Finance and Marketing

Scenario D

Finance Assessment Task-2

Name : Sankeerthan Kasa Student ID :

32066531

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Table of Contents
Introduction......................................................................................................................................2
Answer 1..........................................................................................................................................2
Finance Accounting.........................................................................................................................2
Management Accounting.................................................................................................................2
Responsibilities of Finance Director...........................................................................................3
Answer 2..........................................................................................................................................3
Risk and Return...........................................................................................................................3
Time Value of Money..................................................................................................................4
Answer 3..........................................................................................................................................4
a) Contribution..........................................................................................................................4
b) Break-even point...................................................................................................................5
Safety of Margin......................................................................................................................5
c) Profit target at the estimated number of Units.....................................................................6
d) Report on the state of the economy revised..........................................................................6
Answer 4..........................................................................................................................................7
i) Payback Period.....................................................................................................................7
a) Product revenue on an annual basis..................................................................................7
b) Total financial inflows calculation....................................................................................8
ii) NPV......................................................................................................................................8
Answer 5..........................................................................................................................................9
NPV.............................................................................................................................................9
Advantages of NPV.................................................................................................................9
Disadvantages of NPV...........................................................................................................10
Payback Period Method.............................................................................................................10
Advantages of Payback Period..............................................................................................10
Disadvantages of Payback Period..........................................................................................10

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Conclusion.....................................................................................................................................11
References......................................................................................................................................11

Introduction
Manufacturing has begun at Sheffield Aerospace Materials, which is also contemplating the
introduction of a new product as part of its expansion strategy. Additionally, the company will be
required to make an initial financial investment in order to cover all of the production expenses
that are associated with bringing this product to market (Xie, 2021). The corporation needs to
give serious consideration to both the positive and negative aspects of the initiative because of
the high risks involved and the possibility of losing funds. When it comes to evaluating
investments, the NPV and PP are two of the most often utilised measures by management
organisations. The management may also include a break-even analysis in the evaluation, in
addition to other measurements that are straightforward to obtain.

Answer 1

Finance Accounting
The purpose of financial accounting is to record and keep track of all business transactions in
order to provide stakeholders with financial statements that are accurate and comprehensive at
regular intervals (Scarpellini et al., 2020). These statements are necessary in order to arrive at an
accurate assessment of the financial health and performance of a company. Accounting standards
are one example of a system for financial reporting that management adheres to in order to
guarantee that their reports are consistent and easy to compare with these of other organisations.

Management Accounting
The goal of management accounting, often known as cost accounting, is to help managers make
better decisions by giving them a clearer picture of the company's cost structure. In order to
maximise the efficiency and effectiveness of a business, this process entails examining data
pertaining to finances and costs (Shukla et al., 2020). Management accounting reports, in
contrast to financial accounting reports, are not shared with other parties and are used

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exclusively inside. In order to keep costs down and revenues up, businesses use a wide variety of
cost management tactics. Some examples are normal costing and budgeting. Organisational
performance is further improved by the use of various cost management approaches.

Responsibilities of Finance Director

Every organisation has different rules about what Financial Directors must do. Their
responsibilities include overseeing the company's cash flow, financial reporting, and the
fulfilment of all financial obligations (Geddes & Schmidt, 2020). Financial Directors must
diligently keep tabs on tax legislation, accounting standards, and legal requirements in order to
execute their tasks. An organization's financial health and resilience in the face of financial
difficulties are highly susceptible to changes in these areas. Financial Directors, in order to
guarantee efficient financial management, must continually deepen their knowledge of the
unique regulatory requirements that apply to their industry. The responsibilities of the company's
Financial Director are as follows:

 Collaborating with other departments to support business goals.

 Managing investments.
 Creating financial forecasts.
 Implementing strategies to reduce costs.
 Analysing market trends.
 Ensuring regulatory compliance
 Managing cash flow.
 Evaluating risks.
 Overseeing financial reporting.

Answer 2

Risk and Return

In making investment decisions, the link between return and risk is extremely important for
companies.

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 • Returns are the expected monetary benefits of an investment. Returns on investment in a
company may be realised in the form of dividends or capital appreciation, which refers to
the rise in the value of the invested shares (Weber, 2021).
• Opposite these anticipated gains is the degree of uncertainty that is embodied by risk. For
example, it includes the possibility of a steep fall in the value of the bought equities,
leading to heavy losses.
• The returns represent the earnings that a business expects to receive from selling its
recently introduced goods to customers (Knoke et al., 2020).
• In other words, it encapsulates the possibility that a company would suffer losses if it is
unable to sell sufficient quantities of units to satisfy its profit targets.

Time Value of Money

This theory emphasises the gradual depreciation of currency, which is predominantly assigned to
variables such as inflation (Papazian, 2023). As a result, the purchasing power of a particular
quantity progressively decreases by successive periods. Consequentially, neglecting to allocate
idle funds results in the loss of prospective profits, highlighting the importance of investing
presently in order to take advantage of existing prospects.

Answer 3
A number of calculations need to be made in order to use the break-even analysis in business.
This involves calculating the contribution margin per unit and identifying the fixed costs. The
break-even point, denoting the smallest quantity of units that must be sold to offset all expenses,
can be ascertained with the help of this information.

a) Contribution
Particulars Amount
(£)

Selling price per unit 525

Less the cost of variable per unit

Direct material cost of the product 295

Contribution (per unit) 230

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The contribution of a unit is the profit that is left over after variable costs are taken out of the
sales price of one thing. Setting a starting price for a product can be helped by this knowledge.
The contribution margin per unit also shows how much of the fixed costs are paid by each sale.

b) Break-even point
The contribution per unit is the profit that is left over after variable costs are taken out of the
sales price of one thing. Setting a starting price for a product can be helped by this knowledge.
The contribution margin per unit also shows how much of the fixed costs are paid by each sale.

Break-even point in units = Total fixed costs of the product /Contribution

= (475000 + 195000)/ 230

= 2913 units

Break-even point = Break-even point in units * Selling price

= 2913 x 525 = £1529325

Therefore, 2913 units are needed to break even, which comes to £1529325.

Safety of Margin
Safety of Margin = Current sales unit – break-even units

= 3500 - 2913

= 587 Units

Safety of Margin = Margin of safety units * Selling price per unit

= 587 * 525

= £308175

So, the safety margin is 587 units, which means the sales value is £308175.

Note: The values are calculated as pounds.

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c) Profit target at the estimated number of Units
Particulars Amount

Sales (3500 units * £525 per unit) 1837500

Less the cost of variable

Direct material cost (3500 units * £295 per unit) 1032500

Contribution 805000

Less the fixed costs

Selling cost of the product 475000

Admin cost of the product 195000

Expected profit from the product 135000

Hence, the expected profit from 3,500 units is 135,000.

d) Report on the state of the economy revised

Particulars Amount

Non-current assets

Land and building (750000 + 9750000) 10500000

Vehicles 320000

Total Non-current assets 10820000

Current assets

Stock 1345000

Trade receivables 550000

Cash 2250000

Total Current assets 4145000

Total assets 14965000

Current liabilities

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 Trade payables (1945000+470000) 2415000

Total Current liabilities 2315000

Non-current liabilities

Bank loan (4000000 +145000) 4145000

Total Non-current liabilities 4145000

Capital and reserves

Shares 1000000

Retained profits 7270000

Total Capital and reserves 8270000

Total liabilities 14965000

Answer 4

i) Payback Period
PP = Initial investment of the product / Profit target

Profit target = {Estimated sales values x contribution per unit}-Selling cost

Payback Period =550000/135000

=4 years

a) Product revenue on an annual basis

Particulars 1 2 3 4 5 6

Total revenue 183750 1837500 1837500 183750 1837500 1837500

0 0

Less: direct costs 103250 1032500 1032500 103250 1032500 1032500

0 0

Selling costs 475000 475000 475000 475000 475000 475000

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Admin costs 195000 195000 195000 195000 195000 195000

Cash inflows 135000 135000 135000 135000 135000 135000

b) Total financial inflows calculation

Year Cash Cumulative cash
inflows inflows

Year 1 135000 135000

Year 2 135000 135000+270000

Year 3 135000 135000+405000

Year 4 135000 135000+540000

Year 5 135000 135000+675000

Year 6 135000 810000

ii) NPV
Year Cash PVF @ 8% Present value
inflows

1 Year 135000 0.926 125010

2 Year 135000 0.857 115695

3 Year 135000 0.794 107190

4 Year 135000 0.735 99225

5 Year 135000 0.681 91935

6 Year 135000 0.630 85050

Total values of cash inflows 624105

Less the total initial cash outflow 550000

NPV 74105

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This table appears to detail a cash flow analysis over a span of six years, listing cash inflows for
each year alongside their present value factors (PVF) calculated at an 8% discount rate. The
present value represents the current worth of future cash inflows when discounted at the given
rate. The 'Cash inflows' column indicates the anticipated cash amounts expected in each
respective year. Each year's cash input is calculated to have a present value using the present
value factor, which is shown in the 'PVF @ 8%' column. The 'Present value' column shows the
cash input for each year multiplied by its matching PVF, which is the computed present value.
The 'Total values of cash inflows sums up the present values of all cash inflows across the six
years, resulting in a total of 624,105. The 'Total initial cash outflow likely represents an initial
investment or expenditure of 550,000. Finally, the NPV is derived by subtracting the total initial
cash outflow from the total present value of cash inflows. In this case, the NPV is 74,105,
indicating the net value generated by the project after considering the initial investment and
future cash inflows discounted at 8% over six years. A positive NPV typically suggests the
project is financially viable and could yield positive returns.

Answer 5

NPV
Net Present Value is a method that capital budgeting professionals use to determine if an
investment or project is financially viable (Chang, 2023). The process involves adding up all of
the money that is expected to come in and go out. The total net present value of these cash flows
is determined by factoring in the time value of money. Incorporating the time value of money
into this evaluation requires the use of the discounted rate, commonly called the necessary rate of
return.

Advantages of NPV
The period-end cash flow reduction is calculated using capital expenditures. Cost of capital and
estimated risk are included when calculating net present value. Cash flow predictions 10 years
out are more uncertain than yearly forecasts. Shorter time periods are better for forecasting future

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free cash flows using the net present value method. ROI possibilities are assessed. Mixing the
discount rate and risk premium can account for project risk.

Disadvantages of NPV
An organization's ability to make reliable predictions about future capital expenditures is the
main obstacle to using the net present value approach. Underestimating investment costs or
making inaccurate capital cost estimates might result in less-than-ideal expenditure choices due
to the inherent uncertainty. The act of underestimating may result in investments being allocated
to projects of inferior quality, whereas overestimating may present numerous profitable
prospects, albeit at a considerable financial burden (Hutahayan, 2020). This approach fails to
account for concealed expenditures such as research and development expenses and encounters
difficulties when initial investments fluctuate, which present substantial obstacles when
attempting to compare divers alternatives.

Payback Period Method

The computation of cumulative cash inflows over different time periods is an essential
component of this investment assessment procedure. The time required for an investment to
recoup its initial investment is then calculated using these cash inflows.

Advantages of Payback Period

The investment's payback period may be simply determined. The time required to complete this
work by the management team is minimal. Corporate losses are minimised by selecting
investments with a shorter payback period utilising this method.

Disadvantages of Payback Period

Even small changes in labour or maintenance prices might affect profitability and ROI. This
technique ignores business liquidity and solvency issues temporarily. The payback period
method ignores money value fluctuations (Fortaleza et al., 2020). Capital planning is inaccurate
as it ignores cost of capital and financial inflows beyond the repayment period.

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Conclusion
The preceding data shows that management's product introduction was good for the company's
finances. This conclusion is based on investment appraisal methods like Payback Period and Net
Present Value. The product has a short payback period, indicating a quick return on investment.

References
 Chang, K. P. (2023). Internal Rate of Return, Profitability Index and Payback Period
Methods. In Corporate Finance: A Systematic Approach (pp. 59-69). Singapore:
Springer Nature Singapore. https://doi.org/10.1007/978-981-19-9119-6_6
 Fortaleza, E. L. F., Neto, E. P. B., & Miranda, M. E. R. (2020). Production optimization
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