must be zero, which is also known as normal profit. Economic profit is zero in the long run because of the entry of new firms, which drives down the market price. For an uncompetitive market, economic profit can be positive. Uncompetitive markets can earn positive profits due to barriers to entry, market power of the firms, and a general lack of competition. Brisbane Broncos Limited made more profit in 2015. So that for long term run of the business it can be continued to operate. Step 2:All information in my spreadsheet, with NPV, IRR, and overall decision of two options. I choice two options for investment decision making, which are night club and sports clothing shop. LINK Excel.Sheet.8 "E:\\Term 7\\ACCT11059\\ASS#3\\He Wang_s0249389_Spreadsheet.xls" "NPV & IRR!R1C3:R15C5" \a \f 5 \h \* MERGEFORMAT Brisbane Broncos LimitedTwo options for investment decision making Project AProject BNight ClubSports Clothing ShopOriginal cost $ 1,300,000 $ 980,000 Estimated life6 years8 yearsResidual value $ 2,400,000 $ 1,620,000 Estimated future cash flows　　2017 $ 230,000 $ 110,000 2018 $ 295,000 $ 110,000 2019 $ 350,000 $ 167,000 2020 $ 329,000 $ 194,000 2021 $ 375,000 $ 222,000 2022 $ 412,000 $ 242,000 2023　 $ 262,000 2024　 $ 262,000 More information about two options please look at my company spreadsheet. Payback period, NPV, & IRR as I had already discussed in SPA #3:Payback period:Payback period in capital budgeting refers to the period of time required to recoup the funds expended in an investment, or to reach the break-even point (Paul et al, 2010). For example, returned of $1,000 per year for an investment of $2,000 with the payback period of two years. Without considering the time value of money. The payback period intuitively measures how long it takes to "pay for it." All other things being equal, the shorter payback period of investment is superior to the payback period of investment. Payback period of investment is popular, because of its easy to use. The formula is: Payback period = Initial investment / Cash flow. The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing, or other important considerations, such as the opportunity cost. Whilst the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation. Alternative measures of "return" preferred by economists are net present value and internal rate of return. An implicit assumption in the use of payback period is that returns to the investment continue after the payback period. Payback period does not specify any required comparison to other investments or even to not making an investment. The payback period of investment is considered to be an analytical approach that has serious limitations and the use of qualifications because it does not consider the time value of money, risk, financing or other important factors, such as opportunity cost. Although the time value of money can be corrected by applying the weighted average cost of capital discount, it is generally accepted that such an investment decision-making tool should not be used in isolation. The alternative to "return" is the net present value and internal rate of return. An implicit assumption of the payback period is that the return on investment continues after the investment recovery period. The investment recovery period does not specify any comparison with other investments, or even does not specify an present value (NPV):Discounted cash flow (DCF) analysis represents the net present value (NPV) of the estimated cash flows available to all capital providers, which is deducted from the cash required to produce the desired growth. The concept of DCF valuation is based on the principle that the value of an enterprise or asset is inherently based on its ability to generate cash flow for capital providers. To this extent, DCF is more dependent on the firm's basic expectations, rather than the open market factors or historical precedent, it is a more theoretical approach, relying on a number of assumptions. DCF analysis of the overall value of the enterprise, including debt and equity. DCF has three key components of a DCF: free cash flow (FCF); terminal value (TV); and discount rate. (This calculation of discounted cash flow is from , 2012).Discounted cash flow models are robust, but they have drawbacks. DCF is just a mechanical evaluation tool, which makes it subject to the axiom of "garbage input, garbage output". Small changes in inputs may lead to huge changes in the value of the company. Rather than trying to invest in cash flow to infinity, it often uses terminal value technology. For example, the use of simple gold over the past 10 years to estimate the final value. This is because, over time, it is more difficult to make a realistic estimate of cash flow (Investopedia, 2012). Advantages & disadvantages of NPV are include (Kathy, 2017): Advantages: Time ValueOne advantage of the net present value method involves its consideration of the time value of money. The value of money changes over time, especially during periods of high inflation or deflation. A company cannot rely on money being worth the same amount in the future as it is today. The net present value method allows the company to consider the value of the money on the day the company pays it out and the value of the money on the day the company receives it.Advantages: Ranking CapabilityAnother advantage of the net present value method considers its ability to compare projects. As the company evaluates each project, it calculates the current total value of the project. This calculation considers each of the expected cash receipts and cash payments and the value of the money at the time of the transaction. The project with the highest net present value is viewed as the one most likely to bring the highest value to the company. The company may then pursue those projects that bring the most value to the organization.Disadvantages: ComplexA disadvantage of the net present value method is that it requires the company to perform more complex calculations. The company needs to estimate each cash transaction that will occur with the project. The company uses numeric tables that provide multipliers for various time periods and interest rates. The company must locate the correct multiplier for each cash transaction and multiply the cash amount by the multiplier. Once the company performs each of these calculations, it adds up the total to determine the net present value of the project.Disadvantages: AssumptionsAnother disadvantage of this method involves its use of assumptions. The company needs to make assumptions regarding both the dollar amount and timing of future cash transactions associated with the project. The company also needs to estimate its interest rate for the duration of the project. These assumptions may or may not be realizable. Inaccurate assumptions lead to inaccurate calculations of the net present value for a project.Internal rate of return (IRR):There is a YouTube video for IRR that I recommend you to watch. click here Amy (2016) states the biggest mistake is the use of IRR. It is best to use at least one other method (NPV and / or return) to analyse the project. Using it alone can cause you to make a bad decision on where to invest your company's hard-earned dollars, especially in comparison to different durations of the project. Assuming you have a one-year project, the internal rate of return of 20%, the internal rate of return of the project is 10 years of $13%. If you make a decision based on IRR, you may be in favour of the 20%IRR project. However, this is a mistake. If you have a minimum interest rate of 10% during this period, you world had better get an internal rate of return of $13% over a period of 10 years, with an internal rate of return of $20% in a year. You must also be careful how IRR considers the time value of money. IRR assumes that the future cash flows from the project will be reinvested in the IRR, rather than reinvested in the company's capital costs, so that it is not as accurate as NPV to pay attention to the cost of capital and the time value of money. The revised internal rate of return (MIRR), assuming that the positive cash flow to the company's cost of capital reinvestment, the initial cost of financing by the company's financing costs, more accurately reflect the cost and profitability of the project. However, this is a good rule of thumb, always use IRR combined with NPV, so you can get a more comprehensive return on investment.Advantages & disadvantages of IRR method are include (Management Accounting, 2016):Advantages:1. It considers the time value of money even though the annual cash inflow is even and uneven.2. The profitability of the project is considered over the entire economic life of the project. In this way, a true profitability of the project is evaluated.3. There is no need of the pre-determination of cost of capital or cut off rate. Hence, Internal Rate of Return method is better than Net Present Value method.4. Sometimes, the pre-determination of cost of capital is very difficult. At that time, Internal Rate of Return can be used to evaluate the project. 5. The ranking of project proposals is very easy under Internal Rate of Return since it indicates percentage return.6. It provides for maximizing profitability.7. Internal Rate of Return takes into account the total cash inflow and outflows.8. It gives much importance to the objective of maximizing shareholder’s wealth.Disadvantages:1. This method assumed that the earnings are reinvested at the internal rate of return for the remaining life of the project. If the average rate of return earned by the firm is not close to the internal rate of return, the profitability of the project is not justifiable.2. It involves tedious calculations.3. This method gives importance only to the profitability but not consider the earliest recouping of capital expenditure. The reason is that sometimes Internal Rate of Return method favours a project which comparatively requires a longer period for recouping the capital expenditure. Under the conditions of future is uncertainty, sometimes the full capital expenditure can not be recouped if Internal Rate of Return followed.4. The results of Net Present Value method and Internal Rate of Return method may differ when the projects under evaluation differ in their size, life and timings of cash inflows.Project A: Night ClubProject B: Sports Clothing ShopPayback period 4.26 years5.73 yearsNPV$105,972.92$2.86IRR13%2%Accept/RejectAccept this investment planReject this investment planReference list Amy, G. (2016, March 17). A refresher on internal rate of return. Retrieved February 2, 2017, from Kathy, A. M. Advantages & disadvantages of net present value method. Retrieved February 2, 2017, from (2012). Introduction to discounted cash flow valuation. Retrieved from Management Accounting. (2016, December 7). Money matters | all management articles. Retrieved February 2, 2017, from Paul, W. F., Neil, T. B., Phillip, E. P., & David, J. R. (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Retrieved February 2, 2017,from Step 3:PEER FEEDBACK:Feedback From: He WangFeedback To: My CommentsStep 1Calculation of ratiosRatios – commentary (blog) Calculate economic profitCommentary – drivers of economic profit (blog)Step 2Develop capital investment decision for your firmCalculation of payback period, NPV & IRR Recommendation & discussionOverall ASS#3 ................
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