BIZZ201 Accounting for Decision-Making Report Sample
Assessment Task
Work in a group of 3-4 students, to calculate financial information for a given business scenario. Then interpret and analyse these results and explain the role and importance of financial information in business decision making.
Context
Using Financial Statements of companies to perform calculations, interpreting results and analysing them will help you develop understanding about how business decisions are made in the industry considering the available financial information. By completing this assessment, you will demonstrate the importance of financial information in business decision making, including the application of costing and capital budgeting techniques to business decisions.
Instructions
1. Download the provided Excel workbook ‘BIZ201_Assessment_3_Student Workbook’ from the Assessment 3 area on Blackboard.
2. Download the ‘Financial Statements Document’ from the Assessment 3 area on Blackboard. You will use the information contained in this document for the completion of tasks in this brief.
3. Complete the following calculations and tasks for the given business.
TASK 1: CAPITAL BUDGETING
The company wantsto monitor its actual performance of cash flows with the budgeted
performance. The following table provides a summary of the expected increases or decreases from last year’s actual figures:
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a) Calculate the budgeted amounts for:
i) Net Cash Operating Cash Flows
ii) Net Cash Investing Cash Flows
iii) Net Cash Financing Cash Flows
iv) Increase/decrease in Net Cash and Cash Equivalents
v) Cash and Cash Equivalents at the end of the period
b) Calculate the variance between actual and budgeted performance on the provided Excel Workbook within the Task 1 Capital Budgeting worksheet.
c) Indicate whether each one of them isfavourable or unfavourable on the provided Excel Workbook within Task 1 Capital Budgeting worksheet.
d) Comment on company’s approach to prepare budgeted cash flows and make recommendations for future.
TASK 2: CAPITAL INVESTMENT
The company is planning to invest in a new Hotel. The negotiated purchase price of the Hotel is $12,000,000. Other costs incurred on the purchase of the Hotel, including stamp duty and legal fees amounted to $3,000,000. The following table provides a summary of the expected cash inflows and cash outflows for the Hotel over the next 10 years.
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You have been asked to complete the following tasks:
a) Calculate the Net Present Value [NPV] for the investment in the Hotel within Task 2 Capital Investment worksheet. The cost of capital is 8%.
b) Based on your results, make a recommendation for investing into this Hotel and discussthe significance of the results of your analysis. Highlight other practical issues that should be taken into consideration.
A copy of the discount table has been added to assist you in your calculations.
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TASK 3: COST-VOLUME-PROFIT ANALYSIS
The company is planning to hold a luncheon event at a hotel it owns. The selling price for the event is priced at $200. The maximum capacity for the event is 800 people. The associated costs are given below:
Fixed costs $50,000
Variable costs $80 per unit
The owners are seeking your expertise. Calculate the following on Excel workbook within
Task 3 Cost-Volume-Profit Analysis worksheet.
a) Contribution margin
b) Contribution ratio
c) Units required to breakeven
d) Sales revenue required to breakeven
e) Units required to achieve a target profit of $50,000
f) Salesrevenue required to achieve a target profit of $50,000
g) Highlight on the importance of Cost-Volume-Profit analysis and ensure you provide guidance on the maximum available profit for the event.
Solutions
Introduction
This document presents the analysis of the costing, capital budgeting, capital investment and Cost-Volume-Profit analysis from the financial statements taken from the annual report 2021 of the hotel Crown Resorts.
Task1
Capital Budgeting
In order to analyse and comment the company’s approach, we can notice that almost all cash flow results became positive for FY2021 except for operating activities. However, it seems that Crown management team underestimate expectations and they got variances much higher than the expected budget.
Regarding the unfavourable variance from the operating activities, it was expected a decrease of $330 million. This expectation can be related with the Government subsidies and JobKeeper that were presented net of cash receipts and cashflows in payments to suppliers and employees as it is mentioned in the Annual Report page 108.
Looking at the cash flow statement in detail, there were some operating activities which may have influenced for the unfavourable variance such as:
? Borrowing costs went higher in 2021 with a difference of $10.4 million from 2020.
? The Income tax paid in 2021 was $36.3 million more than 2020.
? The decrease in receipts from customers with $653.1 million in comparison with FY2020.
In that order, the approach was not really accurate, and it is necessary proper budgeting resources. Some expenses as the ones listed above, could have been considered in the budgeting performance prediction. On the other hand, the proceeds from sale of property, plant and equipment increased exponentially from $0.1 million in 2020 to $650.5 million in 2021 which automatically generates higher revenue.
With that information obtained from the summary of the expected increases/decreases, we can recommend for the budgeting management department to do it more carefully and realistic, as well as gather information about various operational responsibilities to pay and the revenue they are generating too, because even though the variances were favourable, they went too high, so that means that the company’s approach is less consistent and therefore, harder to make right predictions.
Task 2
Answer a
NPV = $-16,071,205 (Refer Excel Worksheet)
Answer b
Recommendation
Based on the cash flow projection and discounting analysis, it can be concluded that the financial feasibility of investing in the hotel is not viable. The negative net present value of -16,071,205 suggests that the initial investment of $15,000,000 may not yield sufficient cash flow to offset expenses and generate a favourable return on investment (Anthes, 2003). According to the findings of this analysis, it is not recommended to make an investment in this particular hotel.
Based on the updated cash flow projection, it can be inferred that the hotel is anticipated to yield a favourable cash flow amounting to $500,000 annually for the initial four years. Nevertheless, it is anticipated that the hotel will experience a deficit of $8,000,000 in cash flow during its fifth year (Peymankar & Ranjbar, 2021). The observed reduction in numbers is noteworthy and implies a potential issue with either the hotel's management or the demand in the market. Furthermore, the anticipated positive cash flows for the upcoming five-year period are inadequate to counterbalance the substantial negative cash flow in the fifth year (Gaspars-Wieloch, 2019).
Significance of the Result
The present analysis holds significance as it furnishes a quantitative evaluation of the viability of the investment. The Net Present Value (NPV) is a widely utilised metric by investors to assess the profitability of investment while considering the concept of the time value of money (Rich et al. 2018)). A negative net present value (NPV) signifies that the investment is unlikely to generate sufficient revenue to offset the expenses and achieve the anticipated rate of return (A, 2018). Consequently, the financial feasibility of this hotel investment is questionable.
Practical Considerations
One of the foremost pragmatic concerns to contemplate is the hotel's market demand level. The viability of an investment notwithstanding, the decision to invest in a hotel may not be prudent in the absence of sufficient demand. Hence, conducting market research is imperative to ascertain the hotel's potential to allure adequate customers for generating revenue and maintaining its operations (Popovic et al. 2019).
An additional crucial factor to contemplate is the level of competition present within the market. The presence of multiple established hotels in a given area may challenge a new entrant to attract customers and gain a foothold in the market (Zolfani et al. 2018). Under such circumstances, it may be imperative to undertake a competitive analysis to comprehend the market positioning and strategies of the extant hotels within the vicinity to identify a distinctive selling proposition for the novel hotel (Pereira-Moliner et al. 2015). Moreover, the geographical situation of the hotel is a crucial aspect to consider. The likelihood of a hotel attracting customers may increase if it is situated in a location with high traffic or proximity to major attractions. Nonetheless, if the location is situated in a remote or less frequented tourist spot, it could pose a greater difficulty in enticing potential clientele (Popovic et al. 2019).
The hotel's operating costs must also be taken into account. It includes the costs for staffing, maintenance, energy use, and other necessities necessary for running and maintaining the hotel. Investing in the hotel may not be financially viable when operating costs are very high (Pereira-Moliner et al. 2015).
Task 3: “COST-VOLUME-PROFIT ANALYSIS”
The CVP analysis has been performed for the planning of holding the lunch event on the hotel and the total assumption of cost units that will be incurred at the time of initiating the event programmed.
A. Contribution margin
B. Contribution ratio
C. Units required to reach the breakeven point.
D. Sales revenue
E. Units required to achieve a target profit of $50,000.
F. Sales revenue required to achieve a target profit of $50,000.
All analysis is performed on the Excel workbook.
G) Importance of “Cost-Volume-Profit analysis” and the reason that will increase the profit available
The “Cost volume profit analysis” is also termed the break-even analysis which is commonly required for analysing the “breakeven point” of various sales volume and cost stature. Based on the research work of Huiskamp et al. (2022), the identification of the cost and volume stature helps managers in taking strategic financial long-term decisions that are helpful in making their overall growth and expansion possible.
In simple terms it is used by managers and analysts as way of predicting the changes under the firm financial position with the overall changes in sales quantity, fixed costs, sales price, variable costs, and sales mix of the company. As per the reference of Fodhil et al. (2019), CVP analysis is essential important as it is used to understand the impact of various levels of activity on the outcomes of the financial reporting.
Conclusion
The analysis findings suggest that the financial feasibility of investing in the hotel is questionable due to the negative net present value. Although the projected cash inflows for the first four years are promising, the predicted sizable cash outflow in the fifth year presents a significant obstacle. In addition, it is necessary to consider pragmatic factors such as the level of demand in the market, the level of competition, the geographical location, and the expenses associated with operations before arriving at an investment determination. A thorough examination of these factors is imperative to ascertain the feasibility of investing in the hotel.
References
A, K. (2018). Critical analysis of the concept of net present value of investments projects, (4), 119–125. https://doi.org/10.26425/1816-4277-2018-4-119-125
Anthes, G. H. (2003). Net present value. Computerworld, 37(7), 30–30.
Fodhil, F., Hamidat, A. and Nadjemi, O., 2019. Potential, optimization and sensitivity analysis of photovoltaic-diesel-battery hybrid energy system for rural electrification in Algeria. Energy, 169, pp.613-624.
Gaspars-Wieloch, H. (2019). Project net present value estimation under uncertainty. Central European Journal of Operations Research, 27(1), 179–197. https://doi.org/10.1007/s10100-017-0500-0
Huiskamp, U., ten Brinke, B. and Kramer, G.J., 2022. The climate resilience cycle: Using scenario analysis to inform climate?resilient business strategies. Business Strategy and the Environment, 31(4), pp.1763-1775.
Pereira-Moliner, J., Font, X., Tarí, J. J., Molina-Azorin, J. F., Lopez-Gamero, M. D., & Pertusa-Ortega, E. M. (2015). The Holy Grail: Environmental management, competitive advantage and business performance in the Spanish hotel industry. International Journal of Contemporary Hospitality Management. https://doi.org/10.1108/IJCHM-12-2013-0559
Peymankar, M., & Ranjbar, M. (2021). Maximizing the net present value in project scheduling under periodic inflation. Asia - Pacific Journal of Operational Research, 38(4). https://doi.org/10.1142/S0217595920500578
Popovic, G., Stanujkic, D., & Karabasevic, D. (2019). A framework for the evaluation of hotel property development projects. International Journal of Strategic Property Management, 23(2), 96-107. https://doi.org/10.3846/ijspm.2019.7435
Rich, S. P., Rose, J. T., & Delaney, C. J. (2018). Net present value analysis in finance and real estate: a clash of methodologies. Journal of Real Estate Portfolio Management, 24(1), 83–94.
Zolfani, S. H., Pourhossein, M., Yazdani, M., & Zavadskas, E. K. (2018). Evaluating construction projects of hotels based on environmental sustainability with MCDM framework. Alexandria engineering journal, 57(1), 357-365. https://doi.org/10.1016/j.aej.2016.11.002
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