Assignment
QUESTION I
Temple Ltd is currently considering a programed of expansion through purchase of new plant equipment. Two mutually exclusive investment projects have been identified as potential means of achieving this. The following information has been collected regarding the two projects:
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Project 1
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Project 2
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£
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£
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Initial Investment
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200,000
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150,000
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Expected profit per annum:
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Year 1
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30,000
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10,000
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Year 2
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25,000
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12,000
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Year 3
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25,000
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12,250
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|
Year 4
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22,500
|
25,000
|
|
Year 5
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17,500
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35,000
|
|
Estimated residual value
|
10,000
|
7,500
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Temple Ltd has a scrap 12% cost of capital and its maximum payback period is 4 years. The company uses the straight-line method of depreciation for all fixed assets when calculating net profit. Neither project would affect the working capital of the business.
Required:
i. Calculate the payback period, Accounting Rate of Return and Net Present Value for both projects.
ii. Write a memo to the Board of Temple Ltd advising which project ABC should accept, stating clearly your reasons.
iii. For the project you have chosen as the best investment calculate the Internal Rate of Return and explain what the IRR represents.
Question II
Socrates Ltd has given you the following extracts from its ratio analysis for the year ended 30 June 2011.
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30.6.10
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30.6.11
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Current ratio
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1.9:1
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0.9:1
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Debtor days
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43 days
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58 days
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Net Profit
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6%
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5%
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Creditor days
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66 days
|
60 days
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Interest cover
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12 times
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4 times
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Gearing
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28%
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65%
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Dividend cover
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8 times
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6 times
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Dividend yield
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7%
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2%
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Required:
i. Write a Report to the Managing Director highlighting, giving your reasons, the 4 main areas of concern which he needs to be made aware of and outlining, with reasons what other ratios you would like to have been given.
ii. Discuss the main limitations of relying too heavily on ratios as a method of analysing a company's performance.
Format your assignment according to the following formatting requirements:
i) The answer should be typed, using Times New Roman font (size 12), double spaced, with one-inch margins on all sides.
ii) The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
iii) Also include a reference page. The Citations and references must follow APA format. The reference page is not included in the required page length.