BUS4012 Introduction to Business Finance
a) Calculate the accounting rate of return (average method) for each software package
The accounting rate of return (ARR) can be calculated using
the following formula:
ARR = Average annual profit / Initial investment x 100%
Using the average method, we can calculate the average
annual profit by adding up the cash inflows for each year and dividing by the
number of years:
For Software X:
Average annual profit = (8,000 +
8,000 + 8,000 + 6,000) / 4 = £7,500
ARR for Software X = 7,500 / 20,000
x 100% = 37.5%
For Software Y:
Average annual profit = (8,500 +
8,500 + 8,500 + 8,500) / 4 = £8,500
ARR for Software Y = 8,500 / 25,000
x 100% = 34%
Therefore, the accounting rate of return for Software X is
37.5% and for Software Y is 34%.
b) Calculate the payback for each software package
The payback period is the amount of time it takes for the
initial investment to be recovered from the cash inflows.
For Software X:
Payback period = Initial investment
/ Annual cash inflow
Payback period = £20,000 / £8,000 =
2.5 years
For Software Y:
Payback period = Initial investment
/ Annual cash inflow
Payback period = £25,000 / £8,500 =
2.94 years
Therefore, the payback period for Software X is 2.5 years
and for Software Y is 2.94 years.
c) Calculate the net present value for each software package.
The net present value (NPV) of each software package can be
calculated using the following formula:
NPV = -Initial investment + (Cash inflows / (1 + Cost of
capital)^t)
Where t represents the year in which the cash inflow occurs.
For Software X:
NPV = -£20,000 + (£8,000 / (1 +
0.14)^1) + (£8,000 / (1 + 0.14)^2) + (£8,000 / (1 + 0.14)^3) + (£6,000 / (1 +
0.14)^4)
NPV = -£20,000 + £7,017 + £6,136 +
£5,360 + £3,827
NPV = £2,340
For Software Y:
NPV = -£25,000 + (£8,500 / (1 +
0.14)^1) + (£8,500 / (1 + 0.14)^2) + (£8,500 / (1 + 0.14)^3) + (£8,500 / (1 +
0.14)^4)
NPV = -£25,000 + £7,456 + £6,512 +
£5,687 + £4,971
NPV = £299
Therefore, the net present value for Software X is £2,340
and for Software Y is £299. Based on NPV, AAA should choose Software X as it
has a higher net present value.
d) Advise AAA as to which software package should be chosen
The analysis of the accounting rate of return, payback period, and net present value computations leads to the suggestion that AAA should opt for Software X.
Although the accounting rate of return is identical for both software packages, Software X exhibits a shorter payback period of 2.75 years in contrast to Software Y's 2.94 years. Furthermore, it can be observed that Software X exhibits a superior net present value of £2,340, while Software Y demonstrates a comparatively lower net present value of £299.
Thus, based on the available evidence, it can be inferred that opting for Software X would be a more viable alternative for AAA to enhance its profitability by enhancing its route planning capabilities.
e) Explain how the use of FinTech could be beneficially incorporated into the online retail sales project
The implementation of Financial Technology (FinTech) has the potential to yield numerous advantages for AAA's e-commerce sales initiative. The following are instances:
- Payment processing: AAA has the capability to integrate with FinTech enterprises that specialize in the processing of online payments. This integration can provide customers with a payment method that is both swift and dependable, while also ensuring the security of their transactions. This measure has the potential to mitigate the incidence of abandoned transactions and enhance customer confidence.
- Fraud detection: The utilization of FinTech can potentially enhance AAA's fraud detection capabilities in response to the escalating incidence of online fraudulent activities. AAA is capable of analyzing transactions in real-time through the use of machine learning algorithms, which enables the identification of any suspicious patterns and ultimately decreases the probability of fraudulent transactions.
- Inventory management: The optimization of inventory management can be achieved by AAA through the utilization of Financial Technology (FinTech). By implementing automated inventory management, AAA is able to effectively monitor its inventory levels and replenish products in an automated manner, thereby ensuring optimal stock levels that meet demand without resulting in excess inventory.
- Customer relationship management: The integration of FinTech with customer relationship management (CRM) software has the potential to enhance AAA's customer relationship management. The aforementioned approach can furnish AAA with valuable perspectives on customer conduct, inclinations, and requirements, thereby enabling the organization to offer a more individualized and customized encounter to its clientele.
- Big data analytics: The utilization of financial technology (FinTech) in the analysis of sales data can enable AAA to conduct big data analytics and discern recurring patterns and trends. Through the analysis of customer data and purchase histories, AAA can make informed decisions regarding product stocking and marketing strategies.