Investment Analysis Budgeting

Question: Task 1 Write a 400-word introduction on the need for budgeting, the process for preparing budgets and their limitations. Task 2 Prepare the following documents for the first six (6) months of the hotels operation: A cash budget A budgeted income statement A budgeted statement of financial position Task 3 Calculate the payback period using both the payback method (8 marks) and the discounted payback method (12 marks), as well as the NPV of the project (15 marks), assuming the following: A cost of capital of 7%, using four decimal points on the discount factor; Net cash flow will grow 3% on a year basis compared to previous year; and John hopes to sell the hotel at the end (October 1) of the tenth year for 3,200,000. Answer: Introduction This Report is intended to analyze the investment proposal to invest in the hotel industry. (Donovan, 2006)To analyze, initially budgeting techniques such as preparation of cash budget, budgeted income statement and budgeted balance sheet. A budget is an arrangement for your future pay and uses that you can use as a rule for spending and sparing. Albeit numerous Americans as of now utilize a budget to arrange their spending, the greater part of Americans likewise routinely spends more than they can bear. The way to spending inside of your methods is to know your costs and to spend short of what you make. A decent month to month budget can guarantee you pay your bills on time, have assets to cover startling crises, and achieve your money related objectives. The greater part of the data you need is as of now readily available. To make or revamp your budget, take the basic steps sketched out underneath to get an unmistakable photo of your month to month funds. (Hammonds, 2006)You can likewise utilize our free internet budgeting number crunchers underneath to budget for certain particular buys or occasions. (Hammonds, 2006) The cash budget contains a separation of the anticipated sources and employments of cash in a future period. This budget is utilized to determine whether organization operations and different exercises will give an adequate measure of cash to meet anticipated cash prerequisites. If not, administration should discover extra subsidizing sources. The inputs to the cash budget originate from a few different budgets. The aftereffects of the cash budget are utilized as a part of the financing budget, which orders ventures, obligation, and both premium wage and premium cost. The cash budget is contained two fundamental regions, which are Sources of Cash and Uses of Cash. The Sources of Cash area contains the starting cash parity, and also cash receipts from cash deals, records of sales accumulations, and the offer of advantages. (Sinclair, 1934)The Uses of Cash area contains all arranged cash uses, which originates from the immediate materials budget, direct work budget, fabricating overhead budget, and offering and managerial cost budget. It might likewise contain details for altered resource buys and profits to shareholders. The budgeted income statement is an important part of a business's financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them. A budgeted balance sheet is a report that administration uses to anticipate the levels of advantages, liabilities, and value taking into account the budget for the present bookkeeping period. As such, the budgeted balance sheet demonstrates where the greater part of the records would be toward the end of a period if the genuine organization execution coordinated the budgeted gauges. Setting up this report is generally the last stride in finishing an expert budget arrangement. (Reilly Brown, 1997) Toward the end of every period, administration for the most part begins arranging an expert budget for the following period. The expert budget is comprised of a huge amount of littler budgets for deals, cash, offering costs, and general costs. These budgets are consolidated to make one major, thorough money related arrangement. Budgeted Balance Sheet A budgeted balance sheet is a report that administration uses to anticipate the levels of advantages, liabilities, and value taking into account the budget for the present bookkeeping period. As such, the budgeted balance sheet demonstrates where the greater part of the records would be toward the end of a period if the genuine organization execution coordinated the budgeted gauges. Setting up this report is generally the last stride in finishing an expert budget arrangement. Toward the end of every period, administration for the most part begins arranging an expert budget for the following period. The expert budget is comprised of a huge amount of littler budgets for deals, cash, offering costs, and general costs. These budgets are consolidated to make one major, thorough money related arrangement. Balance Sheet Assets Fixed assets April May June July August September Lease Hold Property 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 Furniture and fittings 150,000 150,000 150,000 150,000 150,000 150,000 Kitchen Equipment 50,000 50,000 50,000 50,000 50,000 50,000 Laundry equipment 25,000 25,000 25,000 25,000 25,000 25,000 Gym equipment 15,000 15,000 15,000 15,000 15,000 15,000 China, glass and cutlery 10,000 10,000 10,000 10,000 10,000 10,000 Bed linen and towels 15,000 15,000 15,000 15,000 15,000 15,000 Accumulated Depreciation (4,875) (9,750) (14,625) (19,500) (24,375) (29,250) 1,860,125 1,855,250 1,850,375 1,845,500 1,840,625 1,835,750 Current Assets Cash 127,430 150,515 182,645 236,240 303,065 368,270 Inventory 15,000 10,000 10,000 10,000 10,000 10,000 Account receivable 28,350 49,950 82,350 113,400 121,500 102,600 170,780 210,465 274,995 359,640 434,565 480,870 Current Liabilities payable (COGS) 6,480 10,260 17,280 23,220 24,300 19,980 Payable OH 2,025 2,700 4,725 6,075 6,075 - 8,505 12,960 22,005 29,295 30,375 19,980 Equity Capital 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 Retained Earning 17,400 42,225 89,325 151,275 213,225 260,325 2,017,400 2,042,225 2,089,325 2,151,275 2,213,225 2,260,325 Budgeted Income Statement The budgeted income statement is an important part of a business's financial planning process. The budgeted income statement, along with a budgeted balance sheet, can help a business determine if its plans are financially feasible. A business can develop and compare different budget projections to help in making decisions about which projects the business should pursue and how it can pay for them. April May June July August September Sales 40,500 54,000 94,500 121,500 121,500 94,500 Cost of sales 8,100 10,800 18,900 24,300 24,300 18,900 Labor Cost 8,100 10,800 18,900 24,300 24,300 18,900 Overhead Costs 2,025 2,700 4,725 6,075 6,075 4,725 Depreciation Per Month 4,875 4,875 4,875 4,875 4,875 4,875 Income 17,400 24,825 47,100 61,950 61,950 47,100 Cash budgeted The cash budget contains a separation of the anticipated sources and employments of cash in a future period. This budget is utilized to determine whether organization operations and different exercises will give an adequate measure of cash to meet anticipated cash prerequisites. If not, administration should discover extra subsidizing sources. The inputs to the cash budget originate from a few different budgets. The aftereffects of the cash budget are utilized as a part of the financing budget, which orders ventures, obligation, and both premium wage and premium cost. The cash budget is contained two fundamental regions, which are Sources of Cash and Uses of Cash. The Sources of Cash area contains the starting cash parity, and also cash receipts from cash deals, records of sales accumulations, and the offer of advantages. The Uses of Cash area contains all arranged cash uses, which originates from the immediate materials budget, direct work budget, fabricating overhead budget, and offering and managerial cost budget. It might likewise contain details for altered resource buys and profits to shareholders. Cash Budget April May June July August September Opening 125,000 127,430 150,515 182,645 236,240 303,065 Sales 12,150 44,550 66,150 102,600 121,500 113,400 COGS 1,620 8,640 12,420 19,980 24,300 23,220 Labor cost 8,100 10,800 18,900 24,300 24,300 18,900 Overhead expenses 2,025 2,700 4,725 6,075 6,075 Closing 127,430 150,515 182,645 236,240 303,065 368,270 Net Present Value Net Present Value - 1 2 3 4 5 6 7 8 9 10 Investment (2,000,000) Cash Inflows 1,401,624 1,443,673 1,486,983 1,531,592 1,577,540 1,624,866 1,673,612 1,723,821 1,775,535 1,828,801 Cash Outflows (595,690) (613,561) (631,968) (650,927) (670,455) (690,568) (711,285) (732,624) (754,603) (777,241) Disposal 3,200,000 Net cashflow (2,000,000) 805,934 830,112 855,015 880,666 907,086 934,298 962,327 991,197 1,020,933 4,251,561 Net Present Value 5,616,951 Since the Net Present Value is positive, an investment is recommended. Payback Payback Cash Flow Cumulative Year 0 (2,000,000) (2,000,000) Year 1 805,934 (1,194,066) Year 2 830,112 (363,954) Year 3 855,015 Year 4 880,666 Year 5 907,086 Year 6 934,298 Year 7 962,327 Year 8 991,197 Year 9 1,020,933 Year 10 4,251,561 Payback Period 1.00 0.43 Payback Period 1.43 As per the above analysis, the payback period would be 1.4 years thus an investment is recommended. Discounted Payback period Discounted payback Cash Flow Discount rate Discounted Cash flow Year 0 (2,000,000) 1.000 (2,000,000) Year 1 805,934 0.935 (1,194,066) Year 2 830,112 0.873 Year 3 855,015 0.816 Year 4 880,666 0.763 Year 5 907,086 0.713 Year 6 934,298 0.666 Year 7 962,327 0.623 Year 8 991,197 0.582 Year 9 1,020,933 0.763 Year 10 4,251,561 0.763 Payback Period 1.00 1.40 Discounted Payback Period 2.40 As per the above analysis, the discounted payback period would be 2.4 years thus an investment is recommended. References Donovan, S. (2006).Budgeting. Minneapolis: Lerner Publications Co. Elton, E., Gruber, M. (1995).Modern portfolio theory and investment analysis. New York: Wiley. Hammonds, H. (2006).Budgeting. North Mankato, MN: Smart Apple. Prime, J. (1967).Investment analysis. Englewood Cliffs, N.J.: Prentice-Hall. Reilly, F., Brown, K. (1997).Investment analysis and portfolio management. Fort Worth, Tex.: Dryden Press. Sinclair, P. (1934).Budgeting. New York: Ronald Press Co. Weaver, D. (1971).Investment analysis. London: Longman [for] the Society of Investment Analysts. Williams, E., Findlay, M. (1974).Investment analysis. Englewood Cliffs, N.J.: Prentice-Hall. Wiseman, B. (2010).Budgeting. New York, NY: Weigl Publishers.