Example on differential cash flows, Financial Accounting

Assignment Help:

Q. Example on Differential cash flows?

301_Example on Differential cash flows.png

Differential cash flows: contracting out versus in-house provision

NET PRESENT VALUE =£45519

The positive NPV signifies that the cash flows from contracting out exceed those from keeping the service in-house. Note the £3 difference among the NPV of the two alternative approaches is merely a result of rounding.

Contracting out the catering service is therefore the preferred alternative and it is recommended that Amber plc accept the tender from the outside supplier.

The financial effect is able to be assessed by comparison of the present value of the additional costs incurred with the present value of the incremental contribution.

WORKINGS

Present value of the further expense = 3·605 × £10000 = £36050

The further contribution amounts to 10% per year that is Years 1-5 Additional contribution = £24699 per year

Present value at 12% per year = 3·605 × £24699 = £89040

The net present value of the further investment in staff training is thus £89040 less £36000. This signifies that the net present value can be increased by £52990 by retaining the service in-house but increasing demand via improved services.

This further net present value is greater than the £45522 which is able to be created by switching to an outside provider for the catering service. The decision to contract out is consequently changed although Amber plc should be wary of the fact that the difference between the in-house and the contracted out service is only £7468 that is (£52990 - £45522). The advantage is so relatively insignificant. Perhaps more significantly the forecast that demand can be increased by as much as ten percent for the relatively small investment of £10000 per year (less than 2% of current variable costs) suggests that Amber plc must perhaps look more closely at the possible opportunities for increasing their contribution from the catering service before they choose to contract out. If demand is extremely sensitive to both price and quality it may perhaps require little investment to make the catering service very profitable.

The profits from investing internally however must be weighed against the potential gains to be earned from higher demand for a contracted out service. The additional information demonstrates that the company will receive 5% of gross sales receipts once daily sales exceed £2200. At present sales are at £2079 as well as so if the external contractor was able to raise demand by 10% Amber plc would receive 5% of the new annual revenue that is £41164 without incurring any additional expense. The choice so of whether to use the outside supplier or keep the service in-house is very dependent on the anticipated levels of future demand.


Related Discussions:- Example on differential cash flows

Depreciation, The non current asset section of Aadil & Co. at December 31, ...

The non current asset section of Aadil & Co. at December 31, 2005 is as under:- Land Rs. 1,000,000 Office equipment Rs. 5,000,000 Less: accumulated depreciation 250,000 4,75

Bell mountain vineyards is considering updating, Bell Mountain Vineyards is...

Bell Mountain Vineyards is considering updating its current manual accounting system with a high-end electronic system. While the new accounting system would save the company mon

Show the foreign tax credit, Q. Show the Foreign Tax Credit? Foreign Ta...

Q. Show the Foreign Tax Credit? Foreign Tax Credit - A U.S. taxpayer who pays or accrues income tax to a foreign country may elect to credit or deduct these taxes in a determin

Acquisition of a subsidiary company during the year, ACQUISITION OF A SUBSI...

ACQUISITION OF A SUBSIDIARY COMPANY DURING THE YEAR When the holding company acquires a subsidiary company portray during the financial period, and then the approach to preparing

Amortization of patents, Nieland Industries had one patent recorded on its ...

Nieland Industries had one patent recorded on its books as of January 1, 2014. This patent had a book value of $288,000 and a remaining useful life of 8 years. During 2014, Nieland

How the following situations should be reported, You have just started work...

You have just started work for Warren Co. as part of the controller's group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in

Illustrate accounting ramifications, Q. Illustrate Accounting ramifications...

Q. Illustrate Accounting ramifications? Accounting ramifications i) Restatement ii) Unable to file on timely basis while go back and determine what periods are effected

Static balancing-dynamic balancing-field balancing, Static Balancing : Th...

Static Balancing : This balancing is complete in the plane of unbalance. Dynamic Balancing : In this case two balance planes are needed because forces along couples are to

The principle of revenue, The principle that (1) requires revenue to be re...

The principle that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash and (3

Show danger of high financial gearing, Q. Show danger of high financial gea...

Q. Show danger of high financial gearing? A additional danger of high financial gearing is that a company may move into a loss-making position as a result of high interest paym

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd