MODULE: MAR209 – Financial Accounting and Managerial Decision
Making
COURSEWORK: 40% of overall module grade.
FORMAT: Report.
LENGTH: 2,000 words (which excludes tables and references).
REFERENCING: Harvard referencing should be used where appropriate using
academic sources.

INFORMATION:
You are to prepare a document in report format which addresses all of the questions
contained in this document. You should illustrate your answers to the questions by
providing a short narrative explaining your reasoning in obtaining the answer. You
are required to answer all three questions.
The following context is provided for the questions.
Blue Shipping wants to invest Euros 100,000,000 in a new vessel to take advantage
of the growing demand for sea transport of consignments over the next 5 years. At
the end of 5 years the liner can be sold for Euros 20,000,000. The table below
summarise the basic calculation over the 5 year period.
Time to…….t5 Item description Amount (000 Euros)
Today = to Cost of liner 100,000
Year 1= t1 Operating profit before depreciation 20,000
Year 2 = t2 Operating profit before depreciation 40,000
Year 3 = t3 Operating profit before depreciation 60,000
Year 4 = t4 Operating profit before depreciation 60,000
Year 5 = t5 Operating profit before depreciation 20,000
Year 5 = t5 Disposal proceeds from the liner 20,000
For purposes of simplification, the following assumptions are made for the appraisal
of this investment.

1) Operating profit before depreciation equals the net amount of cash inflow.
2) Working capital which is made up of inventories, trade receivables and trade
payables remain constant.
3) No wages are paid.
4) Sales revenues and expenses are all paid at year end. Although not strictly
true, this is a practical assumption.

Question 1:
Your manager would like some reassurance before making this financial commitment
and has asked you to evaluate the annual inflow and outflow from this investment.
Using the Accounting Rate of Return (ARR) calculate the average operating profit
generated by the investment as a percentage of the average investment made over
the useful life of the vessel.
a) What is the average annual operating profit (AAOP) generated by the vessel
using a straight-line depreciation over the 5 years period?
(5 marks)
b) What is the average investment (AI)?
(5 marks)
c) Explain the advantages and disadvantages of ARR as a method of appraising
capital investment.
(10 marks)
After obtaining the ARR, your manager asked you to use a different appraisal
method, namely the Pay-back period method (PP) to calculate the time it will take for
this initial investment to be repaid out of the net cash inflows it will generate.
d) Demonstrate at which point the investment will start to generate positive cash
flow and discuss the merits of pay-back period as a method of appraising
capital decision
(10 marks)
Question 2:
Having completed an appraisal of the investment of 100,000,000 Euros in a new
vessel using the ARR and the PP methods, you are informed that Senior
Management have still not made a decision yet. You are required to examine the
effect of the acquisition of the new vessel on Blue Shipping cash flow considering
each of the following options:
a) Use accumulated reserves from previous years for the total investment
amount.
(10 marks)
b) Borrow Euros 100,000,000 over 10 years from the bank at a flat rate of 5%.
(10 marks)
c) Charter at the cost of Euros 10,000,000 per year with bunker and other related
costs (staff, insurance etc.) of Euros 5,000,000 per year.
(10 marks)
Question3. Discuss other alternative sources of long term finance that Blue
Shipping could consider and why you should recommend them to the Senior
Management of the company.
(20 marks)
Marking criteria
Criterion Weighting
Question 1 on ARR and PP methods: answer to include definition, formulae,
calculation and interpretation of result; advantages and disadvantages of ARR
and PP appraisal method in the business context.
30%
Question 2 on cash flow effect resulting from the 3 options: examination
of each considered option for finance in terms of their classification in the cash
flow statement and discussion on their implication on Blue Shipping financial
position.
30%
Question 3 on alternative sources of finance for the acquisition of the new
vessel: Define sources of finance in general with an example in each category;
Identify and define alternative sources of finance (no more than 2) and discuss
their respective appropriateness in this case.
20%
Presentation, structure, clarity and accuracy, referencing 20%
Total 100%