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Step 1: Ratio Analysis
1. This assessment task involves you calculating a range of ratios for your firm and using these ratios to assess the business performance of your firm.
2. Go to the „Ratios tab in your firm’s spreadsheet. In this worksheet is a blank table for you to calculate a range of ratios for your firm. A list of possible ratios is included in the worksheet. Please calculate a number of these ratios. You are not expected to calculate all of these ratios. For example, you may not have sufficient information from your firm’s financial statements to calculate some of them. ?
Calculate these ratios for the last two (2) years for your firm. Once you have calculated a few ratios for your firm sit back and have a look at them. What do these ratios tell you about your firm? How do you make sense of them?
If you wished, you could calculate a large number of ratios for your firm. But what would they tell you about what is really going on with your firm? How would you make sense of them? How would you use them to analyse, engage with and connect to your firm’s economic and business realities (that is with what is really going on in your firm)? To find this out will take more effort, strain and risk on your part than simply googling “How to make sense of financial ratios”.
You have calculated a few financial ratios for your firm. Tell me what sense you can make of them. Discuss with other students in your study group (and/or in the course) your ratios. How do your company’s ratios differ to the ratios of companies of other students in the course?
3. Calculate economic profit for your firm for the past two years.
4. Identify the key accounting drivers of your firm’s past economic profit.
5. Comment on your firm’s key accounting drivers. Which are the most important or critical? Discuss your thoughts on your firm’s key accounting drivers with other students. What similarities or differences are there between your different firms’ key accounting drivers? Why is this? What insights have you gained by „breaking into bits’ your firm’s financial statements? What insights have you not gained?
6. Include in your assignment your firm’s spreadsheet, including your firm’s ratios that you have calculated, as well as a Word file setting out your commentary on your firm’s ratios and key accounting drivers and similarities or differences you have noted with the key accounting drivers of firms being analysed by other students. Include a discussion of the insights you have gained, and not gained, at this stage in your analysis.
Please allow about 540 – 600 minutes to complete Step 1.
Step 2: Capital Budgeting
Coffee Extra Ltd is considering making an investment in new coffee grinding equipment.
The company is considering purchasing one of two types of new machines:
Machine A Machine B
Original cost $115,000 $175,000
Estimated life 10 years 5 years
Residual value Nil Nil
Estimated annual cash inflows $30,000 $60,000
Estimated annual cash outflows $8,000 $12,000
Coffee Extra has a required cost of capital of 10%. It also has a rule of thumb that an investment proposal should not be accepted unless it has a payback period of 6 years or less.
Calculate the payback period, net present value (NPV) and internal rate of return (IRR) for each machine and advise the company which machine it should purchase. Show your workings (perhaps in a spreadsheet) and briefly discuss your thought processes in coming to your recommendation. Also briefly discuss the strengths and weaknesses of your analysis.
Please allow about 60 – 90 minutes to complete Step 2.
Grades will be allocated to Assignment Stage 3 (ASS#3) as follows:
Step 1 20%
Step 2 5%
Total 25%
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