Central Queensland University

Written Assessment 325% Assessment 3

Boden Abell – S0271465Unit Coordinator: John Mcgrath

ACCT11059: Using Accounting for Decision MakingDue: 13/02/2016

Step 1:

Ratio AnalysisProfitability Ratios

Net Profit Margin [NPM]

Ratios are best understood by examining the inputs involved. The NPM comprises of

the net profit after tax and the sales/service revenue. So ultimately this ratio explains

how much after tax profit or loss is made from each dollar of service revenue.

The NPM starts at 6.7% in 2012. While this indicates that Ausenco is making a 6.7%

profit from each dollar of service revenue, this is concerning. More so is the transition

to losses from 2013 to 2015. Businesses with a low turnover are expected to have a

high NPM; yet this is not the case for Ausenco. Why? Tightening market conditions,

especially with the poor performance of the commodities industry, is causing an

adverse ripple effect from Ausenco’s potential clients.

To identify why the NPM has decreased significantly to -35.06%, I conducted

horizontal analysis of service revenue and expenses as seen in the figure 1. Using

2012 as the base, it can be seen that service revenue has taken a hard hit over the years

and Ausenco has reduced its expenses in response. However, expenses have declined

at a slower rate than service revenue, thus the negative NPMs.

Figure 1. Horizontal Analysis of Service Revenue and Expenses 2012-2015

Return on Assets [ROA]

ROA expresses how productive the total assets of a firm are in producing a profit.

Because this formula uses the same numerator as the NPM, a similar decline is also

witnessed here. Horizontal analysis of the total assets in figure 2 also reveals a sharp

drop in total assets over the years.

Figure 2. Horizontal Analysis of Total Assets 2012-2015

Overall there are two major factors affecting this reduction in return on assets; a faster

decline in revenues than expenses and a decrease in total assets. So I thought to

myself, why no eliminate expenses from the equation to clarify if assets are really

being ineffectively managed. This is answered in the total asset turnover ratio.

Efficiency (or Asset Management) Ratios

Days of Inventory

Ausenco is solely a service providing company and thus there are no COGS nor are

there inventories; this ratio is not applicable.

Total Asset Turnover Ratio [TAT]

Continuing from the ROA, the TAT reveals how effectively total assets are being

controlled by management to generate revenue without the impact of expenses. From

2012 to 2014 assets were providing greater than or closely equal to a dollar of service

revenue for each dollar of total assets, which is depicted in figure 3. However, as with

all other ratios calculated so far there is a downward trend. Management needs to

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rework how their assets are being utilised as they are not performing to a standard

which would be expected of a low turnover firm.

Figure 3. Service Revenue versus Total Assets 2012-2015

Liquidity Ratios

Current Ratio

The current ratio investigates how liquid the firm is; that is, can the firm meet its

financial obligations which are due within the current accounting period? More

specifically, this formula calculates how many times over the firm can repay its

current obligations using current assets. Liquidity is much like solvency and holds

equal, if not greater, importance to the firm. One thing that confuses me is that

companies are assessed by solvency, and if they are found insolvent, they are wound

up. In this context, solvency relates to the ability to repay debts as and when they fall

due. To me this sounds more like a liquidity test as “as and when they fall due”

appears to be discussing short term debts. Regardless, all businesses should maintain a

level of liquidity greater than 1.

An ideal figure that I always hear when discussing liquidity is 2:1; that is, current

assets are two times greater than current liabilities. Ausenco does not reach this level

in any of the four years. However, a ratio of 1.5 is sufficient. 2014 saw an

improvement over 2013, mainly because the current borrowings had been reduced by

approximately $30,000. This may be because the firm paid down some of the current

debt, or some was reclassified and/or renegotiated to non-current borrowings, or even

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a combination of both. By 2015 however, the ratio more than halved as much of the

non-current borrowings of 2014 became current. I have already discussed the material

uncertainty with the going concern principle for Ausenco which this ratio reveals.

Ausenco would only be able to repay just over half of its current obligations out of

current assets which is very concerning. However, as part of the refinancing this debt

to equity with RCF, this ratio should improve dramatically for the 2016 period.

Financial Structure Ratios

Debt/Equity Ratio [D/E] & Equity Ratio

The D/E is a measure of the financial leverage in a firm. Greater levels of debt

increases the leverage or the gearing of the firm. So essentially what this ratio aims to

reveal is the percentage of debt that the company uses to finance its assets as opposed

to equity. It makes sense that this is the case as when liabilities are increased, the ratio

will be higher. Thus, it can be seen in figure 4 that Ausenco continued to pay off its

debt between 2012 and 2014. This also corresponds with the increasing proportion of

equity in the firm through the equity ratio. Another ratio which complements this is

the debt ratio which demonstrates the shrinking fraction of debt in Ausenco.

Figure 4. Horizontal Analysis of Total Liabilities and Total Equity 2012-2015

2015 experiences a major jump in the D/E and the debt ratio while a decrease in the

equity ratio. Horizontal analysis of the total liabilities and total equity shows the

continuing decline in both items over the first four years. However, liabilities

accelerated at a faster rate than equity in 2015 which explains the increase in the D/E

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ratio. Without comparable benchmarks it is difficult to form a comprehensive

evaluation, however I do not believe that this level of debt is ideal for Ausenco. In

respect to this, there should be a vast improvement to these ratios as the RCF

refinancing and conversion to equity would result in very low debt and much larger

equity holdings.

Market Ratios

Earnings per Share [EpS]

EpS is a division of the business’ profits or losses allocated to each issued ordinary

share. It is by no means the amount paid out to each share. Companies generally will

need to retain some internally generated funds to assist with financing itself and

repaying liabilities so they may only pay a dividend at a fraction of this profit. For

2012, Ausenco generated 19 cents of profitability per ordinary share while incurring a

loss of 14 cents per share in 2013 and so forth. It is obvious that shareholders would

not be pleased with these losses. Furthermore, it would be difficult for Ausenco to

raise capital from retail investors because of this grim outlook.

Dividends per Share [DpS]

This ratio calculates the total dividend paid out per issued ordinary share. If the

company only pays a final dividend this may be straightforward as the relevant

securities exchange will list the dividend per share and the number of shares held on

that date for listed public companies. This reveals a limitation in this model; there has

been more than one dividend payment and the amount of shares held varied over the

course of their declaration. So even when details are known for each dividend

declared, the numbers wouldn’t be able to be added up as not all investors would

receive the dividend. When comparing figure 5 to the DpS, it is clear that there is a

large difference caused by these limitations.

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Figure 5. Historical Dividends of AusencoYahoo! Finance (2016)

Dividends were paid out in 2012 and 2013. Ausenco made a profit in 2012 and

accordingly the directors saw fit to distribute dividends during this period. However,

in 2013 an overall loss was made yet dividends were paid. Why? The chairman’s

report explains that “given the 2013 loss, the Board determined not to pay a dividend

for the second half in line with our policy of only paying dividends from net profits

after tax” (Ausenco, 2016). This indicates that the half yearly performance must have

generated a net profit after tax. Additionally, this also explains the lack of dividends

throughout 2014 and 2015. Equity investors may be disappointed to not receive a

dividend, however I believe it is in the best interest of Ausenco to discontinue the

dividend payments until it returns to profitability.

Price Earnings Ratio [PE]

The PE compares the market price per share with the EpS. To simplify, this ratio

seeks to answer how many times over the EpS needs to be received that year to match

the market price. So for 2012, the EpS would need to be 16.71 times higher in order to

match the market value of $3.19. Price earnings also reveals the discrepancy between

what the market anticipates the performance of the company will be with the actual

earnings. The market is not completely efficient so a difference is natural. Between

2013 and 2015, the market price becomes smaller and smaller in response to negative

outlooks by equity investors. The market price is determined by the market

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participants as it is the price that they are willing to trade the stock as, and when more

information is released to the public the more efficient the market gets. So

correspondingly, the market downgraded their expectations and thus closed the gap

between the EpS and the market price.

Ratios Based on Reformulated Financial Statements

Return on Equity [ROE]

ROE shows the percentage of return earned on each dollar invested as equity using

the total comprehensive income. This demonstrates how effective the firm is in

utilising the shareholders capital. In 2012, Ausenco was able to generate 15.81% per

dollar invested. Naturally, as profits declined from 2013 through to 2015, so did the

ROE.

Return on Net Operating Assets [RNOA]

This ratio is similar to the ROA, except the operating income after tax and NOA are

used. By removing the financial items we are able to identify exactly what return was

provided on each dollar invested in operating assets less the operating liabilities.

Separating out the financial and operating activities also assists with gaining a clearer

insight into the operations of the firm which create and detract value from the firm.

Figure 6 depicts that this ratio is more sensitive to change than the ROA.

Figure 6. ROA versus RNOA for Ausenco 2012-2015

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In 2012, the RNOA calculation was 5.49% better off than the ROA calculation which

I feel is a much more reasonable return for a firm in Ausenco’s line of business. Of

course, 2013 to 2015 which initially showed an extraordinary decline in returns

revealed a more adverse impact on the RNOA. This is because the financial assets and

financial income are not utilised to soften the blow.

Net Borrowing Cost [NBC]

The NBC of the firm is essentially the net interest rate being charged on the firm’s

financial obligations. Since 2012 the rate has dropped approximately 3% which helps

to explain why Ausenco has increased its D/E ratio; the cost of borrowing is falling.

This also may be showing the effect of refinancing with RCF, which would

consolidate the interest rates of the many banks that Ausenco acquired loans from into

a single, more manageable rate. It is clear to me that Ausenco’s debt policy is strong

in terms of the interest repayments even though the borrowings themselves are

corroding profits.

Profit Margin [PM]

The PM explains how much after tax operating profit or loss is made from each dollar

of sales/service revenue. The NPM ratio is so similar to the PM ratio, as justified by

figure 7. This will not be the case for all firms as some may have greater portions of

financial income and expenses to operating income and expenses.

Figure 7. NPM versus PM of Ausenco 2012-2015

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Asset Turnover [ATO]

ATO is similar to the TAT as the numerator of sales is the same. The denominator has

now varied to NOA to reveal how effectively the operating assets of the firm are

being utilised by management to generate revenue. As seen in figure 8, the shape of

the curve over the five years is similar but with a larger decline for the ATO. Under

the new curve, Ausenco has managed to generate greater than a dollar of sales to each

dollar invested in operating assets which is a more ideal outcome compared to the

TAT in 2015. This is by no means a cause to rejoice as the numbers themselves are

not what matters; instead it is the shape of the curve. It does seem that the curve is

levelling out which is a good sign but improvement is required.

Figure 8. TAT versus ATO for Ausenco 2012-2015

Economic Profit

Creation and detraction of value in a firm was measured in the RNOA. Economic

profit also measures this but for the overall profitability of the firm for that accounting

period; it shows the economic and business reality of the firm.

Comparing the difference between the economic profit and the total comprehensive

income for the year suggests that Ausenco did not performed as well as reported, at

least economically. Figure 9 presents these figures parallel to each other and it can be

seen that the curve is essentially the same but lower on the chart. This reflects one of

the drivers of economic profit; the profitability of the firm. While not directly utilised

in the calculation, there is an underlying relationship; after all, it evaluates the

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performance of the accounting profit with the cost of capital. So in order to make an

economic profit, an accounting profit must first be made. Ausenco was only just

successful with this for 2012 as 0.31% of its total comprehensive income was

economic profit while the other periods were unprofitable both accounting wise and

economically. An economic profit margin is highlighted in figure 10.

Figure 9. TCI versus Economic Profit of Ausenco 2012-2015

Figure 10. Economic Profit Margin 2012-2015

Another driver to consider is the part of the formula “RNOA – cost of capital” which

seeks to discover if the RNOA cover the cost of capital for the period. The cost of

capital is the opportunity cost of utilising the capital invested in the firm, or more

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specifically, the next best alternative return the firm could earn. Figure 11 reveals that

Ausenco was able to provide a slightly better RNOA than the cost of capital for the

2012 period by 0.65%. However, in subsequent periods Ausenco did not even closely

match it. Some of this is attributable to the shrinking of service revenue mentioned in

my analysis of NPM while some is due to the deterioration of NOA. Figure 12

compares these items and the result suggests that the primary cause lies in the NOA

not being as efficient as they have been in the past. Similar to what I mentioned in the

NPM analysis, the operating expenses are falling at a rate behind operating income.

This is attributable to the weakening market conditions and needs to be addressed

immediately. Furthermore, while NOA has fallen too, this seems to be related to the

rightsizing activities of the firm in an attempt to “trim the fat” from operations.

Figure 11. RNOA versus Cost of Capital of Ausenco 2012-2015

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Figure 12. Service Revenue versus NOA of Ausenco 2012-2015

Reflection on Ausenco’s RatiosOverall, I have not found that this ratio analysis has not revealed too much new

information as beforehand I had carefully read over the figures of the financials and

the directors’ report. In regards to specific ratios, these are my reactions:

The NPM, EpS, and PM were all anticipated to be largely within the negatives

from 2013-2015 simply because Ausenco did not make a net profit after tax

nor a positive total comprehensive income. Economic profit in itself was not

surprising at all for the same reason; years that made accounting losses also

made economic losses and when the RNOA in 2012 was greater than the cost

of capital an economic profit was made. ROA, ROE, and RNOA were also

along these lines as you simply cannot provide a return on anything if you are

making losses.

I was surprised by the TAT as it was fine throughout 2013 then declined

unlike the other ratios which turned to negatives in this year. The ATO did

even better to my shock as it was still fine by the end of 2015.

Before I started this ratio analysis, I had looked over the current ratio for these

years due to the material uncertainty of going concern imposed in 2015.

Furthermore, I had investigated Ausenco’s financing structure as part of the

RCF deal.

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I had not thought about the problems with the DpS calculation until

completing this analysis. Additionally, there was no surprise in 2014-2015 as

Ausenco made no dividend payments.

The NBC was very helpful to explain why Ausenco had taken on more debt in

2015; the interest rate has lowered to a more ideal rate.

Restating the financials to help calculate these ratios also did not provide too much of

a benefit. ROE would have been no different under the restated or the reported figures

as all true equity was included from the beginning. RNOA did reveal that operations

were worse off in the 2013-2015 years, however when ignoring the figure differences

the shape of the curve is very much the same so decision-making would not be

effected significantly. I can also conclude that the PM was entirely useless next to the

NPM as they were identical in almost every way. Breaking the financials into bits

only seemed to benefit Ausenco’s ratio analysis with the ATO and economic profit.

Throughout the analysis I have compared many trends and calculated other ratios to

assist with understanding the required ratios. It is important to recognise that ratios are

often useless without comparison with another ratio, the past, or industry benchmarks.

A constant theme I ran into with these comparisons and ratios was that everything was

declining; there was little to no improvement between 2012 and 2015. As a result, in

line with Ausenco’s rightsizing activities the company is shrinking. Revenues,

expenses, profits, returns; it is all diminishing. I think that Ausenco has taken the

correct steps to improve the firm by readjusting its size as the market is not

performing at its best currently. I am excited to see how 2016 went for Ausenco in

terms of the outcomes of the RCF refinancing and the temporary boost to

commodities seen in the final quarter of the year.

Student DiscussionsThe names are hyperlinked to the blog post with the comment.

Suzanne Drovandi – Blog Post

Compared Daimler’s ratios to Ausenco’s. Not many similarities where found but

many differences where present. Also posed a question regarding economic profit

drivers.

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Suzanne Drovandi – Moodle Post

Seeking to answer Suzanne’s concerns on large variances with restated and reported

ratios.

Courtney Honnery – Economic Profit

Gave feedback on Courtney’s post on here economic profit drivers. Also compared

our analyses.

Courtney Honnery – Ratios

Feedback was given on how to improve the ratios analysis regarding communication.

Compared Ausenco’s ratios with Sinotruk’s.

Nicole Olsen

Commentary on debt/equity ratio and expectations on similarities between restated

and reported ratios.

Belinda Donaldson

Compared Ausenco’s and BPI’s ratios and made recommendation to review the

calculated price earnings ratio as it appeared to be blatantly incorrect.

Reflection on Ausenco’s Ratios Compared to Other Firms’Ausenco is a rather unique company due to its financial instability and illiquidity. So

comparisons between other companies so far have revealed more differences than

similarities. In regards to ratios involving profitability this remains to hold true. The

NPMs, ROAs, and EPSs of Ausenco differed from most firms based on the single fact

that profitability collapsed into exponential losses. Other student’s companies which I

have compared against (Daimler, Sinotruk, and BPI) reveal that these ratios were

rather stable with slight improvement or ending the 4 years around the same point.

Daimler was the only company which had a NPM which began around the same point

as Ausenco.

BPI and Ausenco trended downwards with their total asset turnover ratios while the

other companies remained rather stable.

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Ausenco had very similar levels of current ratios to Sinotruk and BPI from 2012 to

2014. Daimler was also within the range of 1 to 1.5. It seems that many companies do

not actually achieve the ideal 2:1 ratio.

I was very surprised to learn that most firms had debt/equity ratios in excess of 100%,

200%, and 300%. Some even showed 500%! Ausenco seems to stick out from the

crowd with meagre ratios of 79% and less. Furthermore, the equity ratio of Ausenco,

in line with the lower debt/equity ratios in comparison to other firms, has shown to be

higher than other companies. Ausenco’s capital raising policies must be focused more

on equity than debt whereas others allow for greater debt.

Dividends per share across companies seemed to be low, just as with Ausenco when it

was paying dividends; this excludes Daimler.

Ausenco, with its unprofitability, had negative price earnings ratios which was not

experienced by other firms.

ROE for other firms tended to show improvement over the years but with a decline in

2014, aside from Sinotruk. This behaviour was not reflected in Ausenco’s ROE.

The RNOA of Sinotruk and Dailmer follow a similar trend to their own ROA which is

also reflected in Ausenco’s own ratios. So while the values differ due to the

profitability, the trends are aligned between these two ratios. This was also the case

for the PM and the NPM, excluding Sinotruk, and the ATO and total asset turnover

with the exception of BPI.

Considering that the other companies compared did not have the same levels of losses

as Ausenco, their economic profits and losses where not to the same scale. However,

it seems it has been held true that companies struggle enough to just make an

accounting profit let alone the economic profit.

Overall, I find it very difficult to find similarities with Ausenco and other student’s

companies. This is not just to do with differences in industry and market factors, but

also internal issues. It appears that profitability tends to flow through to many ratios

and unless comparable companies are experiencing losses to the extreme that Ausenco

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is, then I doubt that many ratios will show similarities. I would like to use industry

benchmarks as a comparison tool, but I have no idea where to start to find them.

Step 2:

Option 1I have developed an exemplar capital investment comparison for Ausenco using

software. Option one comprises of developing a new enterprise system for Ausenco

consisting of project management assistance tools, progress tracking, and analysis

tools among many others to assist with operations as well as executive reporting.

Innovation can be very disruptive throughout the technology industry and thus reduce

the life spans of many software. However, I envision that this enterprise system will

be developed in-house to match the exact needs of Ausenco which effectively boosts

its lifetime. Developers can make adjustments and release new versions of the

software upon request. Therefore, I have given the system a 10 year estimated life.

After this time, the database can be migrated to a replacement system. Regardless of

this, I do not believe that this would provide a residual value and thus I have assigned

it with nil.

The cost of developing such an enterprise system has been estimated at $45 million as

it would be utilised across all subsidiaries. This is in line with examples taught

through the Systems Analysis unit and some experience with long term software in

my current employment. A research and technology innovation grant may also be

acquired from the Australian government to offset part of this cost. I am aware of

such a grant available as I have read over a proposed managed fund which will be

investing in these such operations.

Cash flows are estimated based on benefits provided by implementing the system.

Benefits include economies of scale related to project management, cost savings in

disposal of redundancy of duplicate software, and efficiencies in client management.

Cash flows are expected to rise significantly in years 2 and 3 as users become more

proficient with the system. Consequentially, as maintenance and upgrading

requirements increase with the growing impact of technological disruption, benefits

are expected to decrease from year 5 onward. These cash flows have been discounted

at a rate of 10%. Table 1 presents this analysis.

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Table 1Option 1 Cash Flow Analysis

Enterprise System Software (Internal Only)

   Estimated

Cash Flows*

Cumulative Discounted Cash Flows Cumulative

  $'000 $'000 $'000 $'000 $'000Original Cost -45,000        Estimated Life 10 Years        Discount Rate 10%        Residual Value 0        Year 0 2016 -45,000 -45,000 -45,000 -45,000Year 1 2017 5,500 -39,500 5,000 -40,000Year 2 2018 8,000 -31,500 6,612 -33,388Year 3 2019 10,000 -21,500 7,513 -25,875Year 4 2020 9,500 -12,000 6,489 -19,387Year 5 2021 9,500 -2,500 5,899 -13,488Year 6 2022 9,000 6,500 5,080 -8,408Year 7 2023 9,000 15,500 4,618 -3,789Year 8 2024 8,500 24,000 3,965 176Year 9 2025 8,500 32,500 3,605 3,781Year 10 2026 7,500 40,000 2,892 6,673

*The investment would commence on January 1 2017 and cash flows are expected to

be realised as cost savings throughout the year.

Subsequent NPV and IRR calculations reveal that this option is feasible. The rule of

NPV is that any project with a positive NPV should be undertaken, while the IRR

should be greater than the cost of capital. As the project results in a positive NPV of

approximately $7 million and an IRR of 13%, this option should be undertaken.

However, the payback period must be considered before acceptance. For most

information systems projects, a 5 year payback can be generalised for a 7 year useful

life. So considering that this is a much larger in-house project it would be reasonable

to use a payback of 8 years. It is not recommended to use the general payback period

as it does not account for the time value of money; instead the discounted payback is

ideal. As the discounted payback is just less than 8 years, the project also meets this

criteria.

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Table 2Option 1 Acceptance Analysis

NPV IRR Payback Period Discounted Payback Period$'000      

$6,673 13.23% 5 years, 3 months, and 122 days 7 years, 11 months, and 171 days

Option 2Option two also encompasses software development, however this would involve

selling the product to clients. This would not be an enterprise system, however it

would include a project management assistance tools and progress tracking among

other functionality. Just the same, digital disruption is still a contributing factor

however now competition has greater weighting. For such an external product, I have

given it a useful life of 7 years. Again, I do not believe that the software would have a

residual value and thus I have assigned it with nil.

The cost of developing this software has been estimated at $30 million. It may also

involve a research and technology innovation grant acquired from the Australian

government to offset part of this cost.

Cash flows are estimated based on subscription fees which would be charged monthly

at a minimum. For the purpose of this analysis, an aggregate figure for the year is

utilised. Cash flows are expected to rise significantly in year 2 as the product gains

reputation. Subscription fees are expected to fall following as new products are

released by competitors and maintenance costs rise. Version upgrades are expected to

counteract parts of the decline. These cash flows have been discounted at a rate of

10%. Table 3 presents this analysis.

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Table 3Option 2 Cash Flow Analysis

New Project Management Software (External)

    Estimated Cash Flows Cumulative Discounted

Cash Flows Cumulative

  $'000 $'000 $'000 $'000 $'000Original Cost -30,000        Estimated Life 7 Years        Discount Rate 10%        Residual Value 0        Year 0 2016 -30,000 -30,000 -30,000 -30,000Year 1 2017 7,500 -22,500 6,818 -23,182Year 2 2018 10,000 -12,500 8,264 -14,917Year 3 2019 9,000 -3,500 6,762 -8,156Year 4 2020 7,650 4,150 5,225 -2,930Year 5 2021 6,120 10,270 3,800 870Year 6 2022 4,284 14,554 2,418 3,288Year 7 2023 2,785 17,339 1,429 4,717

The NPV and IRR calculations reveal that this option is feasible as the project results

in a positive NPV of approximately $5 million and an IRR of 15%. For this project, a

5 year payback can be generalised for the 7 year useful life. Utilising the discounted

payback period, we can accept the project as it has a shorter payback period.

Table 4Option 2 Acceptance Analysis

NPV IRR Payback Period Discounted Payback Period$'000      

$4,717 15.41% 3 years, 5 months, and 179 days 4 years, 9 months, and 93 days

ConclusionIt can be concluded that both capital investments are viable projects. If Ausenco has

sufficient capital available then it can be recommended that both projects be

undertaken. In the event that it does not, option two provides a better return on capital

employed; after all, the IRR is approximately 2% higher. Furthermore, option one

requires an additional outflow of $15 million to provide only $2 million extra cash

flows; this capital may be better spent elsewhere. Option one however has a greater

NPV which would contribute more value to the company than option two.

Nonetheless, this does not consider the risk associated with the cash flows. The

discounted payback period is approximately 3 years longer for option one which

exposes the investment to interest rate risk. Additionally, the cash flows related to

option one are not cash inflows but rather reductions in cash outflows. The enterprise

system aims to reduce costs but does not generate in itself any income. These benefits

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are also subjective and difficult to measure in most cases. Considering these factors,

option two still presents itself as the best investment decision.

The weakness to the cash flow analysis is that it does not consider the qualitative

factors. Are staff resistant to technological change? An environment which is opposes

change can drive up costs of producing the enterprise system and could cause it to fail

altogether. Will providing clients with their own project management software reduce

the amount of projects for Ausenco itself? There is always a problem with providing

‘do it yourself’ products; it may detract from your services. However, they could also

bring in clients who do not require the full services of the firm. How fierce is

competition? Will the new entrant software pick up enough motion to get it off of the

ground? If it does, will tech giants such as Microsoft look towards acquiring the

system? Are their enough programmers available to complete both, if not one, of these

projects? There are many qualitative factors which further need to be considered.

Another weakness is that these figures are purely hypothetical. Without experience in

a firm as large as Ausenco and being relatively new to the technology industry, my

estimations are at best guesses. Aside from this, there are unique weaknesses within

the calculations themselves. It is unlikely that the discount rate would be remain at a

constant rate of 10%. In fact, I expect it to decrease over time as world economics

slow and interest rates remain low which decreases the cost of capital. Dropping the

discount rate would not change the decision process for either investment however it

would make them appear more favourable. The NPV itself does not reveal the timing

of the cash flows; it merely states the accumulated present value that the future cash

flows provide. That is why the payback period is also utilised. The payback period

does not consider cash flows beyond the break-even point which is why it is used in

conjunction with other calculations. As for the IRR, it may lead to multiple IRRs or

conflicting answers for mutually exclusive projects. Because the there is only one sign

change from negative to positive for these projects, I did not run into the multiple IRR

issue. However, it can be seen that the IRR disagrees with the NPV in my calculations

because of the difference in the initial outflow. However, I was still able to draw a

conclusion on option two regardless as I read the figures in context of each other.

Boden Abell – S0271465 ACCT11059 Page

Step 3:

Feedback from: Boden AbellFeedback to:

My Comments

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My Comments

Boden Abell – S0271465 ACCT11059 Page 1 of 28

Feedback from: Boden AbellFeedback to:

My Comments

Usefulness of Feedback Received

Boden Abell – S0271465 ACCT11059 Page 2 of 28

References

Ausenco Limited. (2016). Ausenco annual report 2013. Retrieved November 12, 2016

from http://www.ausenco.com/uploads/news/1456463815-160226-fy2015-

financial-report-and-appendix-4e.pdf

Yahoo! Finance. (2016). Ausenco Ltd historical prices. Retrieved December 26, 2016,

from https://au.finance.yahoo.com/