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ACCT11059ACCOUNTING FOR DECISION MAKINGTerm 3, 2016 - Assignment ThreeStudent: Chloe Adams (s0265715)STEP ONEBefore I got started on this assignment, I did some brief research on the definition of “ratio”. I found the following:Result of one number or quantity divided by another. Ratios are the simplest mathematical (statistical) tools that reveal significant relationships hidden in mass of data, and allow meaningful comparisons. Some ratios are expressed as fractions or decimals, and some as percentages. Major types of business ratios include (1) Efficiency, (2) Liquidity, (3) Profitability, and (4) Solvency ratios()A ratio shows the relative sizes of two or more values. Ratios can be shown in different ways. Using the ":" to separate example values, or as a single number by dividing one value by the total. ()A ratio is the?relationship?between two?groups?or?amounts?that?expresses?how much bigger?one is than the other.() I considered about how I use ratios in my everyday life to make decisions. For example, when grocery shopping, I often decide to purchase products not by looking at the marked ticket price, but by comparing the grams to a dollar figure eg 100g/$1.00. I think most people use this same method when comparing fuel prices (price per dollar).Another example where we may use ratios in everyday life is making cordial. We know by reading the packaging that for every 1 part cordial you must fill the jug with 4 parts water.A potential investor in a firm may use ratios to help them compare one firm to another as the comparison of absolute numbers may not be useful. Ratios allow readers to compare operations of different sizes.Ratios are a starting point for analysis of a firm’s performance and can draw the attention of managers to potential problems and risk. For example, if a manager compares his firm to another and there is a significant difference, it would cause management to further investigate this. When it came time to start calculating the ratios, I realised that I had some work to do on my excel spreadsheet as a result of my Profit and Loss Statement not agreeing from ASS#2. This took me a few hours to rectify.The key concept of ratio analysis is actually understanding what the ratios measure and understanding what each item in the ratio equation Profit Margin The net profit margin is calculated by dividing the firm’s net profit after tax figure by sales. This ratio measures the amount of profit a firm can extract from its revenue. For example, the company allocated to me (Renault Group) had a net profit margin of 6.5% for the 2015 year. This means that for every $1.00 in sales made, 6.5 cents were recognised as profit (I’m using Australian dollars rather than Euro for simplicity purposes). The net profit margin was significantly lower at 1.7% in the 2013 year. To me, this shows that the firm’s fixed costs may have been higher at that time when compared to the 2015 year. Return on Assets This ratio (return on assets) is calculated by dividing the business’ net profit after tax by its total assets. This profitability ratio is used to measure how well (or not so well) a firm uses its assets. This ratio however does not take into account liabilities (while costs of funding are allowed for) therefore is limited as to how effective the analysis could be. Like the net profit margin, the 2013 return on assets ratio for Renault Group was much lower when compared with the other years. Days of Inventory The days of inventory ratio is calculated by dividing the amount of inventory the firm had at the year-end by how much stock they sell per day on average.This ratio is a measure of how well the firm is managing its inventory and indicates too much or too little inventory kept.When calculating my firm’s days of inventory ratio, I have used 365 days per year. I am unsure whether my firm trades all seven days a week. I have not taken into account public holidays or leap years.One benefit of having more stock on hand is that there’s a better chance of product availability for customer purchase.Some disadvantages of having more stock on hand may include:Storage costsInterest expenses if funds borrowed to purchase stockDepending on industry – stale stock/wastage (eg grocery store)Funds are tied up and not available for arising investment opportunities However, I question how accurate this ratio comparison would be when the firms being compared operate differently (orders stock at different times etc). Total Asset Turnover Ratio This ratio is calculated by dividing the firm’s sales by total assets. It measures how well a firm uses its assets. My firm’s total asset turnover ratio seems to be consistent for all four years (0.50, 0.50, 0.55, 0.55). Capacity… asset/big building vs small building.. more staff…more work..bigger turnover…Current Ratio We calculate the current ratio of a firm by dividing the current assets by current liabilities. Current assets are those assets available as cash within 12 months. Current liabilities are those liabilities that are expected to be paid within 12 months. This ratio measures a firm’s liquidity (readily available cash). Liquidity is essential for good business. It is ideal that the current assets be the same or more than the current liabilities. Renault Group’s current ratios for each of the analysed years are consistently above 1. This shows positive liquidity and that the firm is in a good position to pay off its debt. Debt / Equity Ratio (Debt / Equity)Equity Ratio (Equity / Total Assets)Earnings per Share – EPS (Net profit after tax / nos of issued ordinary shares)Dividends per Share – DPS (Dividends/number of issued ordinary shares$ amountPrice Earnings Ratio (Market price per share / earnings per share)Market price per share for each year was as follows:2015201420132012This ratio reflects how the market views a firm’s operations when compared to another.Return on Equity – ROE (Comprehensive Income / shareholders’ equity)Return on Net Operating Assets – RNOA (Operating Income after tax (OI) / net operating assets (NOA)Net Borrowing Cost – NBC (Net financial expenses after tax / net financial obligations)Profit Margin – PM (Operating income after tax (OI) / salesAsset Turnover – ATO (Sales / net operating assets (NOA))Economic Profit (RNOA – cost of capital) x net operating assets (NOA)STEP TWOStep 2 involves you developing a capital investment decision for your firm and completing a simple analysis of this decision using Payback Period, NPV and IRRDevelop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussionOption One:Establishing a factory in MexicoOption Two:Establishing a factory in Indonesia Plant in MexicoPlant in Indonesia Original Cost Estimated Life 1Residual Value 2Estimated Future Cash Flows 320162017201820192020XXXXXXXXXSTEP THREEPlease see below feedback I have given to other students:Peer Feedback Sheet:Assignment ThreeFeedback From:Chloe Adams on 05.02.17Feedback To:Belinda Hudson (belinda.hudson@)Step 1Calculation of ratiosRatios – commentary (blog)Calculate economic profitCommentary – drivers of economic profit (blog)CommentsI can see that you have calculated your ratios and used the “linking” function in excel. As a reader of your assignment, I liked that you actually included a copy of each ratio calculation in your word document. This made is easy to read without flipping between word and excel. It’s evident you have gone the extra mile (for example, you have researched the net profit margin market standard for your firm’s industry). You have showed plenty of evidence where you have interacted with other students. I liked reading the “insights” section of your assignment. You have also followed the instruction to post information to your blog page. Well done.Step 2Develop capital investment decision for your firmCalculation of payback period, NPV & IRR Recommendation & discussion CommentsI enjoyed reading step two of your assignment. Your writing style is clear and straightforward. The use of the table function clearly presents your information. The only thing I can suggest is to include a comment in the table in the Residual Value row to the effect of “see note below”. At first glance it appears that this is missing/forgotten.Step 3Individual feedback with other studentsCommentsI understand that this is to come – you have ensured to include a heading for this in your assignment so it’s not forgotten. Overall Assignment ThreeCommentsI can see that you have effectively used referencing. The presentation and formatting of your assignment is of a high standard. Overall great job on your assignment three. I expect that you will get a good grade. Best of luck!Comments about feedback I received from other students: ................
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