ACCT11059 – ASS#2 – Steps 7-10€¦ · Web viewACCT11059 – ASS#2 – Steps 7-10. Due date:...

ACCT11059 CQUniversity Ashleigh Clark

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ACCT11059 – ASS#2 – Steps 7-10

2019

Ashleigh Clark – Student 12108081assignment Stage 2 (Ass#2): Restated financial statements & Ratios

Due date: Monday, 10 May 2019, 11AM


Step 7: Variable Costs & Contribution MarginsCredit Corp Group provide numerous services in debt collection. Three services that I have picked out and provided for this step in the assignment are as follows with what service offerings are available for each.

1. Debt Sale Forward flow or one-off inventory portfolios From 90 to up to 2000 days in arrears High risk pre-charge-off Current or performing Insolvency or Part IX Secured or unsecured Skip accounts Judgement accounts

2. Contingency/Agency Collections Recovery of consumer and small business debts Improvement of collections Reduce fixed costs Provide increased cash flow and profitability

3. Hardship Management Full service offering including hardship assessment Maintenance of payment plans Customised reporting

I selected these three services as there was only four services that Credit Corp Group provides, but also because I felt that these three services were the most important aspects of the firm.

From Credit Corp Group’s website, I could not find any prices for these products. From what I can gather from discussions with others at my workplace about this, debt collection services often use a set commission percentage based on the amount of debt that is being recovered. Below is a table where I have outlined this.

$0 - $500 25%$501 - $1,000 20%

$1,001 - $5,000 12.5%$5,001 - $20,000 7.5%

Over $20,000 5%

For the purpose of this assignment, I have estimated that Credit Corp Group uses a set commission percentage of 12.5% (meaning that it is assumed that each service is only used for debt collections worth between $1,001 and $5,000). I have also assumed that they do not use the ‘no recovery, no fee’ policy or any other additional

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fees (such as solicitor fees), and that there is an annual fee of $250 for each service. Below is the formula I have made to calculate the selling price of each service.

Selling Price = Annual Fee + (Debt Collection x Set Commission Percentage)

Therefore, each service has a price as follows:

1. Debt SaleSelling Price=$250+($1,500×12.5% )¿ $437.50

2. Contingency/Agency CollectionsSelling Price=$250+($3,000×12.5% )¿ $625.00

3. Hardship ManagementSelling Price=$250+($4,500×12.5% )¿ $812.50

Variable costs are the costs which are dependant on and vary based on the level of output of production. However, Credit Corp Group are a firm that provides services, not products. Through discussions with others at my workplace, I found that the fixed and variable costs differ quite significantly to firms that provide production rather than services. For example, labour is often considered a variable cost in a manufacturing firm. This is because the labour rises as the volume of output is increased. In a firm that provides services, however, labour can be categorised as a fixed cost. This is because staff are employed under a secure wage. On Credit Corp Group’s website, I could not find anything that showed variable cost percentage in regard to the three services I had chosen. Therefore, I have made an assumption which is as follows.

1. Debt SaleVariable cost percentage = 40%

2. Contingency/Agency CollectionsVariable cost percentage = 85%

3. Hardship ManagementVariable cost percentage = 60%

To work out the variable cost, the formula is variable cost percentage x selling price. Therefore, the variable cost of each service is as follows:

1. Debt SaleVariablecost=40%×$ 437.50¿ $175.00

2. Contingency/Agency CollectionsVariablecost=85%×$625.00¿ $531.25

3. Hardship ManagementVariablecost=60%×$812.50¿ $487.50

To work out the contribution margin, the formula is selling price – variable cost. Therefore, the contribution margin of each service is as follows:

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1. Debt SaleContributionmargin=$ 437.50−$175¿ $262.50

2. Contingency/Agency CollectionsContributionmargin=$625.00−$ 531.25¿ $93.75

3. Hardship ManagementContributionmargin=$812.50−$ 487.50¿ $325.00

Below is a summary of what has been discussed above.

Debt Sale Contingency/Agency Collections

Hardship Management

Selling Price $437.50 $625.00 $812.50Variable Cost $175.00 $531.25 $487.50Contribution

Margin$262.50 $93.75 $325.00

CM Ratio 60% 15% 40%

Contribution Margin

The contribution margin enables managers to determine how much a product or service contributes to covering fixed costs and how much money goes towards profit.

One of the most important things to note is that it is clearly evident that Credit Corp Group’s contribution margin for all three services that I have chosen is greater than zero, therefore positively contributing towards Credit Corp Group’s fixed costs and profit. It is also evident that the contribution margin across all three services varies quite a bit. From my understanding, this is because the selling prices and variable costs of each service is very different from one to the next. For example, theoretically, Credit Corp Group’s highest-costing service is for contingency/agency collections ($625.00) as it a much more extensive service that has a lot of demand. On the other hand, Credit Corp Group’s lowest-costing service is for debt sale ($437.50) as it is not as extensive as the other services. Therefore, it is easy to identify why there is such a difference between contribution margins.

I believe that there are several reasons as to why Credit Corp Group provides numerous services with a range of contribution margins. First there are many different people that need assistance with the collection of their debt; these people including individuals, small businesses, large firms, government, etc.). Each service that Credit Corp group provides, is different to suit the potential customer. By only having one service, you wouldn’t get as many customers. In regard to pricing, Credit Corp Group vary their selling prices based on the service offerings associated with each service. Each service does not need the same amount of labour intensiveness as the next. For example, there is more labour involved in hardship management than there would be in debt sale. Separating the costs into individual services allows for the customisation for each customer based on the service offerings provided.

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The contribution margin for contingency/agency collections is extremely low ($93.75) compared to the other two services. However, in saying this, it still contributes to the overall profit that Credit Corp Group gains. Theoretically, it is assumed that this service does not have many fixed costs and is therefore a good addition to the increase of revenue. It is found that this service is most often used by customers that have a small business. Even though this service is for small business, it can relate to a large amount. The contribution margin goes from small to very large and significant when many small businesses engage. Obviously, there are other debt collection services in Australia, and worldwide. For Credit Corp Group to know this, it provides a further pressure on the firm to find ways to diversify their service in order to tempt more potential customers.

Therefore, in the theoretical case of Credit Corp Group, it is not operationally advantageous to provide only one service with the highest contribution margin as many of their services are associated with different types of people. I also believe that other non-critical services are also provided within Credit Corp Group with the aim to diversify their operation and generate further revenue.

Possible Constraints

Firms are faced with numerous constraints that can impact their decisions on what products and services to provide customers. For Credit Corp Group, who operate in the service industry, I believe skilled labour would be one of their biggest resource constraints. Many of their services such as debt sale and hardship management involve numerous activities that only employees with the essential skills and qualifications can conduct. For example, when Credit Corp Group determines the how they are going to collect debt from consumers, for someone else, they would need to consider the available employees with the essential skills and qualifications to do this. When hiring and providing training, Credit Corp Group would have to take into account the population size of the area that they are working in, in order to continue their success into the future.

When determining the services Credit Corp Group provides, it is highly important to consider the above constraint. Credit Corp Group must consider how often they are able to provide these services if the above potential constraint were to arise. For example, if skilled labour has fallen, Credit Corp Group would need to consider how often they can provide each service based on the skilled staff currently employed. Credit Corp Group might find that one of its services is not essential. If this is the case, when there is a shortage in skilled labour, the firm could either terminate or reduce the offering of the service. This would ensure that critical services have more employees available, with potentially training said employees in the areas required to continue operations at the most efficient level.

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Step 8: Ratio AnalysisI’ve left this step until last (disregarding Step 10) as I find it the most daunting. Ratio analysis sounds super hard but nonetheless I decided that I would set myself the goal of calculating Credit Corp Group’s ratios with an open mind.

I followed Maria’s video on how to calculate Credit Corp Group’s ratios to ensure that they were correct and to ensure that I was linking the correct data to each equation. This made the process of completing Credit Corp Group’s ratios relatively easy (I only had a few hurdles to get over). In my blog, Credit Corp Group’s Ratio Analysis (hyperlink), I have talked about my overall thoughts on the ratios, how they compare with other debt collection services ratios (use Molly’s spreadsheet), and all the new questions that have been made since calculating the ratios. However, let’s go back to the start. Before I could even begin calculating the ratios, I had to understand what each ratio meant and what it could tell me about Credit Corp Group. To do this, I watched Maria’s video on ratios and wrote down notes during the theory section.

Profitability Ratios

From my understanding, profitability ratios have a lot to do with their name; they have to do with the profitability of a firm. I found it really easy to determine which items to apply when calculating the net profit margin and the return on assets (ROA).

Net Profit Margin

The net profit margin is used to determine how much revenue that is generated, is converted into profit once all expenses are paid. Therefore, this illustrates the firm’s ability to transfer sales into net income. It is within a firm’s interest to have a higher percentage for this ratio as it shows that the firm is operating efficiently whilst making a profit. It is evident in Figure 1 below that from 2015 to 2018, Credit Corp Group is turning approximately 20% of their sales into profit. It is also evident that from each year to year, the percentage is increasing slowly, but still increasing. This trend is a positive sign for the firm as it shows that they are operating more efficiently each year whilst generating almost 1/5 of their sales into profit each year.

Return on Assets (ROA)

The return on assets (ROA) is used to determine how much profit is being generated from a firm’s assets. This is sort of like the same concept as the net profit margin, where the ratio illustrates the firm’s ability to transfer assets into net income. Just like the net profit margin, it is favourable for a firm to have a higher percentage as it shows that the firm’s assets are being used efficiently to produce enough sales in order to generate the profit. It is evident in Figure 1 below that from 2015-2017, Credit Corp Group’s ROA is trending downwards until it starts to rise again in 2018. From my understanding, this means that the from 2015-2017, Credit Corp Group wasn’t using their assets to their maximum capacity where the level of efficiency is highest. However, it is a positive sign that the trend started to increase again in 2018 as this could mean that Credit Corp Group are starting to use their assets more

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efficiently. On average, Credit Corp Group is generating approximately 11.9% of their assets into profit.

In regard to the profitability ratios, I feel confident that Credit Corp Group is doing quite well in generating their sales and assets into profit. I don’t feel as though the decrease in trend for ROA between 2015 and 2017 will negatively affect Credit Corp Group’s profitability for future years to come.

Figure 1

Efficiency Ratios

From my understanding, efficiency ratios also have a lot to do with their name; they have to do with the efficiency of a firm. I found it quite simple to determine these ratios for Credit Corp Group.

Days of Inventory

The days of inventory ratio shows how long it takes for a firm to sell their inventory. Credit Corp Group is a service industry and does not do any manufacturing whatsoever. When Maria said that most service firms don’t have inventory, I started to stress. But with reassurance from myself, I decided to check the annual reports as I could vaguely remember reading about inventory when I was entering in data for my financial statements and restated financial statements. In each year’s annual reports, I found that other assets included two figures: prepayments and inventory. In Figure 2 below, I have shown this for 2018. In Figure 3 below, I have shown how I have entered this into my excel spreadsheet. In a business, if there are inventories there will be some form of cost of goods sold. For Credit Corp Group’s cost of goods sold figure, I have used their collection expenses figure as I though that this seemed the most logical item to use, considering that the firm is collecting debt and debt would be the main, if only, inventory. The days of inventory figure came up as a negative figure, but this was negated as it is being compared for a ratio. It is evident in Figure 4 below, that from 2015-2018 there has been an increase in the amount of days it takes for Credit Corp Group to sell off their inventories. Usually a smaller figure is more desirable as it is obvious that a firm would want to sell their inventory quicker than slower. Even though there is a slight increase, I don’t think that this is detrimental to Credit Corp Group as it is still under a fortnight, theoretically. However, if it keeps increasing in further years to come, this might not be such a good thing. It would be interesting to see if in the years to come, Credit Corp Group’s days of inventory ratio grows beyond 30 days. Would this be detrimental to the firm? Or perhaps does it mean they aren’t purchasing as much inventory as what they were? When will it start costing the firm to have this inventory sitting there, not being sold?

Total Asset Turnover Ratio

The total asset ratio is beneficial to the firm to show how well a firm is generating sales from their assets. In other words, for every dollar of assets, how much of this dollar is turning into sales? This ratio was easy to calculate and understand. In

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Figure 4 below, it is evident that the trend is decreasing from 2015-2017. In 2018, the trend starts to increase again. Even though the trend is decreasing, it is still above 50 cents. This means that for every dollar of assets that they are using, Credit Corp Group is generating more than half of this into sales. On average, Credit Corp Group is generating approximately 58 cents of every dollar of assets into sales. In my opinion, this is really good for a firm.

Figure 2

Figure 3

Figure 4

Liquidity Ratio

Current Ratio

Liquidity ratios show all different types of things to a firm. Some of these things include:

Can they pay their short-term debt? Are they using their assets efficiently? If so, how efficiently are they using their

assets? Do they have enough cash to pay for their debts?

The current ratio is similar to that of the total asset turnover ratio. The current ratio is a really important and beneficial ratio to a firm as it shows for every dollar of current liabilities, does the firm have $1 or more of current assets. The reason that it is more desirable (I like to think of it as a crucial concept) to have $1 or more of current assets is that the current assets need to pay for the current liabilities. For example, if you had $1 for current liabilities but only 50 cents for current assets, you would only be able to pay for half of the current liabilities. Therefore, it is essential that you have an equal or greater balance between current liabilities and current assets. It is evident in Figure 5 below, that Credit Corp Group has a lot more than $1 of current assets for every dollar of current liabilities; current assets are 4-5 times more than current liabilities. This is such a high figure and from my understanding this means that Credit Corp Group is using their assets efficiently and almost to their maximum capacity where they are most efficient. It can be noticed however, that the trend increases, decreases, then increases again. I think it would be more reassuring for

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Credit Corp Group to try to use their assets at a capacity where they are most efficient in order to try and stabilise these figures.

Figure 5

Financial Structure Ratios

Debt/Equity Ratio

The debt/equity ratio is another really important and beneficial ratio to a firm. This is because it shows how much a bank is putting into the firm for every dollar than an owner of the firm is putting in. With this being said, it is generally more desirable for a firm to have lower ratios. It is evident in Figure 6 below, that the ratios are fairly high for Credit Corp Group. It can be seen that the trend increases significantly from 2015 to 2016 which makes me question why. I noticed that the current liabilities had increased from $93,889 in 2015 to $185,015 in 2016; the total equity had 180,110 in 2015 to 214,098 in 2016. From 2016 to 2017, the current liabilities had another massive increase by almost $85,000 whilst the total equity increased at a steady rate. From 2017 to 2018 both the current liabilities and total equity increased at a steady rate. Is the high trend in ratios because of these large increases? Is so, is the decrease in trend from 2017 to 2018 because of the steady increase in current liabilities and total equity? From my understanding, because Credit Corp Group is a firm which collects debt, they would be heavily involved with the banks in regard to loaning money out. However, I could be wrong which makes me question if any other debt collection firms have unusually high ratios as well.

Equity Ratio

The equity ratio is closely linked with the debt ratio in regard to the fact that both ratios have to equal 100%. The equity ratio shows how much of a firm’s assets are financed by equity investors. It is evident in Figure 6 below that the trend decreases from 2015-2017 until it increases slightly in 2018. This trend was straightforward to understand. Essentially, from what I can gather and understand, it shows that more than half of Credit Corp Group’s assets have been financed by equity investors in 2015, and the firm is slowly repaying this finance back to the investors. This would be due to the fact that the liabilities are decreasing. However, looking back through their financial statements, I could see that both the equity and total assets were both increasing from 2015 to 2018. So, why was there a sudden increase in 2018? To double check that I had done my calculations right, I calculated the debt ratio to see if both ratios equalled to 100%. This can be seen in Figure 7 below. They did equal 100% so I am left wondering why the increase has occurred.

Figure 6

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Figure 7

Market Ratios

So far, these were the hardest ratios to calculate initially, purely for the fact that I couldn’t find the relevant information on the weighted average cost of capital (WACC) figure. With the help of my peers and after looking through Credit Corp Group’s annual statements, I was able to find the issued ordinary shares for 2015-2018. However, these figures were for as at 30 August. I found this really unusual, but I’ve made the assumption that these figures were the same for as at 30 June, for the purpose of this assignment. In Figure 8 below, this is shown for 2018. The market price for Credit Corp Group’s shares were relatively easy to find in the annual reports. In Figure 9 below, this is also shown for 2015-2018. I struggled to find the WACC figure so as per Maria and Martin’s advice, I just used 10%.

Earnings Per Share (EPS)

The definition of this ratio confused me quite a bit but after a lot of pondering I have come to the conclusion that the earnings per share (EPS) shows how much profit each share is earning, but it is not associated with how much of this earning is transferred to equity investors. I am assuming that a high ratio should indicate a firm’s profitability in regard to their shares. It is evident in Figure 10 below, that the EPS is increasing over the four years. This is a positive sign for Credit Corp Group, but it could still increase to produce an even better result in the years to come. As of 2018, their profitability is 1.35.

Dividends Per Share (DPS)

The dividends per share (DPS) is the number of dividends paid to shareholders. Essentially, is it beneficial for a firm to have a higher EPS than DPS as it is obvious that a firm would want to earn more than what they give to their shareholders. For example, if shareholders were paid $1.50 in dividends, your firm would want to be earning more than $1.50 per share otherwise you won’t be able to pay the dividends from your EPS. Therefore, I find this a crucial aspect of any firm as it can eventuate to be quite costly if a firm is paying more than what they are receiving. As shown in Figure 10 below, it is quite obvious that Credit Corp Group is earning a lot more than what they are giving out to shareholders as dividends. It can be seen that as each year passes from 2015 to 2018, the DPS is increasing as the EPS is increasing. One question that I do have though is why they aren’t paying their shareholders more than $1 if they are earning, on average, approximately $1.24? Are they doing this just to be safe in the case that they have a major decrease in EPS?

Price Earnings Ratio

This was a hard ratio for me to understand. In Maria’s video, she explains her view on the price earnings ratio which didn’t really make sense to me. She had another person’s view which I quite liked as I understood it almost completely. So, the price earnings ratio shows us the financial worth of shares originally bought and how long it would take for this financial worth to be reinvested. For example, in the case of Credit Corp Group (Figure 10 below), if I bought a share in 2018, it would take me

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approximately 13 years for the amount I paid for the shares in 2018 to be reinvested. Another way to look at it – perhaps an even simpler way – is that it shows the future financial worth of shares based on their earnings. It is assumed that managers like to see a higher ratio because it signifies expectations of future profit and profitability. Even though Credit Corp Group’s price earnings ratio was relatively the same amount from 2015 to 2018, I don’t think this ratio is an accurate of effective way to measure a firm’s performance in the future.

Figure 8

Figure 9

Figure 10

Ratios Based on Reformulated Financial Statements

These ratios I found easy to calculate, but some of them I had a bit of trouble understanding what the results meant. This will be shown in the explanations provided.

Return on Equity (ROE)

The return on equity (ROE) ratio shows a firm how much profit was being generated for every dollar of shareholder’s equity. It is evident in Figure 11 below, that from 2015 to 2018 the return on equity has been increasing slowly, but still increasing. In 2018, Credit Corp Group generated 22.44% of every dollar of shareholder’s equity into profit. In my opinion, this seems like a relatively good figure for a firm as they are generating just under a quarter of every dollar into profit. However, I learnt through discussions with others that the return on equity ratio can be highly influenced by firms to make the value seem more appealing than it actually is.

Return on Net Operating Assets (RNOA)

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The return on net operating assets (RNOA) is a ratio that attempts to remove the problem discussed above, by focusing only on a firm’s operating activities. Essentially, this ratio splits the operating assets from the total assets of a firm. Once the operating side of a firm is known, the firm’s performance might look better overall. To properly understand this ratio, I compared the RNOA with the ROA which can be seen in Figure 12 below. The first thing that I noticed was the fact that both the RNOA and the ROA fluctuate in the exact same way (they decrease from 2015-2017 until it increases again in 2018). However, the figures are extremely different. When trying to compare these ratios, I had a lot of trouble in trying to work out why Credit Corp Group’s RNOA was so high. The only conclusion that I could come to, was the fact that they are earning however many times more in operating assets than in total assets. For example, in 2018, Credit Corp Group is earning approximately 380% more operating assets than total assets. This means that once financial assets were removed, it is evident that Credit Corp Group was doing extremely well. Furthermore, this means that Credit Corp Group could be requiring a lot of financial assistance from creditors. This theory could be so wrong, but I can’t figure out why it would be. I checked all my calculations, and everything was flowing smoothly so I knew that there couldn’t possibly be something skewed there. Unlike ROE, I believe that RNOA is an accurate way of determining a firm’s performance and future profitability of its operating assets.

Net Borrowing Cost (NBC)

I found the net borrowing cost (NBC) to be much simpler to understand. NBC is the cost of debt that a firm has and can sometimes be looked at as the average interest rate the firm is paying on financing. As it can be seen in Figure 11 below, from 2015 to 2018, the NBC is decreasing. This means that the trend is positive (as it is more beneficial for a firm to have lower borrowing costs), meaning that the borrowing cost rate is cheaper. To gain a further understanding, looking back through the other ratios, the debt/equity ratio increases significantly from 2015-2017 (until it decreases again in 2018) which means that Credit Corp Group borrowed a significant amount of money during this time period. However, by looking at the NBC, it is evident that they got their borrowing cost at a cheaper rate, as each year passed. Overall, this is good for Credit Corp Group, but considering their debt/equity ratio increased in 2018, does this mean that they are starting to borrow more again? Does this also mean that they borrowing cost rate will increase or will it become cheaper than what it currently is?

Profit Margin (PM)

This was another relatively easy ratio to calculate. The PM is used in a firm to determine the profitability, with a focus only on the operating activities. What this means is that the operating income has been separated from the total income when calculating this ratio. For Credit Corp Group, their PM is negative because the comprehensive operating income is negative for all four years. To gain a further understanding of this ratio, the net PM was compared with the PM from above. This can be seen in Figure 13 below. The first thing I noticed, just like the RNOA ratio, is that the trend and fluctuation was the same for both the PM and the net profit margin. However, it is evident that Credit Corp Group is much more profitable when

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the financial activities are included in the calculation. This can be shown by the large negative numbers of the PM ratio. From my understanding, these negative numbers mean that Credit Corp Group was not generating any profit through just the operating activities. From this data, does it mean that Credit Corp Group is solely reliant on their financial activities in order to succeed?

Asset Turnover (ATO)

The asset turnover (ATO) ratio shows a firm how much of every dollar of operating assets are generated into sales. Theoretically, the ATO figures should be slightly better than the total ATO figures because the operating assets have been taken out of the total assets. To show this, the total ATO and the ATO have been compared, as it can be seen in Figure 14 below. Once again, the first thing I noticed was that the trend and fluctuation was the same for both ratios. As I stated before, the ATO figures should be slightly better than the total ATO figures. However, this is not the case for Credit Corp Group. This makes me further question if Credit Corp Group is solely reliant on their financial activities in order to perform well in the industry.

Economic Profit

Economic profit is essential for a firm to know as it is the difference between the total revenue received by the firm and the total explicit and implicit costs for a firm. The economic profit is derived from RNOA, the cost of capital, and NOA. When calculating this ratio, I used the recommended 10% for the WACC figure as it was not mentioned in the annual reports for Credit Corp Group.

With this ratio, unlike the other ratios where a negative is negated to become a positive, the fact of whether it is a negative or a positive is important in this ratio as it tells a firm whether there is profit being earnt or not. As it can be seen, the economic profit fluctuates around the -$50,000 to -$55,000 mark across all four years for Credit Corp Group.

I believe that the following items are the key drivers that have significantly affected Credit Corp Group’s economic profit:

WACC figure RNOA figure NOA figure

The WACC has negatively affected Credit Corp Group’s economic profit. As I stated previously, I used the recommended 10% WACC. The has caused the economic profit to decrease. I experimented a little bit and found that if the WACC was increased to 90% or more (which from my understanding is very rare), it would only increase Credit Corp Group’s economic profit to approximately -$35,000 from -$50,000 in 2018. Therefore, even though the WACC has negatively affected the economic profit, I feel like it doesn’t have a significant affect as the economic profit will always be a negative figure no matter which way you go.

I believe that the NOA has also negatively affected Credit Corp Group’s economic profit. This is because, generally speaking, if a company’s NOA is a high figure, it shows that the operating assets are performing more efficiently than the liabilities.

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Therefore, a high NOA would produce a better overall economic profit. However, this is not the case for Credit Corp Group’s NOA. Their NOA suggests that because it’s drastically low, it is showing that the operating assets are performing worse than the liabilities. This makes me come back to my assumption that Credit Corp Group relies heavily on their financial activities in order to generate the most amount of profit.

Another concept is the RNOA. Credit Corp Group’s RNOA is much greater than the 10% WACC. Generally speaking, if RNOA is low, economic profit is likely to be unfavourable (a negative figure). However, with Credit Corp Group’s RNOA, it is showing that it is extremely high, yet their economic profit is at the other end of the spectrum and is extremely low. Again, I am making the assumption that this is because of the fact that Credit Corp Group relies heavily on their financial activities to perform well and generate the most amount of profit possible. The two key accounting drivers of RNOA are the PM and the ATO. For Credit Corp Group, these two concepts are both negative throughout all four years. This makes me question why the RNOA is extremely high, almost unrealistically high. From my understanding, I would have assumed that the RNOA would be quite low considering the low figures for the PM and ATO.

To conclude, I have gained many insights by breaking my firm up into little bits. I was extremely glad that these ratios were quite simple to calculate with the help of Maria’s video. I was almost dumbfounded when I was examining each ratios meaning to a firm, especially to Credit Corp Group, and it was much more difficult and time-consuming than I had anticipated. This was definitely one of the hardest steps to complete for ASS#2, however I am glad that I have accomplished it and I am proud of my efforts. To be quite honest I haven’t not gained anything from this experience.

Figure 11

Figure 12

Figure 13

Figure 14

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Figure 15

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Step 9: Capital Investment DecisionFor this assignment, it is assumed that there are two developing capital investment decisions for Credit Corp Group to make. These two investment opportunities are opening another call centre in Melbourne or upgrading its call centre in Sydney (in regard to infrastructure, furniture, and fittings). As of the current moment, Credit Corp Group’s current call centres are not enough for the large number of enquiries that are starting to come through. Also, Credit Corp Group’s most original call centre in Sydney is very old, run-down, and in need of desperate renovations.

For the first investment opportunity – the new call centre in Melbourne – the cost to build is $3 million with a life expectancy of ten years. After this time span, the call centre will need to undergo major renovations to continue operating. Therefore, the residual value for the new call centre after the ten-year period is $930,000, where a real estate agent would advertise and sell the building if it was no longer required.

For the second investment opportunity – the upgrade to the Sydney call centre – the cost to do this is $1 million with again, a life expectancy of ten years. Ideally, Credit Corp Group have no plans to stop operation and shut down the call centre after ten years. However, due to Credit Corp Group’s operation being dependant on customers it is difficult to forecast the call centre’s expected life after ten years. The residual value of this investment after ten years is $310,000.

The cash flows generate from both investment opportunities would be from conducting services less their operational expenses which would include things such as wages and insurances.

The residual value that has been used is based off of the formula original price x estimated useful life x % of expected annual growth. To determine the % of expected annual growth, I did some research with the help of others in this unit and found that the annual growth rate for debt collection firms within Australia in between 2014 and 2019 is 3.1%.

Out of the two investments, one of them is to be made on 1st July 2019, with the expected future cash flows to be received on 30th June every year. The original cost, estimated life, residual value, and estimated future cash flows of each investment

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are set out in the table below. All amounts are expressed in AUD. The rate or return/discount rate/WACC used is 10% as recommended.

New call centre in Melbourne

Upgrade of call centre in Sydney

Original Cost -$3 million -$1 millionEstimated Useful Life 10 years 10 yearsResidual Value $930,000 $310,000Estimated Future Cash Flows30 June 2020 (Time Period = 1 Year) $185,000 $75,00030 June 2021 (Time Period = 2 Years) $310,000 $75,00030 June 2022 (Time Period = 3 Years) $310,000 $75,00030 June 2023 (Time Period = 4 Years) $540,000 $150,00030 June 2024 (Time Period = 5 Years) $540,000 $150,00030 June 2025 (Time Period = 6 Years) $540,000 $150,00030 June 2026 (Time Period = 7 Years) $625,000 $150,00030 June 2027 (Time Period = 8 Years) $625,000 $200,00030 June 2028 (Time Period = 9 Years) $625,000 $200,00030 June 2029 (Time Period = 10 Years) $625,000 $210,000

By using the above information set out in the table, I have been able to calculate the net present value (NPV), internal rate of return (IRR), and the payback period for both capital investment opportunities. NPV is a means of comparing the amount of funds invested with the expected future cashflow return in a dollar figure, by discounting the expected returns to a rate that is appropriate to today. IRR provides a percentage on the expected rate of return of the initial investment whilst considering the value of future cashflow. The payback period outlines the time is takes for a firm to recover the cost of an investment.

The results for both capital investment opportunities are shown below.

Investment Opportunity 1 – New call centre in Melbourne

NVP – Based on the results, it is expected that Credit Corp Group would receive $143,100 which is over the original cost.

IRR – Based on the results, it is clear that this investment opportunity has an IRR of 10.8% which positively indicates that the investment would yield a profit for Credit Corp Group, based on the predicted cashflows.

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Payback period – To recover the costs of investing in a new call in Melbourne, it would take approximately 6 years and 11 months.

Investment Opportunity 2 – Upgrade of call centre in Sydney

NVP – Based on the results, it is expected that Credit Corp Group would receive -$77,648 which is over the original cost but is still a negative figure.

IRR – Based on the results, it is clear that this investment opportunity has an IRR of 8.6% which positively indicates that the investment would yield a profit for Credit Corp Group, based on the predicted cashflows.

Payback period – To recover the costs of investing in a new call in Melbourne, it would take approximately 7 years and 10 months.

Capital Investment Decision

Based on the calculations above, only the first capital investment opportunity would yield a positive result; the second would yield a negative result. However, there is an insignificant variance between the IRR (10.8% and 8.6%). It is clear that the payback period has almost a year’s variance between the two investment opportunities (6 years, 11 months and 7 years, 10 months). Even though the payback period does not take into consideration for the time value of money, I will still be using it to compare the two investment opportunities as there is a fairly large gap in time.

Listed below is a table that I have created to show the NVP, IRR, payback period, original cost, estimated life, and residual value for the two capital investment opportunities. The green represents which investment opportunity has the greater value for Credit Corp Group to yield a better positive result.

Investment 1 Investment 2NVP $143,100 -$77,648IRR 10.8% 8.6%Payback Period 6 years 11 months 7 years 10 monthsOriginal Cost $3 million $1 millionEstimated Life 10 years 10 yearsResidual Value $930,000 $310,000

Therefore, based on the above table, it is evident that the first capital investment opportunity is potentially the more profitable option assuming that the cashflows are accurate. The higher NVP value for the new call centre in Melbourne ($143,100) compared to the upgrade of the Sydney call centre (-$77,648) was expected as it is clearly evident that the investment outlay, returned cash flow, and residual value are

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higher than that of the upgrade to the Sydney call centre. Although the new call centre in Melbourne yielded a higher result for the NVP, the difference between NVP for both investment opportunities is $220,748. To me this does not seem like a large difference considering the initial costs for both investment opportunities. I found it really odd but interesting that the IRR for both investment opportunities yielded similar results (10.8% and 8.6%). For the payback period, it is clearly evident that the new call centre in Melbourne recovers all of its cost almost a year shorter than that of the upgrade to the call centre in Sydney. Hence, this makes me start to think that I definitely know which capital investment opportunity is the better of the two.

Therefore, my recommendations to Credit Corp Group would be to invest in the both capital investment opportunities in order to provide the most benefits back to its customers but also to the firm itself in moving forward. I think this because of the minimal margin in all areas between the two. However, if these two capital investment opportunities were mutually exclusive projects, Credit Corp Group can only rely on the NPV for their decision. With this being said, the best investment opportunity would be the new call centre in Melbourne as it has a higher NPV than that of the upgrade to the Sydney call centre, as discussed above.

Either way that Credit Corp Group decides to go, the financial position that they are currently in needs to be strategically analysed, as well as the consideration of whether these two investment opportunities would need to be funded by third party creditors. However, I believe that it is achievable for Credit Corp Group to go ahead with either or both investment opportunities without negatively affecting their bottom line, as their equity, assets, and profits are continuing to grow strongly. Both investment opportunities, whilst not reliant on each other, would certainly be complimentary services to the firm.

However, there are some weaknesses to contributing a significant amount of funds to invest in the new call centre in Melbourne and the upgrade of the Sydney call centre. The most significant weakness is due to the market itself in which Credit Corp Group operate – debt collection. As expected, this market fluctuates all the time depending on how the economy stands. There are also many changes to rules and regulations domestically and internationally (for Credit Corp Group’s New Zealand and American customers) that affects how Credit Corp Group collects the debt for its customers. Obviously, there are also other debt collection services that provide the same services that customers can turn to. Theoretically, if customers were to go to other debt collection companies rather than Credit Corp Group, the operation, future cashflow, and residual value would be greatly affected. Both the NPV and IRR are heavily reliant on the discount rate which is applied to calculate the time value of money for an investment. With all this being said, I believe that these weaknesses are minimal in the case of the two potential capital investment opportunities. This is because no matter what the economy is doing, there will always be debt and nine times out of ten, if the debt has been outstanding for a significant amount of time, people will resort to a company to recover this debt for them. This is signified by the fact of the market size within Australia. There are currently 567 debt collection services within Australia, conducting business at an annual growth rate of 3.1%. This is shown in the below figure.

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Therefore, moving forward within Credit Corp Group, I highly suggest that they invest in both capital investment opportunities to fully open their range of gaining the most amount of profit in the long run.

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Step 10: FeedbackFeedback From: Ashleigh Clark

Feedback To: Clarice Palomar

My CommentsStep 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

Three productsClearly showed your three products that you will be using. I love the use of pictures! It shows the reader exactly what you’re talking about.Estimated selling priceGood pickup on the US dollars conversion to RM dollars. Clearly showed the selling price. I like how you have used a table to show each selling price for each product. Clearly shows what you have just talked about.Variable costGood explanation of why you chose the variable cost % that you did. Again, good use of table (just don’t forget to complete it)!Contribution marginsI particularly like the reasons as to why you have chosen to use the contribution margins that you did. Make sure you remember to calculate the contribution margins!Commentary on contribution marginsGreat mention of your honest thoughts on converting between MR, USD, and AUD. I would have no clue what I was doing if I was in your position. You’ve explained well what you think a contribution margin is. ConstraintsAnother possible constraint you could have would be labour hire or if another brand was to come in the near future and take all of Nike and Under Armour’s consumers. You have some really good constraints and it is clear that you have done a lot of research to find these.

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit

Calculation of ratiosYour Excel spreadsheet looks good. All formulas and links are correct and they all work. One formatting tip I have would be to move your notes that you have next to your ratios, to the ‘Notes’ section. This will just make it look a bit tidier and perhaps more professional I think.

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(blog) Commentary on ratios (blog)In regard to your Word Document, you’ve used a great number of pictures to help explain your point to the reader, you have explained each ratio and how you went about them really well, and everything flows nicely (such as headings, bullet points, etc.). Make sure you provide a general overview of how you found your ratios on your blog. I would suggest make it look like a conclusion. Don’t stress though, I haven’t done this as of yet either. Calculation of economic profitAgain, your formulas and links were all correct for you economic profit.Commentary on drivers of economic profit (blog)Same as above in regard to layout and formatting, good job. There is one suggestion that I do have though. Try and think of anything else that has affected your negative economic profit. For example, have a look at your RNOA and NOA for a start as these are in the calculation for economic profit. Have a look at their trends, in particular.

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

Capital investment decision for your firmYou have used two good examples of capital investment opportunities. They are realistic, and I like them! Nice use of a table to sum everything up to make it clearer for the reader.Calculation of payback periodYour payback period has been calculated correctly. All formulas seemed to have worked fine.Calculation of NPVAgain, your NPV has also been calculated correctly with all formulas working correctly.Calculation of IRRYour calculation of IRR is different to mine. I’m not sure if you need the 0.1 that you have multiplied your cashflow by. If you don’t use this 0.1, your IRR will be 11% neat.Recommendations and discussionsGreat explanation on how and why you came to your decision to go ahead with Option 1. Perhaps you could mention mutually exclusive projects (where you can only choose one option).

Overall ASS#2 Steps 7-9 Overall, your Steps 7-9 have been really well done. Only a few minor tweaks that

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could potentially be made here and there but other than that you’ve done a fantastic job! Hope you’re proud of what you’ve achieved throughout this unit 😊

Feedback From: Ashleigh Clark

Feedback To: Kate Gordon

My CommentsStep 7





Three productsI like how you have used three very different medical centres for your services. I feel like this gives the assignment a great variety to read about but it also gives you a lot to talk about in your comparisons.Estimated selling priceI couldn’t see anywhere that you had explained why you chose the selling prices that you did but they seem like reasonable prices. Maybe you could include this?Variable costI loved reading about why you chose to use the variable costs that you did. They seemed like reasonable and logical figures.Contribution marginsI like how you have explained what you think contribution margins are. I love how you have used a table as it is so easy for the reader to know exactly what you’re talking about.Commentary on contribution marginsGood quick and simple explanation of the contribution margin ratio. Perhaps you could explain each margin ratio for each service individually and show what you think each one means.ConstraintsI couldn’t see where you had any constraints for your firm. Maybe you didn’t have any. Some possible ones that I can think of would be labour hire, laws regulating IVF (maybe in the future IVF will be illegalised), just to name a couple.

Step 8




Calculation of ratiosAll of your calculations were correct. Your links and formulas all worked fine. One suggestion I have is moving your debt ratio to the ‘Working Area’ as this is not being marked (this is what I did for mine anyway).

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Commentary – drivers of economic profit (blog)

Also, you could move your notes that you have next to your ratios to the ‘Notes’ section. I feel like this would make your spreadsheet look neater and more professional!Commentary on ratios (blog)You have explained in great detail all your thoughts and insights on your ratios that you have calculated. This shows that you have really put in a lot of thought and effort into doing this. In regard to your Word Document, you have used a lot of pictures which makes it really easy for the reader to see. I also really like how you have used red boxes to highlight things on the pictures – I did this for a couple of mine too! Your layout flows nicely also.Calculation of economic profitYour economic profit ratio looked all good. Formulas and links worked!Commentary on drivers of economic profit (blog)You have explained exceptionally well why you believe your firm got the economic profit that it did. I noticed that you did a lot of research into why this economic profit occurred which shows a great amount of initiative and effort. Good job!

Step 9




Capital investment decision for your firmI really like the capital investment opportunities that you have thought of. They are extremely realistic. Again, I like how you have used a table to show exactly what you are talking about.Calculation of payback periodYour calculations worked well. All formulas were all good!Calculation of NPVYour calculations worked well. All formulas were all good!Calculation of IRRYour calculations worked well. All formulas were all good!Recommendations and discussionsI like the reasoning you have used to recommend the Perth building to your firm. You have used logical reasoning and the screenshot of your excel document really helped.

Overall ASS#2 Steps 7-9 Overall, your assignment has been done really well and you should be proud of what you have done. Good luck on your

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submission 😊

Feedback From: Ashleigh Clark

Feedback To: Natasha Bennett

My CommentsStep 7





Three productsI liked how you have chosen three different products as it shows a great variety to the reader, but it also gives you a lot to talk about as well! You’ve explained these products really well.Estimated selling priceReasonable selling prices. Great use of a table to show everything. This makes it really easy for the reader to see exactly what you’re talking about.Variable costGreat detailed description. This really shows that you have a deep understanding of the concept.Contribution marginsYour calculation of your contribution margin looks right.Commentary on contribution marginsAnother great detailed description. It really shows that you have a deep understanding of the concept. ConstraintsReally looks like you have put a lot of thought into your constraints. Great explanations and reasoning! Good job!

Step 8




Commentary – drivers of economic profit (blog)

Calculation of ratiosYour calculation of your ratios looks good. All formulas and links are working which is good. One suggestion I have is to put your notes that you have next to your ratios in the ‘Notes’ section as this will make it look more professional. You could also delete the lines with the ratios that we aren’t being marked on as there is no need for these – this makes it look cluttered and hard to read. Commentary on ratios (blog)It seems like parts of you commentary on your ratios isn’t quite complete. Either way, it looks like you have a great understanding of each ratio and how they work in regard to your firm. Good use of paragraphs and layout as well!

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Calculation of economic profitYour formulas and links for your economic profit works.Commentary on drivers of economic profit (blog)It seems that you haven’t finished your commentary on the drivers of your firm’s economic profit. However, from what I can see, so far you have explained what you think economic profit is and you’ve explained the range that your firm’s economic profit has in the past four years. These things are a great baseline for what you are going to be talking about.

Step 9




Capital investment decision for your firmI really like your two capital investment opportunities for your firm as they are extremely relevant to the medical industry. You have explained both really well.Calculation of payback periodFrom what I can see on your spreadsheet, you haven’t done this. Do this in the ‘NPV and IRR’ tab. Calculation of NPVFrom what I can see on your spreadsheet, you haven’t done this. Do this in the ‘NPV and IRR’ tab. Calculation of IRRFrom what I can see on your spreadsheet, you haven’t done this. Do this in the ‘NPV and IRR’ tab. Recommendations and discussionsYou have provided a really good description as to why you would recommend that Blackmores invest in the kids vitamin product.

Overall ASS#2 Steps 7-9 Overall, you have done an excellent job on ASS#2. You just need to complete a few of the things that I have mentioned (if they haven’t already been done) and possibly take on my suggestions. Good luck on your submission 😊

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