Divisional Profit Measurement (collin)-examples

Solution of Pb 20.14 (5ed) and Pb 20.27(6th ed) Current Budgeted ROCE =

Return / Capital Employed (330 / 1,155) x 100 28.57 %

Capital employed = SHE + Total Liab Capital employed = Total assets

OR

W-1: Capital Employed: 1 Net Current assets 2 Net Fixed Assets: Cost of Fixed assets Less: Accumulated dep Capital Employed

375 1,500 (720)

780 1,155

Required a) Suggestion for 4 transactions: Transaction A: Profit decrease by 8,000 due to cash discount given to customer. Revised ROCE =

Return / Capital Employed (322 / 1,125) x 100 28.62 %

Return: Budgeted profit Less: Cash discount

330 (8) 322

Capital Employed: Net Current assets Budgeted Net current asset Less; decrease in debtors Net Fixed Assets: Cost of Fixed assets Less: Accumulated dep Capital Employed

1,500 (720)

Transaction B: Revised ROCE =

Return / Capital Employed (345 / 1,195) x 100 28.87 %

Return: Budgeted profit add: Increase in contribution

330 15 345

Capital Employed: Net Current assets Budgeted Net current asset Add: Increase in stock Net Fixed Assets: Cost of Fixed assets Less: Accumulated dep Capital Employed

Transaction C: Revised ROCE =

Return / Capital Employed (320 / 1,095) x 100

29.22 % Return: Budgeted profit Less: Loss due to sale of fixed asset Less: Reduction in profit add: Reduction in depreciation b/c asset is sold RETURN

Loss on sale of fixed assets: Cost of fixed asset Less: Accumulated depreciation (300,000 x 4/5) Written Down Value Sold at Loss on sale of FA

Capital Employed: 330 Net Current assets (25) Budgeted Net current asset (45) Net Fixed Assets: 60 Cost of Fixed assets 320 Less: Accumulated dep Capital Employed Assumption: Cash received from sale of asset is remitted to 300,000 HO, that is why there is no impact on increase of cash on net current asset.(Book) because, (240,000) Cash is normally hold at head office. 60,000 35,000 25,000

Transaction D: Revised ROCE =

Return / Capital Employed (347 / 1,299) x 100 26.67 %

Return: Budgeted profit add: Decrease in revenue cost (Inc in CM) less: Increase in depreciation (180 / 5 y)

Assumption: Cash paid on purchase on asset is provided by

Capital Employed: 330 Net Current assets 52.50 (36) Fixed Asset: 347 Cost of Fixed asset (1,500+180) Less: Accumulated dep (720 + 36)

HO, that is why there is no impact on decrease of cash on net current asset.(Book)

Required no. 2: Evaluation of 4 non - routine transactions are in the best interest of group: Transaction Year

A

Cash Inflow

1

Cash outflow

30

Net Cash Flow

PV factor NPV 15%

(8)

22 (8)

0.8696 1.9854 NPV

19.1312 (15.8832) 3.2480

(8) (8) (8) (8)

22 (8) (8) (8)

0.8696 0.7561 0.6575 0.5718

19.1304 (6.0491) (5.2601) (4.5740) 3.2471

2-4 OR A

1 2 3 4

30 -

Rs. 30 inflow cash is due to decrease in account receivable in year 01 and decrease of Rs 8 is due to cash discount given to customer. Transaction Year

Cash Inflow

Cash outflow

Net Cash

PV factor NPV

Flow B

1 2-4

15 15

(40)

15% (25) 15

0.8696 1.9854 NPV

(21.7400) 29.7810 8.0410

Increase in contribution margin per year and Increase in stock in first year,resulting decrease in cash

1 2 3 4

Transaction Year

15 15 15 15

Cash Inflow

C

1

35

(40) -

Cash outflow

(45)

(25) 15 15 15

Net Cash Flow 35 (45)

0.8696 0.7561 0.6575 0.5718

(21.7391) 11.3422 9.8627 8.5763 8.0421

PV factor NPV 15% 1.0000 0.8696 NPV

35.0000 (39.1320) (4.1320)

Sale of asset is made at the start of the year. On time line diagram the value of the year is zero at the start of the year as well PV factor is 01. The profit reduce after one year that is why it is taken at 0.8696 (discounted value)

Transaction Year

D

Cash Inflow

1- 5

Cash outflow

1 2 3 4 5

52.50 52.50 52.50 52.50 52.50

PV factor NPV 15%

(180)

(180) 52.50

1.0000 3.3520 NPV

(180.0000) 175.9800 (4.0200)

(180) -

(180) 52.5000 52.5000 52.5000 52.5000 52.5000

1.0000 0.8696 0.7561 0.6575 0.5718 0.4972

(180.0000) 45.6522 39.6975 34.5196 30.0170 26.1018 (4.0119)

52.50

0

Net Cash Flow

CONCULSION: Transaction A and B yeild positive NPV, therefore it will be undertaken Transaction C and D yeild negative NPV, therefore it will be rejected.

375 (30)

345

780 1,125

375 40

1,500 (720)

415

780 1,195

375

1,200 (480)

720 1,095

ale of asset is remitted to is no impact on increase asset.(Book) because, at head office.

,500+180) ep (720 + 36)

375

1,680 (756)

924 1,299

Solution of Ques. 20.18 (5th ed) + 20.19(6th ed) Aromatic Plant: Particulars

2001

Net Cash in flow, before tax (in M) Less: Depreciation (6.4 / 4)

2002

2003

2004

2.4 (1.6)

2.4 (1.6)

2.4 (1.6)

2.4 (1.6)

Net Profit before I/ Tax(Accounting Profit) Less: Cost of Capital (16%) of WDV

0.8 (1.02)

0.8 (0.77)

0.8 (0.51)

0.8 (0.26)

Residual Income (DCF Profit)

(0.22)

0.03

0.29

0.54

2.4

2.4

2.4

2.4

(1.60) (1.02) (2.62)

(1.60) (0.77) (2.37)

(1.60) (0.51) (2.11)

(1.60) (0.26) (1.86)

(0.22)

0.03

0.29

0.54

Calculation of WDV of Aromatic Plant Cost / WDV of aromatic plant Less: Depreciation expenses

6.4

6.4 (1.6)

4.8 (1.6)

3.2 (1.6)

WDV at the Opening of the year

6.4

4.8

3.2

1.6

12.50 %

16.67 %

25.00 %

50.00 %

Summary: Benefit obtain from Aromatic plant Less: Cost on Aromatic Plant a) depreciation cost b) Cost of investment Total Cost Net Result

WDV means Capital Employed. RETURN ON CAPITAL EMPLOYED:

ROCE = Net Income / Capital Employed

Capital Employed = Net Current asset + BV of fixed asset

Zomin Plant: Particulars Net Cash in flow, before tax (in M) Less: Depreciation (5.2 / 4)

2001

2002

2003

2004

2.6 (1.3)

2.2 (1.3)

1.5 (1.3)

1.0 (1.3)

1.3 (0.83)

0.9 (0.62)

0.2 (0.42)

(0.3) (0.21)

0.47

0.28

(0.22)

(0.51)

Calculation of WDV of Aromatic Plant Cost / WDV of aromatic plant Less: Depreciation expenses

5.2

5.2 (1.3)

3.9 (1.3)

2.6 (1.3)

WDV at the Opening of the year

5.2

3.9

2.6

1.3

25.00 %

23.08 %

7.69 %

(23.08) %

Net Profit before I/ Tax Less: Cost of Capital (16%) of WDV Residual Income

RETURN ON CAPITAL EMPLOYED: ROCE = Net Profit / WDV ROCE = Net Income / Capital Employed

Capital Employed = Net Current asset + BV of fixed asset

Total 9.6 (6.4) 3.2 (2.56) 0.64

Total 7.3 (5.2) 2.1 (2.08) 0.02

Aromatic PV of Cash outflow PV of Cash inflow

-6.4

1

-6.4

2.4 2.4 2.4 2.4

0.86 0.74 0.64 0.55

2.07 1.78 1.54 1.33 315,634