ASS#3

Assignment Stage 3 (ASS#3): Ratio Analysis and Capital Budgeting		CQUniversity Martin Turner ACCT11059 – Using Accounting for Decision Making Zoe De-Witt (S0271932) Due 8th June 2015

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

= -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

 https://docs.google.com/spreadsheets/d/1dqEF8S2v8sOM6hEkLX65tGZl-8W9JFiWieszS3ayEi8/edit?usp=sharing