End of Module Authentic Assessment
Module Title: Financial Analysis for Managers
Module Code: 7ACCN018W
Module Status: Core
Assessment Weighting: 60%
In Module Assessment: Authentic Assessment
Where to Access the Feedback: Module Blackboard Site
Feedback Method: Mixture of Formative and Summative Assessment Feedback. Students receive comments on their ability to link theory into practice in terms of applying and interpreting “financial ratio analysis” to selected companies.
Assignment Outline:
This ‘Authentic Assignment’ contributes to 60% of the overall mark for the module. The assignment will be undertaken on an individual basis.
The word limit excluding calculations is 10 words for every 1 mark of discursive answer (+/- 10%). For example, for a 10-mark discussion question, the word limit is 300 words +/- 10%. Ignoring the word limit will incur a mark reduction.
All your Excel calculations/sheets should be copied and pasted into one single MS Word or pdf document containing your answers to the discussion requirements.
In answering the questions in this assessment, please start your answer to each requirement on a new page (a new page for requirement (a), a new page for requirement (b), etc)
Scenario
Homer and his best friend Flanders have decided to set up a business importing first aid kits from a well-known manufacturer in the USA. To finance the business, they will each put in £75,000 from their savings. They intend to start trading from 1st July 2022. Homer has already spoken to a bank who has agreed to provide an overdraft facility of up to £60,000 to cover short-term cash shortages during the first year. Any overdrawn balance at the end of any month will incur interest at 1.5% per month in that month by the bank.
Homer & Flanders are unsure as to whether the business should be in the form of a partnership or a limited company.
Last month Homer commissioned a research and marketing firm to carry out a market research whose findings indicated that there is likely to be good demand for these first aid kits.
Annual demand in the first year is likely to be:
i. 15,000 kits with a probability of 35%
ii. 16,400 kits a probability of 45%
iii. 17,100 kits with a probability of 20%
The demand in each year will be seasonal. 40% of annual sales will be in the first quarter, 25% in the second quarter, 20% in the third quarter and 15% in the final quarter of the year. (you may assume that in each quarter, sales occur evenly)
2. In the following four years, demand is expected to increase by 8% in year 2, 10% in year 3, 6.5% in year 4 and 5% in year 5. The research company is unable to forecast sales beyond year 5.
3. Selling price in the first year will be set at £66 per kit, increasing by 3.1% per year in each of the following 4 years.
4. Sales will be to pharmacies and on credit. It is expected that 75% of customers pay after 1 month and the rest will pay after two months.
5. The cost of buying one first aid kit from the US manufacturer is estimated at £49.50 in the first year. These costs will increase by an average of 2.8% per year in each of the following 4 years. Purchases of these kits (variable costs) will be made monthly sufficient to cover the sales (demand) for that month, and are paid for in the following month. There is also import tax at 7.5% of the purchase price of each first aid kit that needs to be paid monthly to the UK government in each month that purchase is made.
6. Fixed costs of running the business including staff salaries are estimated at £89,700 in the first year increasing by 2.9% per year in each of the following four years. Fixed costs occur evenly throughout the year and are paid for on a monthly basis.
7. Suitable office will be rented at £60,600 per year with the rent payable quarterly in advance. The rent is expected to increase by 4.5% per year in each of the following 4 years.
8. Office furniture and equipment will cost £59,400 payable immediately. An upgrade to the equipment will be needed in year 3 costing £19,500. These furniture and equipment will be worthless at the end of the fifth year.
9. The business will need £37,000 of working capital. You may assume this will be needed at the start of business. You may assume that the investment in working capital will be recovered in full at the end of year 5.
Required: (Please start your answer to each requirement on a separate page)
a) Discuss the advantages and disadvantages of setting up the business as a partnership or a private limited company.
(10 marks)
(Word limit 300 words +/- 10%)
b) Produce a cash budget for the first year of the business. Suggest, in general, how cash shortages in any month can be dealt with by the business.
(20 marks)
c) Discuss the main functions of budgeting, and the difficulties that start-up businesses face when attempting to draw up budgets.
(10 marks)
(Word limit 300 words +/- 10%)
d) Calculate the following for the first year of the business:
i. Budgeted profit for the year (IGNORE depreciation on equipment)
ii. Break Even Point (BEP)
iii. Margin of safety
iv. What should the selling price per each first aid kit be at the budgeted level of production for the business to generate £100,000 of profit?
(15 marks)
e) Assuming this is a five-year project and ignoring all taxation implications, calculate the following: (Discount rate at 9%)
i. The payback period
ii. The accounting rate of return
iii. The net present value
(30 marks)
f) Discuss the advantages and limitations of each of the project appraisal methods listed in requirement (e) above.
(15 marks)
(Word limit 450 words +/- 10%)
(Total: 100 marks)
The following criteria will be used in assessing this coursework:
The marks awarded for each part of this assignment will be based on:
• Accuracy of the calculations
• Quality of the discussions
The rules on late submission and plagiarism are applied and fully enforced by the School.
