SUMMARY OF FORMULAS Cost-Volume Profit Analysis Contribution margin per unit (CMU) = Selling price per unit - Variable cost per unit B.E.P.in units = Fixed costs/CMU B.E.P.in revenues = B.E.P.in units x SPU Margin of safety = Sales units - B.E.P.in units Units to sell to get a profit = (Fixed costs + expected profit)/CMU Profit = Total Revenues - Variable Costs Fixed costs Cost Allocation Total indirect OR overhead costs Overhead rate Total volume allocation base Budgeting Sales Budget Budgeted sales = budgeted units x selling price per unit Production Budget Budgeted production (units) = Budgeted sales(units) + Target closing finished goods (units) - Opening finished goods (units) Material Budget Budgeted raw material usage = Required production (unit) x material required per unit Budgeted raw material purchase = Budgeted raw material + Target closing raw material stock - Opening raw material stock Cash Budget Cash Budget = opening balance + cash inflow - cash outflow FV2 + + Capital Investment Decisions FV, FV FVR Net Present Value (NPV) = + ... + 1. (1 + r) (1+r)2 (1+r) (1+r)" NPV. R Average annual net profit before interest and taxes Accounting Rate of Return (ARR) = Initial Capital employed on the project Question 3 Maple Ltd. is planning to buy a new equipment costing 90,000 to improve its materials handling system. The equipment has a useful life of five years and will have no terminal disposal value. The new equipment is expected to generate cost saving for 45,000 every year, as well as it requires hiring an additional manager at a cost of 25,000 per year. The company wants to evaluate whether it is worth investing in this new equipment, using the Net Present Value method and has asked you, as a management accountant, to provide a short report highlighting the following aspects. Required: a) Determine the cash flows deriving from this investment over the next five years. [6 marks] b) Calculate Net Present Value (NPV) using the required rate of return of 10% and the discount factors as follows: Discount factor 10% Year 1 0.909 Year 2 0.826 Year 3 0.751 Year 4 0.683 Year 5 0.621 [7 marks] c) Using the net cash flows calculated in a), determine the Payback Period as the number of years and months) it will take to recover from the investment. Considering the senior management has identified the maximum acceptable payback period as 4 years, will this project be a feasible investment option? (5 marks]