Uses of marginal costing to aid short term decision making.

Financial Analysis

You are working as an intern over the summer, in the Financial Management department of a local plc which operates globally. Your first task is to appraise the following investment and if it proves viable to suggest possible methods of financing the initial cash outflow.

  • Payment of £2.5m at the commencement of the project – December 2015
  • Payment of £2.5 million for further development during 2016

The project is forecast to generate the following income and operational costs:

 

Year Income £ Operational Costs £
2016 0 0
2017 3,000,000 £1.65m
2018 3,500,000 £1.8m
2019 4,000,000 £1.9m
2020 4,500,000 £2m
2021 5,000,000 £1.7m

 

The firm’s cost of capital of 12% p.a. With the exception of the initial investment assume that all costs and revenues arise at the end of each year.

It should be noted that another investment is currently being considered and initial appraisal indicates that it would generate a net present value in 2020 of £ 0.5 million.

Requirements:

  1. Evaluate the viability of the project and the reliability of information on which the net present value is based.

(10 Marks)

  1. Identify which costs and revenues are relevant to the investment decision along with any non-relevant costs, explaining your classification of costs.

(6 marks)

  1. Evaluate the potential sources of finance and the associated risks, for the project with reference to the capital structure and gearing.

(14 marks)

  1. Following your successful operational advice you decide to produce a comparison of the role and responsibilities of a Financial Accountant with those of a Financial Management Analyst to help with your future career planning.

(10 marks)

Now that senior management have decided on the investment project, you begin to investigate techniques and procedures, which you can then apply in effectively managing and controlling financial resources.

 

Requirements:

  1. Prepare some notes which identify the types of costs, with an example of each and the impact on both profit and cash flow.                                                                                                                                                 (10 marks)
  1. Provide a short report on the benefits of budgetary planning, how the budget can then be used as a control tool and potential impact of budgets on management motivation.

(10 marks)

  1. Investigate and report on the uses of marginal costing to aid short term decision making.

(10 marks)

 

 

 

 

 

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