Assignment Stage 3 (ASS#3): Ratio Analysis and
Capital Budgeting
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CQUniversity
Martin
Turner
ACCT11059
– Using Accounting for Decision Making
Zoe
De-Witt (S0271932)
Due 8th
June 2015
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Step 1
Step one requires me to calculate ratios for Silver Chef,
please find attached my excel spreadsheet containing my ratio analysis and
economic profit.
Value is essentially added to a firm when the RNOA is greater
than the cost of capital.
Silver Chefs’s economic
profit for the year ended 30 June 2014 as follows:
= Economic profit
= (RNOA – cost of capital) × NOA
= (9.89% - 10%)× $177,201.0m
= (RNOA – cost of capital) × NOA
= (9.89% - 10%)× $177,201.0m
= -0.11% × $177,201.0m =
-$194,900.0
In this case, Silver Chef’s
RNOA of 9.89% for YE JUN14 is actually less than the 10% cost of capital which
results in a negative number for the firm’s economic profit. This is down from
previous years RNOA, which have all been above the cost of capital resulting in
added value to the firm. This means that
the Silver Chef has been earning less OI for each dollar of NOA in YE JUN14
compared to previous years. This is due to added OL and OA, which is costing
more than what the firm is actually making from revenue.
One insight I have gained from breaking my firm’s financial
statements into bits is the ability to see how economic profit is driven by
particular factors. By breaking our firm into bits we are able to see the
changes over the years, which gives people investing in the share market the
ability to see whether a firm is worth investing in. Breaking the firm into
bits lets us see the important information we need know to see which areas a
firm needs to work on improving.
Step 2
Step two requires me to develop two capital investment plans
for my firm. In the companies recent expedition in expanded to Canada, I
thought it was only fitting to develop another overseas expansion investment
for my firm. I think with the successes Silver Chef have had in Australia,
expanding and branching out overseas is an incredibly smart business decision
creating for themselves a hospitality empire.
Decision one: Expanding into the UK – this would cost 2
million dollars. It is estimated that if Silver Chef get a
return of a minimum cash flow of $250,000 per year, the initial investment will
be paid back in a total of eight years. However, because of varied cash flow
amounts Silver Chef will have a payback period of just over 5 years, making this
a smart and cheap, investment decision.
The payback period would be:
= Initial investment /Cash flow
= 2,000,000/250,000
= 8 years
Decision two: Expanding into the United States of America
(USA) – this initial investment would cost a whopping 4.9 million dollars, a
lot of money, however because of the huge hospitality sector in the USA, it
would provide a lot of the smaller businesses a cheaper alternative for starting
up. This would get a return of minimum, $700,000 per year due to how big the
USA is. Varied cash flows would see the firm having a payback period of just
over 6 years. Although this is quite an expensive investment, and at first
would put the firm back, in the long run, this capital investment could
potentially earn them a lot of money.
The payback period would be:
= Initial investment /Cash flow
= 4,900,000/700,000
= 7 years
SPREADSHEET
SPREADSHEET
