Calculation of Payback Period for Investor Return

Calculation of Payback Period for Investor regressexecutive unitingmaryThe report exclusively deals with the Accounting and Financial Management. The report has been divided up into two broad types. The first part deals with the calculations regarding the payback period, honest news report return and break-even analysis. This part of the report likewise explains the various aspects of the kindred. The next one-half of the report is found on the calculations related with the Horizontal and vertical analysis. Further, it also explains the different patterns and trends present in the Income record and Balance Sheet based on the calculations done.IntroductionThe primary objective of accounting in whatever business is to help that business make the maximum profit subsequently tax. Unless accounting makes its unspoiled contribution to that objective, its cost cannot be justified. In directlys industry, one of the ways accounting pays for itself is to help management to mince ope rations. Another way is to help management utilize its working ceiling to the greatest possible advantage.E truly business has important financial concerns and its achievement or failure depends in a large part on the quality of its financial decisions. Effective financial decision making requires an taste of the goal(s) of the faithful. The widely accepted objective of the firm is to maximize the value of firm for its owners, i.e. to maximize shareholders wealth (MAYER, R. et al, 2005).Hence, the accounting and financial management has become an implicit in(p) part of business in the twenty-first century. The concept of payback period, average accounting return, breakeven analysis, trend analysis and vertical analysis are very important for any business, big or small.Discussion2.1 Problem 1A alliance is considering a capital interpret costing 400,000. The sales forecasts, together with the forecast expenditure are shown belowTable 1 sales and Expenditure Forecast yea rSales ()Cost of Sales ()Other unsettled be () pertinacious be except depreciation ()Depreciation ()1200,00060,00020,00030,000100,0002300,00090,00030,00030,000100,0003400,000120,00040,00030,000100,0004300,00090,00030,00030,000100,0001,200,000360,000120,000120,000400,000The above occupation can be formulated in the form of Income Statement as belowTable 2 Income Statement of the Company classs1234Sales200,000300,000400,000300,000Cost of Sales(60,000)(90,000)(120,000)(90,000) vulgar Profit140,000210,000280,000210,000 variable Cost(20,000)(30,000)(40,000)(30,000)Earnings before Fixed Charges120,000180,000240,000180,000Fixed Cost(30,000)(30,000)(30,000)(30,000)Earnings before tax and depreciation90,000150,000210,000150,000Depreciation(100,000)(100,000)(100,000)(100,000) bring in Income-10,00050,000110,00050,0002.1.1 Calculation of Payback period for the ProjectThe payback period for the project is the length of time to get your money back (FABOZZI and PETERSON, 2003). In this probl em, the fellowship has invested 400,000.The carry over below shows the expected cash flows in the four daysTable 3 Expected Cash Flows of the CompanyEnd of YearExpected Cash FlowsAccumulated Cash Flows190,00090,0002150,000240,0003210,000450,0004150,000600,000From the table above, it is clear that at the end of Year 2, the full 400,000 will not be paid back. We need to have whatsoever amount from Year 3 as well. The amount needed from Year 4 will be 400,000 240,000 = 160,000.Hence, the payback period is metric asPayback Period2 long time + 160,000/210,000= 2.762 years= 2 years and 9 months (Approx.)Thus, the Payback period for the connection is 2 years and 9 months.Calculation of the Average Accounting ReturnThe Average Accounting Return (AAR) measures the return on an enthronement, subsequently taxes and depreciation, over a specified period. Mathematically, the ratio is equivalent to the expected average earnings less taxes and depreciation, divided by the average adjudg e value over the duration of the investment.According to table 2 above, we need to find the values ofAverage project earning afterward tax and depreciationAverage wampum Income = Sum of all Net Incomes / No. Of Years= (-10,000 + 50,000 + 110,000 + 50,000) / 5= 50,000Average book value of the investment during its life timeThe depreciation for each year is 100,000. Thus, the yearly book value of investment is given byTable 4 restrain ValuesYearBook Value1400,0002300,0003200,0004100,00050Average book value = Sum of all book values / No. Of years= 400,000 + 300,000 + 200,000 + 100,000 + 0 / 5= 200,000Average Accounting Return (AAR) = 50,000 / 200,000= 0.25Therefore, the Average Accounting Return for the invested 400,000 after taxes and depreciation is 25 %.Break-Even Analysis for the ProjectOne of the most viridity tools used in evaluating the economic feasibility of a new endeavor or product is the break-even analysis. The break-even stopover is the point at which revenue is precisely correspond to costs (HOLLAND, 1998). At this point, no profit is do and no outletes are incurred. The break-even point can be expressed in terms of unit sales or pound sales.That is, the break-even units indicate the train of sales that are required to cover costs. Sales above that lean resolving in profit and sales below that number result in a loss. The break-even sales indicate the pound of gross sales required to break-even. So, a break-even cannot be calculated only once. It should be calculated on a regular basis to reflect changes in costs and prices and in order to maintain profitability or make adjustments in the product line. 1Break-even (Sales) = Total Fixed Cost / (1- Total Variable Cost / Sales)For Year 1,BEP (Sales) = 130,000 / (1- 80,000 / 200,000)= 216,666.67For the Year 2, 3 and 4 also same BEP (Sales) value came due to proportionate change in total rigid cost, total variable cost and sales.This figure is the level of sales that the accompany mu st reach in order to break even. Again, if the company is orbit more than this, then it should be making a profit and if it is not, the company will not be selling enough to cover the fixed expenses.Thus, no profits are made from the sale of product until more than 216,666.67 in gross sales is generated.____________________Source 1, HODGETTS KURATKO,1986.As sales increases, variable costs are incurred, meaning that total costs (fixed + variable) also increase. At low levels of output, costs are greater than income. At the point of crossover (total sales and total cost intersection), costs are exactly equal to income, and hence neither profit nor loss made. This point of intersection is called the Break-even point which is found to be 216,666.67.In the first year, the total sale made by the company is 200,000. But BEP (Sales) is found to be 216,666.67. That means, the company is however short of 16,666.67 in order to make neither profit nor loss i.e. BEP.In the second year, the total sale made by the company is 300,000. Compared to the BEP (Sales) which is 216,666.67 the company is now making profit. And it continues to do that for year 3 and 4 as well.Thus, break-even analysis helps a company to maintain profitability when costs and prices changes.2.2 Problem 2The Horizontal and vertical analyses on financial statements of the geneva Palace Hotel are as followsTable 5 Income Statement (Horizontal Analysis)Income StatementGeneva Palace HotelFor the Years Ending 31 December 2005, 2006 and 20082005% ( 2005-2006)2006% (2006-2007)2007 pabulum Sales Revenue 1,700,5005.26 1,790,0004.00 1,861,600Cost of Goods Sold471,1286.38501,2008.00541,296Gross Profit1,229,3724.831,288,8002.441,320,304 operate ExpensesSalaries and Wages541,65412.36608,6009.00663,374Employee Benefits63,00813.6471,60011.0079,476Laundry Expenses17,0055.2617,9003.5018,527Supplies Expenses52,0893.0953,7003.5055,580Advertising16,8266.3817,9006.0018,974Utilities36,8603.0938,0001.5038,570Mainten ance16,91012.3619,00010.0020,900Other Expenses38,8003.0940,0001.5040,600Total in operation(p) Expenses783,15210.67866,7008.00936,001Income Before Fixed Charges446,220-5.41422,100-8.95384,303Fixed ChargesRent19,4003.0920,0004.0020,800Property Taxes9,4006.3810,0005.0010,500Insurance4,25017.655,00020.006,000 by-line76,0005.2680,0004.0083,200Depreciation19,2004.1720,0004.0020,800Total Fixed Charges128,2505.26135,0004.67141,300Inc