Student Name & Number

Breana Chauntler

S0271591

Course Code

ACCT11059 Accounting, Learning and Online Communication

Assessment 2 Step 7-10

Course Coordinator

Martin Turner

Due Date

Monday 9th October, 11am

Step 7The three products I’ve chosen are:

Interceptor 9000 - $248,000 NZ

7.7m Sport D-Tube - $134,000 NZ

2100 St Amphibious - $230,900 NZ

With Maria’s reasoning, I am assuming that the variable costs are going to be a very small percentage of selling price, as these items are not high-volume. So I am going to assume that variable cost is 10% of selling price. Hence, variable costs will be:

- Interceptor 9000: $24,800- Sport D-Tube: $13,400- 2100 St Amphibious: $23,090

For the contribution margins for each product (SP-VC):

- Interceptor 9000: $248,000 - $24,800 = $223,200- Sport D-Tube: $134,000 - $13,400 = $120,600- 2100 St Amphibious: $230,900 - $23,090 = $207,810

The first thing to note is that all three contribution margins are positive; a good sign! And the contribution margins are similar (compared to selling price) because each product is similar in nature. They are all marine craft, all designed similarly and have similar (or estimated “same”) variable costs.

There are several reasons why Sealegs would include products with different contribution margins. One reason is diversification; companies want to ensure they are diversified so that they can reduce risk. Another reason is to appeal to more potential customers. Having three areas of products (professional, recreational, and technological) allows Sealegs to attract more customers rather than trying to appeal to just one area. And these different areas of customers have different budgets. Those buying for the professional sector may have more available funds than those buying for recreational use. Having a wide range of products with varying prices ensures there is something for everyone.

Constraints for Sealegs can include:

- Lack of demand for these products: While I see this to be highly unlikely (especially in the emergency services industry) there is always the chance that these products will no longer be needed.

- Competitors: At the moment, there are no significant competitors for the company, but their breakthrough technology will no doubt catch the eye of others who want to enter into the market. Once this happens, Sealegs will need to show that their original products are better than their imitators.

- Lack of resources: Because these craft have to be of extremely high quality, it is essential they are manufactured with the best materials. However, these materials may not always be available. And this can affect which products are manufactured and sold.

Step 8Market price of shares was not included in the annual reports, so I found them online at Google Finance:

https://finance.google.com/finance?q=NZE:FMS&xpid=4132891&evtid=6f_SWeCzKYOa8wW2sKaQAw&ep=sr

WACC for each year was also not provided in the annual reports, so I just used Martin’s suggested 10%.

Ratio Analysis

When I first looked at the ratios for my company, I was a little scared. I had no idea what these number meant, and I didn’t know if I’d even calculated them correctly.

Profitability Ratios:

The profitability ratios show the “bottom line” for the company, as well as the return to investors. For Sealegs International, their Net Profit Margin has increased over the past four years.

The Net Profit Margin is the company’s ability to turn sales into profits. While there was a decrease in this value between 2014 and 2015, there has been a steady increase since then. The figures are showing that this year, Sealegs International turned 3.75 cents of every dollar into profit.

The Return on Assets shows that amount of every dollar invested in assets that becomes profits. Again there is a decrease between 2014 and 2015, and an increase from there, ending up at 5.1 cents in each dollar invested that is turned into profit. As stated in their 2015 annual report, these figures reflect the significant investments made by the company, as well as the difficult trading environment. However, these investments seem to have paid off, as the company is now making a profit, which looks to be increasing every year.

Efficiency Ratios:

The efficiency ratios show how well a company is managing its assets. If too much is invested in assets, capital will be too high. If not enough is invested, it will affect sales, profitability and share price.

Days of Inventory for Sealegs shows that the company averages 150 days for inventory to turn over. Considering the products this company manufactures and sells, I think this value is quite reasonable. In 2017, the company sold a total of 90 products. The 150 days of

inventory average is quite reasonable for a company that sells less than 100 products per year.

The Total Asset Turnover Ratio shows how efficiently the assets are generating sales. There doesn’t seem to me much variation in these figures over four years, so I don’t think there is much to be concerned about. The figures indicate that Sealegs is making $1.36 in sales for every dollar invested in assets.

Liquidity Ratios:

The Liquidity Ratio for 2017 shows that for every dollar in liabilities, Sealegs has $3.18 in assets. As this ratio is an indication of the company’s ability to manage debt, I would say Sealegs is doing quite well.

Financial Structure Ratios:

The Debt/Equity Ratio shows how much debt a company is using to finance its assets relative to the amount of value represented in shareholder’s equity. A high debt/equity ratio indicates a company is aggressive in financing growth with debt. In this case, Sealegs has a relatively low debt/equity ratio, which indicates they have taken on relatively little debt and have low risk.

The Equity Ratio shows how much of the assets are funded by shares. Research into the topic has shown that a higher equity ratio can indicate a conservative approach to debt management, which aligns with the assumptions from the previous ratio.

Market Ratios:

Based upon my feedback from other students, as well as just looking at the figures myself, I feel like my Earnings Per Share calculations are not quite right. If you increase the decimals, it shows that the EPS does in fact increase over the 4 years, however the numbers still seem too small. I wasn’t sure where I went wrong, so I was unable to fix any issues.

As my company issued no dividends, it made sense that the Dividends Per Share ratio was nothing.

Ratios Based on the Restated Financial Statements:

Sealegs seem to show a weak Return on Equity (ROE), which indicates the company is not using shareholder’s money efficiently. However, ROE does increase over the 4 years, so the company is clearly improving in this area.

The Return on Net Operating Assets (RNOA) shows how well the company is using their assets to create profit. When comparing the RNOA with the Return on Assets, the only significant difference is that the figures are slightly higher. The fluctuations between the years are relatively similar.

The Net Borrowing Costs Ratio (NBC) shows the average amount of interest paid on borrowings. It seems Sealegs is paying off their borrowings in 2014 and 2015, then it jumps down again in 2016. This could be a result of the additional investments made by the company in order to grow the business, as the figure increases to a positive amount in 2017.

When comparing the Profit Margin (PM) with the Net Profit Margin (NPM), there seems to be very little difference. The profit margin is the percentage of sales left over after paying expenses. Net profit also includes the financial and operating activities. This indicates that the financial and operating activities are not affecting profits too much.

The Asset Turnover (ATO) shows how efficiently the company generates sales from the net operating assets. The Total Asset Turnover Ratio (TAT) shows how efficiently the company generates sales from their total assets. The difference between the two are relatively insignificant, and their fluctuations seems to be quite similar.

With majority of the figures, there seems to be a significant jump between 2015 and 2016. In 2015, Sealegs implemented a strategy to grow their business. I believe this to be the cause of the significant differences in the figures.

Economic Profit

Economic profit is a measure of how profitable a company is and is considered a reflection on management performance. Feedback from other students, as well as comparison to others’ economic profit calculations, has lead me to believe I’ve calculated my economic profit incorrectly, as the figures just seem too small. However, I’m not sure where I’ve gone wrong, and have been unable to come to a different answer. I will use these figures in the analysis, but I’m not sure if they accurately reflect what is going on in the business.

Jump forward to when I’m writing my analysis, and it seems I’ve fixed my calculation! YAY! Turns out I’d gotten confused with my inputs and used the wrong thing. So here is the new economic profit calculation.

I would say the key driver of economic profit is Net Operating Assets. The business strategy implemented in 2015 has increased the company’s assets, which has had an increasing effect on economic profit.

Step 9Sealegs International Ltd is considering expanding into Australia (from New Zealand). Sealegs currently operates out of Albany, Auckland. They are looking at building a new factory in Sydney, NSW and/or on the Gold Coast, QLD. These areas are abundant with beaches, and their emergency service teams will require amphibious craft to be able to perform efficiently.

Sealegs International Ltd have no intentions of closing these factories in the future, as long as they continue to be profitable and solvent. However, market demand for these products may decrease in these areas after a few years, so it is suggested that the projects be given a length of 10 years.

There would be a demolition cost for the building in the Gold Coast at the end of the 10 years, if the company decided to move on. However, the Sydney structure could be sold to a local company for boat housing/storage.

Cash flows for both factories would be predominantly comprised of consumer purchases less operational costs such as purchase of material, employee wages and manufacturing costs.

These two options would be independent of each other, as the cash flows of one would not be affected by the acceptance or rejection of the other. The investment would be made on 1 January 2018. The estimated future cash flows are expected to be received on 31 December of each year. It is assumed the rate of return/discount rate/WACC is 10%.

The original cost, the estimated life, residual value and estimate future cash flows of each investment opportunity are set out in the table below. All amounts are expressed in New Zealand Dollars NZD.

Sydney Gold CoastOriginal Cost -$70 million -$55 millionEstimated Useful Life 10 years 10 yearsResidual Value $2.5 million -$1.5 millionEstimated Future Cash Flows31 December 2018 (1 year) -$3 million -$2 million31 December 2019 (2 years) -$1 million $18 million31 December 2020 (3 years) $17 million $21 million31 December 2021 (4 years) $21 million $23 million31 December 2022 (5 years) $22 million $18 million31 December 2023 (6 years) $19 million $16 million31 December 2024 (7 years) $16 million $14 million31 December 2025 (8 years) $14.5 million $14.5million31 December 2026 (9 years) $15 million $15 million31 December 2027 (10 years) $15 million $14 millionNet Present Value $6 million $35 millionInternal Rate of Return 12% 22%Payback Period 5.74 years 3.78 years

The payback period shows how long it will take to recover the initial cost of the project. If the payback period is less than the life of the project, then the project can be accepted. You don’t want to begin a project if it isn’t going to generate any profit by the time it’s finished. The payback period for both options is less than 10 years, so both projects are viable in this sense. However, option 2 (Gold Coast) will begin generating profits 2 years before option 1 (Sydney), so it would be the better choice as far as payback period is concerned. However, the payback period fails to account for the time value of money, and limits the project to a certain time frame. This means we need to look at other factors before we can make a decision.

Net Present Value (NPV) looks at how much value is created from an investment. It shows the difference between the market value (present value) of future cash flows and costs. If a project NPV is greater the zero, it can be accepted. The greater the positive NPV, the better the project. The NPV of option 2 is significantly greater than that of option 1. This makes the Gold Coast factory a better option than the Sydney factory.

Internal Rate of Return (IRR) is the rate of return that causes NPV to be zero. If this rate is greater than the required rate of return, the project can be accepted. The required rate of return for the two options was 10%. Option 1 had an IRR of 12%, meaning it could be accepted. Option 2 had an IRR of 22%, so it was also a viable option.

From the figures and analysis above, it is advised that Sealegs International ltd choose to expand the Gold Coast, Qld. The NPV for this option is significantly higher than that of option 1; $35 million compared to just $6 million. The internal rate of return is 22% compared to 12% on the first option. And the Gold Coast option is expected to have a payback period of less than 4 years, where the Sydney option will take almost 6 years to return the initial investment.

If they had the funds, Sealegs International Ltd could choose to go ahead with both options, as they both provide returns within the next 10 years, and their rates of return are both greater than the required 10%.

Step 10Writing feedback for others certainly helped me to reflect on my own assignment, as I was able to look at what was required and apply it back to my own work. Receiving feedback from other students also helped me to improve my assignment. The feedback I received from Logan was more a confidence booster than anything, as he had no criticisms for my draft, only praise. The feedback I received from Kim provided some praise, as well as some suggestions on how I could improve certain areas. She also mentioned an issue she found with my Earnings Per Share calculation, but I didn’t quite understand what she meant by it. Tamika’s feedback provided some criticism as well as praise, which both helped.

Feedback From: Breana Chauntler

Feedback To: Tamika Werder

My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost and CMCommentary – contribution marginsConstraints – identify and commentary

You’ve identified three products. You could provide a description of each one.Calculation of variable cost and CM looks good!No commentary on CM or constraints as yet.

Step 8Calculations pf ratios

Ratios – commentary (blog)

Calculate economic profitCommentary – drivers of economic profit

Your ratio calculations look good and you’ve linked from the previous tabs.Good start on the commentary. Maybe include how these figures show what’s happening in your company.Calculation of economic profit looks correct.Your commentary looks good. Very insightful.

Step 9Develop capital investment decision for you firm

Calculation of payback period, NPV & IRRRecommendation & discussion

Good start on the capital investment decision. You still have a little way to go. You could include some background to the scenario (what the options are and details about each one).Your calculations look good.No recommendations as yet. May I suggest Option 1? I’m sure you can see why 😊

Step 10Individual feedback with others Did not see.Overall ASS#3 Overall, great start to the assessment.

Hopefully this feedback helps, and you’re well on your way to an awesome submission.

Feedback From: Breana Chauntler

Feedback To: Chloe Thompson

My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost and CM

Commentary – contribution margins

Constraints – identify and commentary

You’ve identified three products that are comparable, and estimated the selling price, variable cost and contribution margin, which look quite reasonable.Your commentary on contribution margins looks great. I really liked how you described the reasons for selling products with different contribution margins.You’ve identified relevant constraints for your company, and have clearly linked them to how your company decides whether to sell or not.

Step 8Calculations pf ratiosRatios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit

Your ratio calculations look good.Your commentary provides a good description of what has happened. You could provide more analysis into what these numbers mean.Calculation of economic profit looks good.No commentary provided on economic profit so far.

Step 9Develop capital investment decision for you firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

You’ve very clearly set the scenario for your capital investment decision.You might want to look at your IRR calculation for your first option. I think you may have made an error. Other calculations look good.No discussion provided as yet.

Step 10Individual feedback with others

Did not see

Overall ASS#3 I would just read over your written components again, as there are a few grammar issues that could be improved. Overall, it’s looking great!

Feedback From: Breana Chauntler

Feedback To: Tanya Clark

My CommentsStep 7Identify three products or services of your firm

Estimate selling price, variable cost and CM

Commentary – contribution margins

Constraints – identify and commentary

You’ve identified three products, but you could provide a little more description on them.Selling price, variable cost and CM look great! You’ve got a great mix of products.Good discussion on contribution margins. Great analysis on why your company produces products with different contribution margins.Good identification of constraints. You could include how they are relevant when choosing which products to sell.

Step 8Calculations pf ratios

Ratios – commentary (blog)

Calculate economic profitCommentary – drivers of economic profit

Your linking and ratio calculations look great. I was glad to see my company wasn’t the only one that didn’t pay dividends!Your commentary on the ratios is awesome! I love the use of the graphs, great way of presenting the numbers. You could include some more analysis on the ratios, rather than just descriptions of what’s happening.Not included.Not included.

Step 9Develop capital investment decision for you firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Your capital investment decision has been clearly set out.It looks like neither of your options are particularly viable! Perhaps you could go back and play with your cash flow estimates, and try to get at least one option with a positive NPV.No discussion provided as yet.

Step 10Individual feedback with others Did not see.Overall ASS#3 Your assignment is coming along really

nicely. Make sure you go back and read through your written components, as I picked up on a few grammar issues. Overall, great work!

Feedback From: Logan Robinson

Feedback To: Breana Chauntler

My CommentsStep 7Identify three products or services of your firmEstimate selling price, variable cost & CMCommentary – contribution marginsConstraints – identify & commentary

You successfully identified three products of your frim. I agreed with your decisions about the estimations for your variable cost, and the calculations for your contribution margins were correct.

I enjoyed reading your commentary about your contribution margins and you listed a good number of constraints. Good job.

Step 8Calculation of ratiosRatios – Commentary (Blog)Calculate Economic ProfitCommentary – drivers of economic profit

The calculation of your ratios (including economic profit) have been done correctly and you have linked to the previous tabs. Good job

Still required to commentate about ratios and drivers of economic profit.

Step 9Develop capital investment decision for firm

Calculation of payback period, NPV & IRR

Recommendations & Discussion

You successfully developed a capital investment decision.

Your calculations for payback period, NPV and IRR were done correctly

After looking at your three calculations, I would come to the conclusion that option 2 was the better of the two which you seem to agree with. In your recommendations and discussion, you explained exactly why you believed that option 2 was the better of the two and I completely agreed with your reasons. Well done.

Step 10Individual feedback with other studentsOverall You have done an excellent job overall for

those parts you have done. If you complete your step 8 at the same quality as your other steps, you will have produced an excellent assessment.

Feedback From: Kim Street

Feedback To: Breana Chauntler

My Comments

Step 7Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

You have identified three products and the selling price and variable costs are reasonable. Your commentary on why you should have diversified products is good and you have identified constraints. Good job!

Step 8Calculation of ratios

Ratios – Commentary (Blog)

Calculate Economic Profit

Commentary – drivers of economic profit

All your calculations look correct. No commentary as yet for your ratios and economic profit but you have done a great job in the spreadsheet. Maybe you could write about the huge change in ROA from 2015 to 2016 and what change happened in the company to reverse this? Please just check your issued ordinary shares as your earning per share do not match up to that in your annual report. You can work out your shares by dividing your profit by your earnings per share.

Step 9Develop capital investment decision for firm

Calculation of payback period, NPV & IRR

Recommendations & Discussion

Good job in the spreadsheet. You just need to change your estimated life in your table to reflect the 10 years that you have indicated in your word document. You could think about adding your thoughts on the strengths and weaknesses of your recommendation.

Step 10Individual feedback with other students n/aOverall You are well on your way. Great job so far.

Hope this feedback helps.

Feedback From:Tamika Werder

Feedback To: Breana Chauntler

My Comments

Step 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins Constraints

– identify & commentary

You have identified realistic and reasonable

prices and costs. You have written a detailed

commentary on the constraints, reasons why

different contributions margin would occur.

You talked about the demand for products

well and how that will affect prices and how

demand will affect the product

Step 8

Calculation of ratiosRatios – commentary (blog)

Calculate economic profitCommentary – drivers

of economic profit (blog)

The calculations for your rations looked

correct and appropriately formatted. Just

your market ratios looked a little bit out but

I’m sure you will fix that. As well as your

economic profit calculation looked wrong.

Step 9

Develop capital investment decision for your

firm Calculation of payback period, NPV & IRR

Recommendation & discussion

You did a great job in discussing the capital

investment you identified the two capital

investment options in your company very

well and were explained in great detail. I

could tell you have put in a great deal of

effort to give two plausible and well thought

out options. Your recommendation was

reasonable and justified.

Step 10

Individual feedback with other students

Not available

Overall ASS#2

Well done and well completed draft. Your

discussion and calculations all looked great.

I hope you receive a great mark on your

assignment. Good luck!