Cost management
Discuss About The Financial Risk Analysis Project Construction.
With the ramified needs of the expansion of Fletcher Building construction, it needs to undertake only those projects which has high viability of value creation in the invested amount and could add value to organization. by using the capital budgeting tool, DU Pont analysis and long term strategic planning, Fletcher Building construction could assess whether to select particular project or not. The selection of the construction project is based on possible future benefits and viability of the invested capital in the construction field. By using the construction project, Fletcher could easily use its old assets and plants in the construction of the malls in Australia. It could also easily export some of the imperative material for the constructions work in Australia from its origin country (Fletcher Building Construction, 2016). However, joint venture and strategic alliance would made to further expand the business in Australia (Alles, Kogan, and Vasarhelyi, 2018).
Fletcher Building construction needs to use proper cost management which could be done by installing the ABC model framework or life cycle costing method. The main role of cost management is to avoid the unnecessary expenses and increased the overall return on capital employed of the project undertaken by company. Fletcher Building construction should use the proper costing method such as using ABC costing, Life cycle costing method and proper recording of the data in the books of account are the some of the major tools. This cost management is the most important tool which put control over the expenses and cash outflow in the undertaken project. Company had to face the increased business cost due to the less effective cost management tool. As per the work structure and undertaken project, Fletcher should have undertaken the ABC costing model. This costing model assist in proper bifurcation of the cost in the different work department of the organization which eventually reduces the overall costing (Arens, Elder, and Mark, 2012).
In order to fund the new construction business, Fletcher Building construction could raise funds by using the further public offer or debt funding. However, use of debt funding depends upon the financial leverage of company. In this case, company should raise more funds from the banks and financial institution by creating charge on its newly undertaken construction project. Nonetheless, Company could use the below give funding structure to fund its new construction project (Li, 2015).
|
Funding |
% of portion |
|
Equity funding |
30% |
|
Debt funding |
20% |
|
Private funding or promoters funding |
40% |
|
Plugging back the retained earnings in project |
10% |
Funding
The winding up is ideally the end steps when company finds difficulty to continue with the undertaken project. The main issue associated with the commencing of the construction project was related to the employees staff arrangement (Labour availability), lack of control of management due to the non-effective strategic planning and proper deployment of funds. These all these are very important to manage as these are the core aspects for the successful completion of the project. The lack of r finance destructed the undertaken projects. On the other hand, due to the lack of the human power, it was hard for company to efficiently working and create synergy in its process work system. These all the factors resulted to the high cost of construction and due to the high cash outflow as compared to the budgeted plan, company had to wind up its construction project (Fletcher Building Construction, 2016). The project was ended due to the lack of efficient working or strategic planning of the company. There were no environmental issue which affected the project. However, company would have face the environmental issue if it had gone through its internal work issues due the consistent changes in climate in Australia (Warren, Reeve, and Duchac, 2013).
- Company should use proper financial tools such as capital budgeting, cost accounting, ratio analysis to evaluate the viability of the project.
- There should be proper cost management tool such as ABC costing model, life cycle costing model which could be used to reduce the overall costing of the business.
- Proper strategic planning and availability of the resources is must for the effective operation of the undertaken project (Fletcher Building Construction, 2016).
It is analyzed that Myer has high financial leverage and also increased its overall equity capital in 2015 which might not be the good indicator for the future growth of the business.
After analyzing the sources given, it could be inferred that Myer Holding has issued equity capital of AUD $ 212 million in 2016 to its shareholders (Myer Holding Group, 2016).
There are several benefits which occurs to company when they raises capital by issue of equity capital in market such as increased brand image, raising funds for the business and lower down the financial leverage. Myer holding has high financial leverage which could be reduced by issue of more equity capital in business (Myer Holding Group, 2017).
|
Year |
2014 |
2015 |
2016 |
2017 |
|
Common stock (AUD $ in million) |
525 |
525 |
739 |
739 |
|
Other Equity (AUD $ in million) |
(5) |
5 |
(7) |
(5) |
|
Retained earnings (AUD $ in million) |
379 |
335 |
379 |
342 |
|
Accumulated other comp.. (AUD $ in million) |
(1) |
(3) |
(4) |
(3) |
|
Total equity (AUD $ in million) |
893 |
863 |
1108 |
1073 |
(Yahoo finance, 2018).
The main reason of reduction in the overall total equity capital of Myer Holding is related to decreased level of retained earnings. Company had to face high loss in its business through the time which eventually impacted the retained earnings in long run (Myer Holding Group, 2015).
|
Year |
|||||
|
Particular |
1 |
2 |
3 |
4 |
5 |
|
Total sales |
$ 5.50 |
$ 5.61 |
$ 5.72 |
$ 5.84 |
$ 5.95 |
|
(-) Variable Costs |
$ 2.20 |
$ 2.24 |
$ 2.29 |
$ 2.33 |
$ 2.38 |
|
Contribution |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-) Fixed Cost |
$ – |
$ – |
$ – |
$ – |
$ – |
|
Net Profit |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-)Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Net Profit before Tax |
$ 2.80 |
$ 2.87 |
$ 2.93 |
$ 3.00 |
$ 3.07 |
|
(-) Tax @40% |
$ 1.12 |
$ 1.15 |
$ 1.17 |
$ 1.20 |
$ 1.23 |
|
Net Profit after tax |
$ 1.68 |
$ 1.72 |
$ 1.76 |
$ 1.80 |
$ 1.84 |
|
(+) Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Cash Inflows |
$ 2.18 |
$ 2.22 |
$ 2.26 |
$ 2.30 |
$ 2.34 |
|
(+) Salvage Value |
9 |
||||
|
Working Capital |
2 |
||||
|
Free Cash Flows in Australian Dollars |
2.18 |
2.22 |
2.26 |
2.30 |
13.34 |
The total free cash flow which Company would have would be $ 13.34 in all five years.
Computation of NPV in Australian Dollars (AUD) for the project assuming the cost of capital is 5% (Myer Holding Group, 2017).
|
Year |
|||||
|
Particular |
1 |
2 |
3 |
4 |
5 |
|
Total sales |
$ 5.50 |
$ 5.61 |
$ 5.72 |
$ 5.84 |
$ 5.95 |
|
(-) Variable Costs |
$ 2.20 |
$ 2.24 |
$ 2.29 |
$ 2.33 |
$ 2.38 |
|
Contribution |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-) Fixed Cost |
$ – |
$ – |
$ – |
$ – |
$ – |
|
Net Profit |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-)Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Net Profit before Tax |
$ 2.80 |
$ 2.87 |
$ 2.93 |
$ 3.00 |
$ 3.07 |
|
(-) Tax @40% |
$ 1.12 |
$ 1.15 |
$ 1.17 |
$ 1.20 |
$ 1.23 |
|
Net Profit after tax |
$ 1.68 |
$ 1.72 |
$ 1.76 |
$ 1.80 |
$ 1.84 |
|
(+) Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Cash Inflows |
$ 2.18 |
$ 2.22 |
$ 2.26 |
$ 2.30 |
$ 2.34 |
|
(+) Salvage Value |
9 |
||||
|
Working Capital |
2 |
||||
|
Free Cash Flows in Australian Dollars |
2.18 |
2.22 |
2.26 |
2.30 |
13.34 |
|
*Present value factor @5% |
0.952 |
0.907 |
0.864 |
0.823 |
0.784 |
|
Present Value |
$ 2.08 |
$ 2.01 |
$ 1.95 |
$ 1.89 |
$ 10.45 |
|
Total Present values(A) |
$ 18.39 |
||||
|
(-)Cash Outflows |
|||||
|
Initial investment |
$ 10.00 |
||||
|
Working capital investment |
$ 2.00 |
||||
|
(+)Cost Of equipment |
$ 12.00 |
||||
|
Total(B) |
$ 12.00 |
||||
|
Net Present Value(A-B) |
$ 6.39 |
Source: (Yahoo finance, 2018).
If Canadian dollar depreciates against the Australian dollar and it could buy only .95 Australian dollar then the outcome would be
|
Year |
|||||
|
Particular |
1 |
2 |
3 |
4 |
5 |
|
Total sales |
$ 5.50 |
$ 5.61 |
$ 5.72 |
$ 5.84 |
$ 5.95 |
|
(-) Variable Costs |
$ 2.20 |
$ 2.24 |
$ 2.29 |
$ 2.33 |
$ 2.38 |
|
Contribution |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-) Fixed Cost |
$ – |
$ – |
$ – |
$ – |
$ – |
|
Net Profit |
$ 3.30 |
$ 3.37 |
$ 3.43 |
$ 3.50 |
$ 3.57 |
|
(-)Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Net Profit before Tax |
$ 2.80 |
$ 2.87 |
$ 2.93 |
$ 3.00 |
$ 3.07 |
|
(-) Tax @40% |
$ 1.12 |
$ 1.15 |
$ 1.17 |
$ 1.20 |
$ 1.23 |
|
Net Profit after tax |
$ 1.68 |
$ 1.72 |
$ 1.76 |
$ 1.80 |
$ 1.84 |
|
(+) Depreciation |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
$ 0.50 |
|
Cash Inflows |
$ 2.18 |
$ 2.22 |
$ 2.26 |
$ 2.30 |
$ 2.34 |
|
(+) Salvage Value |
9 |
||||
|
Working Capital |
2 |
||||
|
Free Cash Flows in Australian Dollars |
2.18 |
2.22 |
2.26 |
2.30 |
13.34 |
|
*Present value factor @5% |
0.952 |
0.907 |
0.864 |
0.823 |
0.784 |
|
Present Value |
$ 2.08 |
$ 2.01 |
$ 1.95 |
$ 1.89 |
$ 10.45 |
|
Total Present values(A) |
$ 18.39 |
||||
|
Canadian dollar to AUD |
0.95 |
||||
|
Total present cash inflow |
$ 17.47 |
||||
|
(-)Cash Outflows |
|||||
|
Initial investment |
$ 10.00 |
||||
|
Working capital investment |
$ 2.00 |
||||
|
(+)Cost Of equipment |
$ 12.00 |
||||
|
Total(B) |
$ 12.00 |
||||
|
Canadian dollar to AUD |
$ 11.40 |
||||
|
Net Present Value(A-B) |
$ 6.07 |
It is analyzed that the NPV in this case will change to AUD $ 6.07 if there is changes in Canadian dollar to AUD to .95 over the next five years. it will lower down the overall net present value of the project (Warren, Reeve, and Duchac, 2013).
In both cases, the net present value of the project is positive. However, it will lower down my earning if the same amount is remitted to Australia. It will not affect my decision as in both cases I am having positive net present value (Myer Holding Group, 2017).
After analyzing this project, the main advice to Myer would be that it should accept this project. It will not only add value to organization but also increased the inflow of cash for company in near future. Therefore, it is advised to Myer to accept the new proposal to set up stores (Yahoo finance, 2018),
Conclusion
This could be inferred that Myer Company could add value on its investment if it select the given project. However, by using the given capital budgeting method, it could easily determine that it would have positive cash inflow which will be more than its cash outflow.
References
Alles, M. G., Kogan, A., and Vasarhelyi, M. A. 2018. Feasibility and Economics of Continuous Assurance 1. In Continuous Auditing: Theory and Application (pp. 149-167). Emerald Publishing Limited.
Arens, A. A., Elder, R. J., and Mark, B. 2012. Auditing and assurance services: an integrated approach. Boston: Prentice Hall.
Fletcher Building Construction, (2016). Annual report. Available at https://fletcherbuilding.com/investor-centre/financial-results/2017-annual-report/., ., , Accessed on 14th May, 2018
Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis. Journal of Business Finance & Accounting, 42(5-6), pp.555-582.
Myer Holding (2015). Annual report. Available at https://investor.myer.com.au/Reports/?page=Annual-Reports., , Accessed on 14th May, 2018
Myer Holding (2016). Annual report. Available at https://investor.myer.com.au/Reports/?page=Annual-Reports., , Accessed on 14th May, 2018
Myer Holding (2017). Annual report. Available at https://investor.myer.com.au/Reports/?page=Annual-Reports., Accessed on 14th May, 2018
Warren, C.S., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.
Yahoo finance, 2018 Available from https://in.finance.yahoo.com/, Accessed on 14th May, 2018
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