Fundamentals of Finance Case Study Example | Topics and Well Written Essays - 2500 words

Fundamentals of Finance - Case Study Example '10000000. As far as the decision taken by the Swindon Plc is taken in to consideration, it is applying MACRS (Modified Accelerated Cost Recovery System) depreciation is taken in to fact. "Four factors are necessary to determine cost recovery deductions under the MACRS procedure. These are (1) class life, (2) depreciable basis after credit reduction, (3) acquisition year assumption, and (4) recovery method." (The Modified Accelerated Cost Recovery System (MACRS) - Basic Rules. 2001). It is necessary to taken in to consider that the property or asset class lives should be less than the actual life of the asset, so that the salvage value of such assets should be zero. Cost segregation and accelerated depreciation is essential for the effective implementation of investment decision. Like wise, it is necessary to increase the cash flows of an organization. While calculating the MACRS depreciation, salvage value is not as much effective in any other system for depreciation. If a particular property is utilizing for a period of five years or more then the depreciation rate should be calculated in accordance with this manner- First year-20%; Second year-32%; Third year-19.20%; Fourth and fifth year-11.52%; Last year or sixth year- 5.76%. So, by using this method, during the last or sixth year, the value of the specific asset so depreciated will be zero. (Salzmann 2007). In any organization, its structure is taking in to fact; there is a finance department, which is playing a prominent role, because finance is the life blood of any business activity. The basic and most fundamental financial activities are preparation of Balance sheet, Income statement, analysis of shareholders equity and cash flow, tools for profit analysis, preparation of capital and cash budget. Rate of Depreciation of Swindon Plc under MACRS Method. YEAR MACRS % Applicable 1 20% 2 32% 3 19.20% 4 11.52% 5 11.52% 6(Final Year) 5.76% In this particular case, the total purchase price of Drill and platform is '10000000; and this platform can be sold for '3.5M. i.e. '3500000 within a period of five years. Then, thereafter, Swindon plc bought a new platform costs '14M i.e. '14000000 with an addition of '1M i.e. '1000000 as installation charges. The latest platform should also have an estimated life of five years. But Swindon decided to undertake the sales of the latest platform after five years, at a cost of '4M i.e. '4000000. The Overall Summary of Drill and Platform of Swindon Plc. Particulars A) Cost of existing platform.Total selling price after 5years. Amount (in ') '10000000 '3500000 B) Cost of new drill and platform.Add: Installation charges. Total cost of Drill&Platform. Total selling price of new platform and drill. '14000000 '1000000 C) '15000000 '4000000. Cash flow analysis is an important tool with the finance manager for ascertaining the changes in balance of cash in hand and cash at bank. Cash flow statement analyses the reasons for changes in balance of cash in hand or at bank between two accounting period. Moreover, it shows the inflows and outflows of cash, practically, sources and applications of cash. Cash generating efficiency is a fact used while preparing the cash flow statement.