Section2- AssessmentThe assessment example below can be used by centre, or alternatively centre can develop their own assessment.Assessment 1Outcome covered 1Assessment instructionsPrepare a report/response which answers the following question.1.Identify two sources of finance available to private and public sector organizations andexplain the advantages and disadvantages associated with each.Private sector organization:1)Use share to raise money:Advantage:The capital provided by the owner of a business is long-term capital, because in the normal course of events it will not be repaid to owner.Disadvantage:Control a certain percentage shares, will be control the organization’s lifeblood. And it leads much assets and profits flow into the shareholders pocket.2)Loan:Advantage:It is the easiest and the most effective way to raise money.Disadvantage:1.Business risk, i.e. the risk inherent in the project. If the project is risky, a provider offinance will be less certain of recovering its investment, and will charge a higher rateof interest to compensate for that danger.2.Financial risk, if the borrower is already heavily dependent on outside finance, theinterest and repayments will consume much of its profits.Public sector organization:1)Use charity to raise finance:It is depend on the donors who support the work of the charity, special events to collect donations from a wide range of people. However, it has uncertainty, which easily lead to insufficient funding.2)Through the government allocate the funding:Advantage:This finance way is use the money from the government revenue received from taxpayers.Disadvantage:The funds must be used to the projects have benefit for the taxpayers, unless the government did not give the money to the public sector organization.2.Define two alternative methods of funding a capital purchase, e.g. a forklift truck. Considerthe financial benefits or disadvantage of each method.Bank overdraft: the bank allows the business to spend more cash than it actually owns, the bank itself making up the shortfall, it usually charge an arrangement fee for setting up the overdraft facility, and it will charge interest on the amount of cash that has been “overspent” by the businessBenefits:1)Allows a firm to draw check to a greater value than the actual balance in the bankaccount of company.2)Bank overdrafts are a fairly cheap form of finance with the added advantage of flexibility.In some cases a small overdraft facility may be offered free of charge.Disadvantage:1)The bank will take a close interest in the affairs of the business until the overdraft isrepaid.2)An overdraft is need repayable on demand; therefore, the bank can withdraw the facilityat a moment’s notice and require the business to pay the amount owing.Credit from suppliers: A supplier provides goods or services to a purchase with an arrangement for payment at a later date. Their suppliers have in effect-probably unwillingly-“loaned” goods to the business.Advantage:This can be cheapest form of finance.Disadvantage:1)Prices may be adjusted to allow for credit.2)Delayed payments can lead to poor relations with suppliers3.Describe the differences between revenue and capital purchasing and why they areaccounted for in separate ways.Revenue expenditure refers to obtain the benefits of financial services and only those expenditures that occur in the current period. These expenditures as current expenses should be credited to the appropriate expense account. The effectiveness of expenditures associated with the current fiscal year, should be treated as revenue expenditureCapital expenditure refers to the benefits of obtaining property or services and those expenses that can occur multiple accounting periods. Therefore, these expenses should be capitalized and included in the asset class subjects first, and then restaging by the benefits obtained, transferred to the appropriate expense account.Generally, an expense is part of revenue expenditure or capital expenditure, usually the length of the period by the expenditure benefits prevail.Different:1)Revenue expenditure included in the current expense account; capital expendituresnecessary to transfer assets, included in fixed asset accounts, according to the useful life of the future amortization expense.2)Revenue expenditure is to bring benefits to the current period, generally less than oneyear; while capital expenditures not only bring benefits to the current period will also bring benefits to the future business activities, usually in more than one year.3)Revenue expenditure and capital expenditure accounting processes and methods ofdifferent financially.4)Revenue expenditure is the expenditure of simple reproduction management aspects ofthe enterprise, it has liquidity, the final form of current assets or current expenses;capital expenditures expanded reproduction corporate spending, it has a relatively fixity, the final form of fixed assets.4.Explain a decision making process that is relevant to the purchase of a capital item. Detailthe steps taken and what the considerations are for the managers.For example by forklift truck:1.Initial request for capital item: Identifying the need for the purchase, and then formalizethe need.2.Sourcing: Investigate the circumstance of market.Know all information about the forklift truck. And according to the enterprise need choose the suitable forklift struck.3.Authorization: build a business budget.Consider how to raise the finance to buy the forklift truck.4.Investigation: seek a supplier which can be authorization from the enterprise.The manager should find more than 3 suppliers and compare their product and the conditions they give.5.Appraisal and evaluation: evaluation and appraisal.In this item the manager should consider its total life cycle costs.6.Buying decision: approval to purchase.The manager should give the company about the forklift information, supplier requirements, full life-cycle costs and payment ways and deliver information.7.Purchase and contract: purchase and acquireCoordination and communication, reminders, purchase acceptance, organize payment.5.Calculate the life cycle cost for a specific capital purchase using two alternative sources ofsupply. You may use the purchase identified in question 2. Contrast the final costing of each example, show the benefits/savings accrued and comment on your results.Forklift truck purchase:From this life cycle cost table, plan A (the forklift track purchase from company A) have to cost much net cost than B (the forklift track from company B), however, the plan A’s NPV（net present value）is less than 0, and plan B’s NPV is greater than 0, which means the enterprise should priority consider the plan A, so if this purchase has a high risk and it cannot use for 2 years, it is means the plan A cost less than plan B. But if the forklift truck purchase can be use more than 2 years, because the fund cost, maintenance and repair and overhauls, the plan A have to cost much fund than plan B. From this we can conclude that if this purchase has a low risk, the enterprise should buy the forklift from company B, if it has a high risk, the enterprise should buy it from company A.6.Explain two methods of investment appraisal fromPaybackDiscounted cash flowAccounting rate of returnPaybackThe great virtue of this method is its simplicity. The idea is to assess how long a project willtake to pay back the initial investment. Suppose that a company proposes to purchase a replacement machine for £200 000. In the company A, the new machine will lead to financial benefits of £50 000 per annum for each of the five years that the machine is expected to be in use.The net cash flow of company AIn the company B, An alternative project offers financial benefits of £20 000 per annum in years in one to three and £80 000 per years in four to six. The cash flow profile looks like this:The net cash flow of company BIn company A, this project finished the pay back in the fourth year, by the time the machine’s useful life is finished the cumulative net cash flow has reached a positive figure of £50 000.In company B, it finished the pay back need 4 years and 9 months, but overall, this project generates a positive cash flow of £100 000.The effect of using the payback criterion is clear: it gives preference to projects which pay back quickly, even if other projects offer better returns in the long term. For this reason it should be used only as a supplement to more sophisticated methods.The Accounting Rate of Return (ARR) MethodThe idea is simply to calculate the average rate of return earned by the money invested. The decision rule is: A project is acceptable if its rate of return is greater than management ’s minimum rate of return.1)investmentinitial Estimated prof itaverage Estimated =ARR2)projectthe of life useful expected projectthe of profit ve Accumulati =Average profitsAccording to the calculate, the company A average annual returns of £10 000are expected on an investment of £200 000, a 5 per cent rate return, in company B, averageannual returns of £16 667 are expected on an investment of £200 000, a rate of return of 8.3 per cent per annum. Therefore, the company B ’s project is preferable.。