Finance & Accounting
Pages 10 (2510 words)
Finance for Managers Jones Limited Given details can be summarised as per the following. Annual turnover -- ?4,000,000 Annual profit before tax -- ?750,000 Development costs of “Points North”-- ?25,000 New Investments Sought in capital equipments -- ?250,000 Annual production capacity – 5,000 units Equipment life – 5 years Revenue and Cost Details are as per the following.
Break Even Analysis No. of units of production required to break even in a year is given as, Contribution per unit of sale= (Sales price per unit - variable cost labour per unit - variable cost of material per unit) = 95-35-10= ?50 Breakeven production in units = Fixed cost/ contribution per unit = 125,000/50 = 2500 or at 50 % of the total production. Assuming that Jones ltd. is able to sell 5000 units in a year as mentioned in the report, earnings before interest, taxation, depreciation and amortization can be calculated as Total revenue- total variable cost-total fixed cost = (95?5,000) - (45?5,000) -125,000 = 125,000 Thus, per year earnings ?125,000 Answer 2. Capital Investment Appraisal Analysis Payback period for the investment of ?250,000 needed to generate the earnings of ?125,000 Thus, will be 250,000 ? 125,000 = 2 years In another approach, Net Present Values of Profit Streams to be received in next 3 years and 5 years can be calculated to see if they are positive. New investment needed is ?250,000. If the same debt/equity ratio for financing the project i.e 50% each is considered then debt burden will be ?125,000 and that will incur 8% interest charge. The interest charge comes to ?10,000. ...