Step 7€¦ · Web view2019. 6. 9. · Assessment 2: Steps 7-10. Emillee Bagnall. S0287147. CQUniveristy. Step 7. This step involved identifying three products for Automotive Holdings

Assessment 2: Steps 7-10Emillee Bagnall

S0287147CQUniveristy

Step 7This step involved identifying three products for Automotive Holdings Group (AHG), estimating their selling price, variable costs and contribution margin.

The three products I have chosen are the Mazda 6 with an estimated price of $36,000, the Holden Colorado Ute estimated price of $50,000 and the Mercedes Benz C43 estimated price of $110,000. I decided to choose three vehicles from different price ranges to spread out the results. I have estimated these costs according to various internet selling prices as AHG list varied prices, so I have gone with rough estimations.

Fixed cost and variable cost are a little different to each other, fixed costs are costs that are there no matter what and they need to be paid no matter what. Whereas, variable costs are the costs associated with a product and they vary depending on the amount of product sold. For this step I chose to use a variable rate of 70% for all the products. I chose this because AHG does not show its variable costs as most company’s would. I also watched Marias video and for grocery items she used 90% though I didn’t feel that these were as high a volume product, so I went for a lower percentage.

Contribution margin (CM) is the difference between sales revenue (S) and variable costs (VC), the equation for this is CM= S – VC. The contribution margin funds go onto cover fixed costs and add to profits. If a product has a negative contribution margin that means it is taking more from the firm than what it is making in sales to cover fixed costs and add to profit. Though if the contribution margin is too high the product might be too expensive and therefore you will lose business for that product. Contribution margins can help discover demand for a product, on whether

they need to make more because it is in high demand or not. Though resource constraints may affect these decisions.

Selling Price Variable Costs Contribution Margin

Mazda 6 $36,000 $25,200 $10,800Holden Colorado Ute

$50,000 $35,000 $15,000

Mercedes Benz C43

$110,000 $77,000 $33,000

*These numbers are not exact and are purely for the purpose of this assessment*

By looking at the contribution margins for these products it can be seen that the Mercedes Benz produces the highest of the three. This is positive, though this would be a car that few people could afford to own and therefore more of the other two would be sold. That would be a big reason why car dealership sells a variety of different makes and models of car, so that people can choose a car to suit their price range. If they only sold the car with the biggest contribution margin, yes, they would be making a lot on their contribution margin when they sell a car though they would probably not sell as many as if they had a variety.

There are a few constraints that AHG faces these include resource and market constraints. The resource constraints would be thing such as the time it takes for imported cars to get to Australia, whether manufacturers are also selling to other dealerships which may lower the number of cars they receive to sell and how much inventory the importers can hold. There is also the resource constraint of the materials to manufacture the car and whether there is enough, if there is a shortage of the materials that would lead to a shortage of vehicle. The other major constraint are the market constraints these include how well the Australian dollar is doing at a certain point in time, which leads to how well the economy is doing and whether people can afford to purchase a new vehicle. Finally, there is the competition on the market and new entrants to the market such as the hybrid cars and soon electronic and driverless cars.

Step 8- RatiosProfitability Ratios:The net profit margin is basically how much profit the company is getting so per $1 of sales how much is being turned into profit. The equation for this is Net Profit divided by the sales. For AHG the net profit margin is 0.6% in 2018, 1% in 2017, 1.7% in 2016 and 1.8% in 201. So AHG has seen a steady decline in its profit margin of 1.2%. I feel that this is not good as a company probably wants to see a bigger profit margin, though I guess it means they can work their way back up.

Return on assets is pretty similar to net profit margin as it is basically for every $1 of assets how much is being turned into net profit. The equation for this is Net Profit divided by the total Assets. So again, AHG has seen a decline over the years from 4.8%, to 4.5%, to 2.6% and 1.4% in 2015, 2016, 2017 and 2018 respectively. AHG doesn’t seem to have a very high return on its assets, this doesn’t seem good for AHG as this number should probably be going up, just as their net profit margin should be going up not down.

Efficiency Ratios:Days of inventory is just how many days is it taking for inventory to sell, I feel that this number should be small which would mean they are turning over a lot of product. The equation for this is the Inventory divided by the daily cost of goods sold. AHGs days of inventory ratio has gone up steadily in the past for years from 68.43 in 2015 to 81.64 so it is now taking around 13 days more to sell its stock. Though I guess with cars they may take a while to sell because most people buy a car and have that for a number of years before purchasing a new vehicle. I feel that this number is reasonable for AHG though it is going up which probably isn’t that good.

Asset turnover ratio is how well a company is turning its assets into sales. The equation for this is the total sales divided by the total Assets. Once again AHGs figures are sloping down which isn’t a good sign although it is a steady decline. At 2015 the figure was 2.68, 2016 2.57, 2017 2.56 and 2018 2.45, so a larger jump down in 2018.

Liquidity Ratios:Current ratio is just comparing current assets to current liabilities, so for every $1 of liability how many dollars of assets are there to pay. The equation for this is the current Assets divided by the current Liabilities. For AHG their current ratio for 2018 through 2015 is 1.09, 1.14, 1.19 and 1.20 respectively. Over the past four years there has been a steady decline in their current ratio even though they are still above 1 they are declining and may fall below 1 which isn’t very good.

Financial Structure Ratios:Debt/ Equity Ratio compares debt and equity so for $1 of equity how much is being funded by debt such as a bank. Looking at AHGs spreadsheet it is 239.7% for 2018, then 197.3% for 2017, 2016 is 204.6% and 2015 is 181.3%. So, for example in 2018 for every $1 of equity $2.39 was funded by an external party, so possibly the bank.

Equity Ratio is the portion of assets funded by equity, the equation for this is Equity divided by the total Assets. Maria explains that the Debt Ratio and Equity Ratio should add up to 100% so I thought I would test it out with my company. It works so by looking at my company’s Equity ratio which is 29.4% for 2018, 33.6% for 2017, 32.8% for 2016 and for 2015 35.5%. I worked out the Debt Ratio for my company which for 2018 was roughly 70.6%, therefore my company is mainly funded by debt. I don’t think this is a very good sign especially seen as the amount of assets funded by equity is getting smaller.

Market Ratios:Earnings per share is just how much a shareholder has earnt per share for that financial year. It is the amount that if the profits were all distributed to shareholders equally it shows how much each should receive. The equation for this is Net Profit divided by the Number of Ordinary Shares issued. So, in 2018 each shareholder only earnt 11 cents per share, 2017 19 cents per share, 2016 32 cents per share and in 2015 it was 30 cents per share. From a shareholder’s point of view, I think this would be bad if you invest shares you would want to earn back more money rather than a smaller amount. I know I would.

Dividends per share is the amount per share that the company actually paid out. The equation for this is Dividends received divided by the Number of Ordinary Shares. It seems that AHG in 2018 and 2017 paid its share holders more that the earnings per share calculations at 21 cents and 25 cents per share respectively, though it paid less in 2016 and 2015 at 24 and 25 cents per share respectively. When putting our data into the spreadsheets earlier in the term I did at these values from my annual reports. I notice that I calculated more than what they showed in their reports, with the values being 9.8 cents, 17 cents, 29.4 cents and 28.7 cents for 2018 through 2015 shares. I wonder why my figure is more, should they have paid as much as I calculated are there shareholders being ripped off?

Price earnings ratio is how much the market price is per share in the company divided by the earnings per share, so how much can be earnt per share. The equation for this is the Market Price per share divided by the Earnings per Share. In 2018 AHGs market price per share was $2.85 while the earnings per share was only 11 cents. Looking further if I bought a share and paid $2.85 if I only got 11 cents back for the share per year in would take 25 or so years to “pay off” the share. I didn’t understand this when Maria explained it in her video though after really looking at it and understanding the equation I see how this is possibly. In 2017 the price earnings ratio was 18.04, 2016 was 11.80 and 2015 was 13.15. The price earnings ratios for the four years has increased quite a lot, this does not seem very good for the company nor its shareholders.

Ratios Based on the Reformulated Financial Statements:Return on Equity is how much return is being generated for shareholders, the equation for this is Comprehensive Income divided by shareholder Equity. AHGs return on equity has decreased significantly from 13.37% in 2015 to 4.80% in 2018. This is not very good as this number should be higher as this is better.

Return on Net Operating Assets (RNOA) is the return for the use of operating assets, it is similar to return on assets. So rather than just a return on all assets it is the return on just operating assets. The equation for this is Operating income divided by the Net operating assets. For 2018 AHG has a return of 3.15% which is again quite a lot less than previous years with 2017 at 4.63%, 2016 at 7.09% and 2015 at 7.53%. Compared to the return on assets from the original spreadsheet the figures are a lot higher by around 2-4 % for each year respectively. On comparing the figures of total assets from the original statement to the operating assets from the restated statement the percentage difference matches the dollar difference in each. The net operating assets were smaller as it did not include any financial assets which therefore makes the percentage just that bit higher.

Net Borrowing Cost is ratio between the finance costs after tax and total borrowings of the firm, which is expressed as a sort of interest rate. The equation for this is Net Financial costs after tax divided by Net Financial Obligations or debt. I have calculated AHGs Net borrowing cost from 2015 to 2018 as 2.81%, 2.6%, 2.41% and 2.19% respectively. In comparing the figures in the 2018 annual report which were 2.10% for 2018 and 2.22% 2017 to the figures I calculated they seem to be higher in the annual report.

Profit Margin is again how much profit is being earn per dollar of sales though in this section it is just the operating income verse net profit. The equation for this is Operating income divided by the Sales. AHGs profit margin for 2018 was 1.03% which to me seems quite small, for 2017 it was 1.44%, 2016 was 2.22% and 2015 was 2.23%, so not much difference

between 2015 and 2016 but a small jump through the other years. AHGs profit margin is going down this could be a negative sign as you would want to see profits going up. In comparison to the Net Profit Margin the figure is higher though not by much, in 2018 the difference between the net profit margin and profit margin is only 0.7% and 2017 is 0.44%. There is no to much difference between the two sets of figures though again it is only using operating figures without the addition of the financial figures which makes the difference.

Asset Turnover once again is how well the company is turning assets into sales, though in this section only the operating assets are used rather than all assets. The equation for this is Sales divided by Net Operating Assets. I have calculated AHGs assets turnover for the restated financials at 3.07 for 2018, 3.21 for 2017, 3.20 for 2016 and 3.37 in 2015. Overall their asset turnover ratio didn’t change to much over the four years though from 2015 to 2018 there is a decline. Compared to the Total Assets Turnover Ratio these figures are higher at around 0.5 higher for each year respectively. The fact that only operating assets were used and did not include financial assets would have been the main reason this figure change.

Economic Profit is a measure of the value added to a firm during a period. AHGs annual reports seem to use a pre-tax discount rate of 11% but I was not sure if this was the correct figure, so I decided it would be best to use the 10% as stated in Marias ratio video. The equation for this is Return on Net Operating Assets minus cost of capital and this value is multiplied by Net Operating Assets. AHGs economic profit is in the negatives which I guess is not good because this would mean that they are not adding value to the firm and are rather losing it. For the year 2018 AHGs economic profit was over negative 144,000,000, 2017 was over negative 102,000,000, 2016 over negative 51,000,000 and 2015 over negative 38,000,000. The jump of this I would say is very significant, by the looks of the first financial sheet it looks like AHG is doing well but now I am reconsidering. They just seem to be losing value each year by a more significant amount. Though I guess it was always going to be low as the cost of capital percentage is a lot higher than the 2018 and 2017 percentages for RNOA and only slightly higher for 2016 and 2015.

Step 9- Capital InvestmentAutomotive Holdings Group is looking at making a capital investment. In order to evaluate the capital investment payback period, NPV and IRR will be looked at to determine which investment is best for AHG.

The payback period is just the amount of time it will take to be paid back for the amount of the initial investment. It measures up to the point where the investment and cash flows ‘break-even’. When deciding to invest purely based on payback period a company would only accept the investment if payback period is less than a set limit of time. If a company has a 10-year limit on an investment and its payback period is 4 years it would accept the investment, though if it is paid back in 12 years it would reject it. Though there are disadvantages to only looking at payback period to consider an investment such as the time value of money, it ignores and future cash flows after the cut-off date and requires a certain cut-off date in order to decide whether an investment is worth it or not.

Net present value (NPV) is how much value is created from an investment. To get NPV you need to estimate future expected cash flows, then estimate the required return for projects at the same risk level and finally find the present value of the cash flows and minus the initial investment. So, from watching Marias video on this I think I understand net present value as being the amount that each estimated cash flow equals once discounted by a particular discount rate which gives present value, then each of the discounted present values are added together and the initial investment is taken off. The higher the discount rate the lower the NPV and the lower the discount rate the higher the NPV will be. If NPV is positive accept an investment if it is negative do not invest. NPV is consider the main method used for deciding to invest as it considers all cash flows, adjust to risk, accounts for time value of money and can rank mutually exclusive investments.

Internal Rate of Return (IRR) is the rate of return when NPV equals zero. IRR is preferred as it is easy to look at percentages and gauge their

valuableness, it considers all cash flows and considers the time value of money. Though it can produce multiple answers and cannot rank mutually exclusive projects. If IRR is greater than the discount rate, then accept investment though if it is below they should reject the investment.

They are deciding whether to construct a new dealership in the Darwin, in order to expand, or a new dealership in Sydney. They are only willing to invest in one as that is all they can handle at the moment. On examining the original cost, the estimated life of each dealership, residual value of each and the estimated future cash flow, they will decide which to invest in. The dealership in Darwin will be a Mitsubishi dealership, the initial investment cost will be 3.5 Million dollars. While the dealership in Sydney will be a Holden dealership and the initial investment will be 16 Million dollars. AHG expects the Mitsubishi dealership to have an estimated life of 10 years while the Holden dealership only has a 6-year estimated life. They would not expect to sell the Mitsubishi dealership within the 10 years though expect to sell the Holden dealership at the end of its life for a residual value of 18 Million dollars. The investment would be made on the 31 December 2019 and the estimated cash flows to be expected to be received on the 31 December on each consecutive year. The estimated future cash flows of each investment option are as below:

Mitsubishi, Darwin, NT

Holden, Sydney, NSW

Original cost $3.5m $16mEstimated life 10years 6yearsResidual value - $18mEstimated future cash flows2020 $-0.2m -$1m2021 $0.2m $5m2022 $0.4m $5m2023 $0.25m $8m2024 $0.2m $8m2025 $0.5m $7m2026 $0.3m2027 $0.4m2028 $0.7m2029 $0.2m

*These numbers are all imaginary for this particular assessment and are not investments for AHG*

The Net Present Value and Internal Rate of Return for the Mitsubishi dealership are both negatives with the NPV -$1.99m and IRR -2.9%. Ideally for the company to go ahead with this choice it would want these values to be above zero. The fact that AHG would not sell the Mitsubishi dealership and we cannot see the values of the years past the ten-year mark may affect the choice for this decision. The payback period also does not take into consideration all the cash flows of the business. Though with the values of this investment being negative I would not suggest the AHG go ahead with this investment.

The Holden dealerships NPV and IRR are both positive which is good. Its NPV is $5.36m and IRR is at 18%, these are both positive numbers and I would suggest that AHG go ahead with this investment. Another positive for this investment is that its payback period is 4.125 years which is below the 6 years for the investment. The fact that this dealership also has a residual value of $18m is positive as it means that AHG will make a profit on this investment.

Step 10- FeedbackFeedback providedPEER FEEDBACK SHEET: ASS#2 Step 10Feedback To: Molly Carpenter

Feedback From: Emillee Bagnall

CommentsStep 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary

You have identified 3 services of you firm which is good. You have also estimated the price, variable cost and contribution margin for each which is also good. You also talked a little about contribution margins, though I would maybe suggest expanding and writing what you understand contribution margins to be. You also identified some constraints for your firm which was also good.

Step 8 Calculation of ratiosRatios – commentary (blog)Calculate economic profit Commentary – drivers of economic profit (blog)

On first look at your ratios they looked a little off. Your days of inventory seems like too large a number then I noticed you used two numbers from your financial statement one purchased debt ledger from current assets and one from non-current assets. It seems that by adding those two numbers your days of inventory would be over 12 years and this does not seem right. You have used a current and non-current asset, but I feel that it should only be a current asset. I played with the numbers and by only using the figure from the current assets section it lowers your inventory days to roughly 775 days. I feel like this seems more reasonable but correct me if I am wrong. I also noticed that you have used the wrong column for your current ratio in Liquidity ratios you accidentally used the space in D39 on your financials as the total current asset number when it should have been D38. By correcting this you get a ratio which isn’t zero. Other than that, your ratios look good everything is linked and they are linked to the right things.

Step 9 Develop capital investment decision for your firmCalculation of payback period, NPV & IRRRecommendation & discussion

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Overall ASS#2 Steps 7-9

Overall, what you have so far is looking good though I would suggest expanding a little on your contribution margins and just double checking a few of your cells in your spreadsheet. Good luck! 😊

PEER FEEDBACK SHEET: ASS#2 Step 10Feedback To: Ashleigh Clark



You identified three services that your firm provides. You estimated a selling price, variable costs and contribution margin for each service. You also outlined what contribution margins are in your own words and how this applied to your firms’ services and how it affected fixed and variable costs. You also discussed appropriate constraints and how they could affect your firm.


You outlined each ratio and defined it in a way that you understood, which was really good. You also discussed each ratio for you firm well. You also outlined and explained what economic profit is in your own words and how it affected your company’s ratios. Your ratios in your spreadsheet are linked appropriately and look very good. You have also commented your experience on your blog, which is good.


You clearly outlined each investment decision for your firm and estimated the original cost, life, residual value and estimated future cash flows appropriately. You calculated you NPV and IRR correctly and also calculated the payback period for each investment. You stated your recommendation for the investment for you company clearly and outlined some concern that may arise for the future of your firm.


Overall your assessment step 7-9 look really good, there was really anything that looked off. Great job and good luck!

PEER FEEDBACK SHEET: ASS#2 Step 10Feedback To: Natasha Bennett



Your step 7 looks really good you identified three products of your company choosing ones from different areas. You estimated appropriate selling price variable cost and contribution margin for each. You also explained contribution margins in your own words and discussed why the contribution margins were large or small for each product due to its sales. Your constraints

are reasonable and appropriate to your company.


Your ratios look good from what I can see you have linked them appropriately to the correct spreadsheet pages. Your ratio commentary is very good you have explained each ratio in your own words and evaluated it in accordance to your company. You have also calculated economic profit well and explained this in your comments.


Your capital investment decision looks good you outlined the products and the costs well. Your NPV and IRR are calculated correctly in your spreadsheet using the correct sums. Your also calculated your payback period correctly. You also made a clear decision for your company and outlined your reasons for the decision appropriately.


Overall, your assessment looks really good, you have done really well. Good luck!

PEER FEEDBACK SHEET: ASS#2 Step 10Feedback To: Laura Salmon



You identified the three products or services for your firm, and estimated their selling price, variable cost and contribution margin. You also identified certain issues with determining these as aspects of these vary depending on what each customer wants. I know it’s getting a little late to alter much but I would suggest expanding on your contribution margins and explaining what they are in your own words a little. Side note I also feel like coming to this step I had to remember what my company did because I felt like we hadn’t done much with our company for the last few steps.


Your ratio spreadsheet looks good, you have linked everything to the correct financial sheet from what I can see, and your numbers look correct. Your explanation of your ratios looks good, you have explained what they are in your own words and how the numbers might be the way they are. You also explained how some of the values are positive or negative for your

company, and why they are that value. Your explanation of economic ratios is good as well. (I also used the 10% for WACC as my company did not specify).


I would suggest if you have time to go over the task sheet and look at expanding this section. You need to show the initial investment cost, the estimated life of the investment and the estimated cash flow cost of each year of the investment for at least 5 years but a max of 10 years. I like that you did find investments that your company made, though maybe expand on their ideas and use fake numbers, this step I think is more about you developing knowledge on NPV, IRR and payback period so break it down and try to show some figures in this section. Then you need to decide whether the company should go ahead with one, both or neither of the investments. It would show that you understand that if say you get a negative NPV for one of the investments then you might say, ‘the company should not go forward with this investment as it has a negative NPV’. This step really confused me as well but it is not a real investment it is more about your knowledge of you company, NPV, IRR and payback period and assuming appropriate numbers for your firm. In your spreadsheet it seems you have not put in the correct formula. To do this you needed to click into say the B40 cell, press equal, type npv( then click on the cell with your 10% which is B41 the type ‘ , ‘ then drag your mouse along from C39- K39 the put a ) then an addition sign and click into your -28.7 cell which is B39. Your sum when you click into B40 should look like this =NPV(B41,C39:K39)+B39 That is only for your first NPV, you would need to do the second one as well just follow this but do it for the appropriate cells according to your second choice. I would also suggest with the spreadsheet to delete the example and only have your information on there to make it easier to read. I hope this is easy to understand. Your IRR and payback period look good though maybe make the numbers for your payback period absolute references.


Overall, you have done really well. Just a few things to maybe look into if you have time, I know we are getting down to the wire though. Good luck with your assessment! 😊

Feedback ReceivedFeedback about my ratios from Molly Carpenter

PEER FEEDBACK SHEET: ASS#2 Step 10Feedback From: Laura SalmonFeedback To: Emillee Bagnall

. My CommentsStep 7 Identify three products or services of your firm Estimate selling price, variable cost & CM Commentary – contribution margins Constraints – identify & commentary

Unfinished – look at the study guide (Chapter 8.2) again for a better way to display your informationSmart job choosing three cars from different price ranges to look at which would be more profitableNo constraints identified

Step 8 Calculation of ratios Ratios – commentary (blog) Calculate economic profit Commentary – drivers of economic profit (blog)

Your spreadsheet values all look great and I like that you added in your check for the 100% with the Debt and Equity ratios.Great commentary on your values for this section, it shows that you have understood what the values represent from the ratios and the task itself. Check over how you have represented your values in your commentary for the Economic Profit, they look a little messy and like they don’t quite fit. Otherwise, great commentary on the Economic Profit

Step 9 Develop capital investment decision for your firm Calculation of payback period,

Your commentary and understand of this last task are excellent.

NPV & IRR Recommendation & discussion


Great job, you look to be on the right track with only a few things to fix up and look over. I hope this helps.Just check over your spelling and grammar in your commentary, you have a few errors.Again, great job and good luck

I admit I finished these steps really late, they just seemed to overwhelm and confuse me by looking at them. Though once I actually started and really looked at them they got a little easier. By finishing these steps so late I did limit myself on how much feedback I could get, which is not great, but I go a couple, so I guess its not too bad. With the small amount I did receive back I was able to make a couple changes. I don’t mind providing feedback because it means I am constantly going back over my work double checking if I got everything right and di things sort of the same way, so I guess in a way I do my own feedback a little. Now I sit here just slowly going through what I have done, ratios, check, spreadsheet, check, I think I have everything done. Wow! This unit has been somewhat of a whirl wind. At the beginning of the term I was ahead and submitting early then vacation week came, and everything went out the door. Other unit’s assessment went to the top of the list and I guess I sort of pushed Accounting aside. I didn’t mean to, but this subject was the only one I seemed to be able to do and get my head around in the shortest amount of time. I am glad I did this unit this term, it has given me so much more confidence with asking question of other students and getting feedback. The fact that I created a blog, and not a really boring one either, picture wise that is. I know I was a bit absent in these last few weeks with stress of essays being due and exam stress I guess I forgot to post a lot. Thanks for a great term and all the lessons learnt through your textbook Martin.

Documents

Step 7€¦ · Web view2019. 6. 9. · Assessment 2: Steps 7-10. Emillee Bagnall. S0287147. CQUniveristy. Step 7. This step involved identifying three products for Automotive Holdings