Calculation of Payback Period for Investor Return

Calculation of Payback Period for Investor publicationExecutive SummaryThe line exclusively deals with the Accounting and Financial Management. The report has been carve up into two broad types. The first part deals with the calculations regarding the payback check, reasonable accounting return and break-even analysis. This part of the report too explains the various aspects of the same. The next half of the report is based on the calculations related with the Horizontal and vertical analysis. Further, it also explains the different patterns and trends present in the Income contestation and Balance Sheet based on the calculations done. fundamentThe primary objective of accounting in any business is to help that business make the maximum profit after tax. Unless(prenominal) accounting makes its full voice to that objective, its apostrophize cannot be justified. In todays industry, one of the ways accounting pays for itself is to help circumspection to control operations. Ano ther way is to help management utilize its working capital to the greatest possible advantage.Every business has important financial concerns and its success or failure depends in a round part on the quality of its financial decisions. Effective financial decision making requires an understanding of the goal(s) of the firm. The widely accepted objective of the firm is to maximize the respect of firm for its owners, i.e. to maximize shareholders wealth (MAYER, R. et al, 2005).Hence, the accounting and financial management has become an integral part of business in the twenty-first century. The concept of payback period, average accounting return, breakeven analysis, trend analysis and vertical analysis are very important for any business, big or small.Discussion2.1 Problem 1A company is considering a capital envision costing 400,000. The exchanges forecasts, together with the forecast expenditure are shown below shelve 1 Sales and spending Forecast divisionSales ()Cost of Sale s ()Other variable costs ()Fixed costs except depreciation ()Depreciation ()1200,00060,00020,00030,000100,0002300,00090,00030,00030,000100,0003400,000120,00040,00030,000100,0004300,00090,00030,00030,000100,0001,200,000360,000120,000120,000400,000The to a higher place problem can be formulated in the form of Income Statement as belowTable 2 Income Statement of the Companytwelvemonths1234Sales200,000300,000400,000300,000Cost of Sales(60,000)(90,000)(120,000)(90,000) realise Profit140,000210,000280,000210,000Variable Cost(20,000)(30,000)(40,000)(30,000)Earnings ahead Fixed Charges120,000180,000240,000180,000Fixed Cost(30,000)(30,000)(30,000)(30,000)Earnings before tax and depreciation90,000150,000210,000150,000Depreciation(100,000)(100,000)(100,000)(100,000)Net Income-10,00050,000110,00050,0002.1.1 Calculation of Payback period for the ProjectThe payback period for the project is the length of time to get your money back (FABOZZI and PETERSON, 2003). In this problem, the company has invested 400,000.The table below shows the expected cash flows in the four old ageTable 3 Expected Cash Flows of the CompanyEnd of YearExpected Cash FlowsAccumulated Cash Flows190,00090,0002150,000240,0003210,000450,0004150,000600,000From the table above, it is clear that at the end of Year 2, the full 400,000 will not be paid back. We need to have some amount from Year 3 as well. The amount needed from Year 4 will be 400,000 240,000 = 160,000.Hence, the payback period is calculated asPayback Period2 years + 160,000/210,000= 2.762 years= 2 years and 9 months (Approx.)Thus, the Payback period for the company is 2 years and 9 months.Calculation of the Average Accounting ReturnThe Average Accounting Return (AAR) measures the return on an enthronization, after taxes and depreciation, over a specified period. Mathematically, the ratio is equivalent to the expected average earnings less taxes and depreciation, divided by the average ledger value over the duration of the investment.Ac cording to table 2 above, we need to find the values ofAverage project earning after tax and depreciationAverage Net Income = Sum of all Net Incomes / No. Of Years= (-10,000 + 50,000 + 110,000 + 50,000) / 5= 50,000Average book value of the investment during its life timeThe depreciation for each year is 100,000. Thus, the yearly book value of investment is given byTable 4 Book determineYearBook Value1400,0002300,0003200,0004100,00050Average book value = Sum of all book values / No. Of years= 400,000 + 300,000 + 200,000 + 100,000 + 0 / 5= 200,000Average Accounting Return (AAR) = 50,000 / 200,000= 0.25Therefore, the Average Accounting Return for the invested 400,000 after taxes and depreciation is 25 %.Break-Even abstract for the ProjectOne of the most common tools used in evaluating the economic feasibility of a new enterprise or product is the break-even analysis. The break-even load is the point at which revenue is exactly friction match to costs (HOLLAND, 1998). At this po int, no profit is made and no losses are incurred. The break-even point can be expressed in terms of unit sales or pound sales.That is, the break-even units indicate the level of sales that are required to cover costs. Sales above that number result in profit and sales below that number result in a loss. The break-even sales indicate the pound of gross sales required to break-even. So, a break-even cannot be calculated only once. It should be calculated on a regular basis to reflect changes in costs and prices and in order to maintain profitability or make adjustments in the product line. 1Break-even (Sales) = Total Fixed Cost / (1- Total Variable Cost / Sales)For Year 1,BEP (Sales) = 130,000 / (1- 80,000 / 200,000)= 216,666.67For the Year 2, 3 and 4 also same BEP (Sales) value came due to proportionate change in total fixed cost, total variable cost and sales.This figure is the level of sales that the company must reach in order to break even. Again, if the company is reaching mor e than this, then it should be making a profit and if it is not, the company will not be selling enough to cover the fixed expenses.Thus, no profits are made from the sale of product until more than 216,666.67 in gross sales is generated.____________________Source 1, HODGETTS KURATKO,1986.As sales increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, costs are greater than income. At the point of intersection (total sales and total cost intersection), costs are exactly equal to income, and hence neither profit nor loss made. This point of intersection is called the Break-even point which is found to be 216,666.67.In the first year, the total sale made by the company is 200,000. But BEP (Sales) is found to be 216,666.67. That means, the company is still short of 16,666.67 in order to make neither profit nor loss i.e. BEP.In the atomic number 16 year, the total sale made by the company is 300,000. Compared to the BEP (Sales) which is 216,666.67 the company is now making profit. And it continues to do that for year 3 and 4 as well.Thus, break-even analysis helps a company to maintain profitability when costs and prices changes.2.2 Problem 2The Horizontal and vertical analyses on financial statements of the Geneva Palace Hotel are as followsTable 5 Income Statement (Horizontal Analysis)Income StatementGeneva Palace HotelFor the Years Ending 31 December 2005, 2006 and 20082005% ( 2005-2006)2006% (2006-2007)2007Food Sales Revenue 1,700,5005.26 1,790,0004.00 1,861,600Cost of Goods Sold471,1286.38501,2008.00541,296Gross Profit1,229,3724.831,288,8002.441,320,304Operating ExpensesSalaries and Wages541,65412.36608,6009.00663,374Employee Benefits63,00813.6471,60011.0079,476Laundry Expenses17,0055.2617,9003.5018,527Supplies Expenses52,0893.0953,7003.5055,580Advertising16,8266.3817,9006.0018,974Utilities36,8603.0938,0001.5038,570Maintenance16,91012.3619,00010.0020,900Other Expenses38,8003.0940,000 1.5040,600Total Operating Expenses783,15210.67866,7008.00936,001Income Before Fixed Charges446,220-5.41422,100-8.95384,303Fixed ChargesRent19,4003.0920,0004.0020,800Property Taxes9,4006.3810,0005.0010,500 restitution4,25017.655,00020.006,000Interest76,0005.2680,0004.0083,200Depreciation19,2004.1720,0004.0020,800Total Fixed Charges128,2505.26135,0004.67141,300Inc