COMM602 – Principles of Accounting and Finance

Recommendation Report

The Recommendation Report represents the culmination of the case study decision making process
developed through the course. The Recommendation Report is due for submission to the online drop-
box on the course LEARN page by 5:00 pm on Tuesday, 24 October, 2023.

The Recommendation Report contributes to 35% of the final grade and must be completed
individually.

Prior to completing the Recommendation Report, students should complete the relevant Decision
Making Quizzes (Quizzes 1-4) in Modules 2, 3, 4 & 5. These are designed to test your understanding
of the course content needed to complete the Recommendation Report.

The Recommendation Report requires students to make some informed decisions within the case
study scenario and write up their recommendations for the management of Sheffield Limited. Further
details are on page 5.

Case Study:
You are the Business Development Manager of Sheffield Limited, a farm nutrient and environmental
company located in central Canterbury. Sheffield Limited focuses in helping farmers and growers in
the South Island of New Zealand to achieve production efficiency and reduce their environmental
impacts. The company produces fertilisers, agrochemicals, and other agriculture products that help
farmers to improve the fertility of soil, the quality of crops and livestock, and eventually the
profitability of farms. The aspirational goals of the project are to learn the various types of finance-
related decisions that managers of a company have to make and to understand how finance tools can
help managers in making better decisions that will benefit the company.

Your task:
In preparation for an upcoming management meeting, you have been given a special task to analyse
the financial position of the company and provide recommendations on what actions should be taken
to improve the financial position of Sheffield Limited.

You are to prepare a short report (maximum of eight single-sided A4 pages, excluding cover page,
title page, and table of contents, but including reference section) that addresses the specific decisions
currently facing different areas of the business. AGCM cover sheet is not required as all the
assessments are done online and students have to tick a box when they submit to declare that “In
accordance with the Lincoln University Academic Integrity Policy and Procedure, this assignment is my
own work, except where I have acknowledged the words and ideas of other people”.

In your report, outline your recommendations, as well as the information you considered and the steps
you took to arrive at that recommendation.

Here are some background information that you will need to help you in the report process:

Operating
The Inventory Manager is considering introducing a new product to Sheffield Limited – the Sheffield
soil test kit. The kit would sell for $400 per unit, have variable manufacturing costs of $120 per unit,
and variable selling costs of $40 per unit. Market analysis suggests Sheffield Limited could sell 200 units
per month. The company’s monthly fixed expenses due to this product are $36,000. The tax rate is
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30% and Sheffield Limited have a targeted before-tax profit for the product of $16,000 per month.

Investing
At a recent trade fair that you attended, you were impressed with a new machine, Windwhistle model
230E, that can double the production capacity of your flagship product, Cropmaster 18 Fertiliser. The
machine requires a capital outlay of $500,000 and will have a residual value of $25,000 at the end of
its six-year useful life.

It is expected that the new machine will generate the following cash flows:

0 1 2 3 4 5 6

90,000
$(500,000) 185,000 160,000 145,000 90,000 90,000 (Including
Initial Inv. 25,000)

You have obtained information on the payback Period policy of an investment set by management of
Sheffield Limited and the other information for investment in the new machine, Windwhistle Model
230E as below:

Investment decision Decision criteria set by Outcome for investment in

technique management Windwhistle model 230E
Payback Period (PP) Not more than 3 years 3.11 years
Net Present Value (NPV) Positive NPV $92,276.33
Internal Rate of Return (IRR) Not less than 9.0% 16%

Financing
Assuming you have decided to invest in the Windwhistle model 230E, you now need to decide how to
finance the investment. You have two options of financing for the purchase of the new machine. The
first option is by taking up a long-term loan from a bank. The second option is through equity financing
from the shareholders.

In addition, Sheffield have identified four potential suppliers of the required chemical needed to
produce the Cropmaster 18 Fertiliser that uses the Windwhistle model 230E. Each of the suppliers
offer different credit terms as below;

Supplier Cash discount Cash discount Credit period Beginning of

period credit period
A 2.0% 15 days 30 days Date of invoice
B 1.5% 10 days 60 days End of month
C 3.0% 7 days 45 days Date of invoice
D 3.5% 15 days 30 days End of month

The investment in the new machine, Windwhistle Model 230E will have a significant impact on the
financial position of Sheffield Limited for its financial year ending 31 December 2023.

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Despite a sales drop of 24% from 2021 to 2022, Sheffield Limited turn from a net loss of $132,700 to a
net profit after tax of $698,520. The Board of Directors is pleased with the performance of the company
in 2022 but is also puzzled as to how the company can turn to profit although the sales dropped from
the previous year. The Chief Financial Officer of the company made projections of the balance sheet
and income statement of the company for its financial year ending 31 December 2023. The historical
figures for 2021 and 2022, and the estimated figures for 2023 (shown as 2023e) are presented below:

Sheffield Limited
Comparative Balance Sheets
as on 31 December
2021 2022 2023e
Actual ($) Actual ($) Estimated ($)
Assets
Cash 7,300 7,500 8,000
Short-Term Investments 18,500 46,600 48,600
Accounts Receivable 650,000 350,000 351,200
Inventories 1,283,860 713,000 715,200
Total Current Assets 1,959,660 1,117,100 1,123,000
Fixed Assets at cost 1,201,350 490,500 491,000
Less: Accumulated Depreciation 261,860 144,700 146,200
Fixed Assets 939,490 345,800 344,800
Total Assets 2,899,150 1,462,900 1,467,800

Liabilities And Equity

Accounts Payable 323,550 145,400 145,600
Notes Payable 699,700 198,200 200,000
Accruals 283,510 132,700 135,000
Total Current Liabilities 1,306,760 476,300 480,600
Long-Term Debt 980,000 322,000 323,432
Common Stock 460,000 540,000 460,000
Retained Earnings 152,390 124,600 203,768
Total Equity 612,390 664,600 663,768
Total Liabilities And Equity 2,899,150 1,462,900 1,467,800

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 Sheffield Limited
Income Statement
for the year ended 31 December
2021 2022 2023e
Actual ($) Actual ($) Estimated ($)
Sales 5,831,300 4,429,200 4,432,000
COGS excluding depreciation 4,975,800 2,860,500 2,864,000
Depreciation 116,600 18,500 18,900
Other Expenses 698,000 325,000 340,000
Total Operating Costs 5,790,400 3,204,000 3,222,900
EBIT 40,900 1,225,200 1,209,100
Interest Expense 173,600 61,000 62,500
EBT (132,700) 1,164,200 1,146,600
Taxes (40%) - 465,680 458,640
Net Income (132,700) 698,520 687,960

The financial ratios of the company in 2021 and 2022, and the estimated figures for 2023 (shown as
2023e) are presented below. The financial ratios of the agriculture products industry in New Zealand
are included for comparison purposes.

Sheffield Limited
Ratio Analysis
for the year ended 31 December
Category and ratio 2021 2022 2023e Industry
Actual Actual Estimated Average
Efficiency Ratios
Inventory Turnover 3.88 times 4.01 times 4.00 times 5.00 times
Average Age of Inventory 94.18 days 90.98 days 91.15 days 73.00 days
Average Collection Period 40.69 days 28.84 days 28.92 days 30.00 days
Average Payment Period 23.73 days 18.55 days 18.56 days 60.00 days
Fixed Asset Turnover 6.21 times 12.81 times 12.85 times 9.00 times
Total Asset Turnover 2.01 times 3.03 times 3.02 times 2.50 times
Financial Stability Ratios
Current Ratio 1.50 times 2.35 times 2.34 times 2.00 times
Quick Ratio 0.52 times 0.85 times 0.85 times 1.00 times
Debt Ratio 0.79 times 0.55 times 0.55 times 0.40 times
Debt to Equity Ratio 3.73 times 1.20 times 1.21 times 0.70 times
Times Interest Earned 0.24 times 20.09 times 19.35 times 25.00 times
Profitability Ratios
Gross Profit Margin 14.67% 35.42% 35.38% 27.00%
Operating Profit Margin 0.70% 27.66% 27.28% 16.00%
Net Profit Margin -2.28% 15.77% 15.52% 12.00%
Return on Total Assets -4.58% 47.75% 46.87% 30.00%
Return on Equity -21.67% 105.10% 103.64% 35.00%

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Report Requirements:

You are to prepare a short report (maximum of eight single-sided A4 pages) that addresses the
specific decisions currently facing different areas of the business (refer to the details on page 1). In
addition, please refer to the marking guide (see page 6).

1. Introduction: Provide a brief and concise introduction of contents of the recommendation

report and a highlight of the main recommendations. Outline the coverage.
(5 marks)

2. Analysis - Operating Decision: Should Sheffield Limited introduce the ‘Sheffield Soil Test Kit’?
Explain your answer.
(10 marks)

3. Analysis - Investing Decision: Should the capital expenditure proposal to purchase a new
machine, Windwhistle model 230E that can double the production capacity of your flagship
product, Cropmaster 18 Fertiliser be accepted? Explain your answer.
(10 marks)

4. Analysis - Financing Decisions: Which is the better option for financing the new machine –
long-term loan from a bank or equity financing from the shareholders? Who should be the
preferred supplier for the required chemical needed to produce the Cropmaster 18 Fertiliser?
Explain your answer.
(10 marks)

5. Analysis - Financial Statement Analysis: What actions could be taken to improve the
performance of Sheffield Limited in each of the categories of financial ratios (efficiency ratios,
financial stability ratios, and profitability ratios)?
(20 marks)

6. Analysis - Overall: What should be the future direction of Sheffield Limited? (Some hints to
help you to generate ideas are your thoughts toward those questions: What do you think are
the most important factors that a company should consider when deciding its future
direction? What strategies do you think a company can use to stay competitive and successful
in the future? What do you see as the biggest challenges that a company will face in the next
5-10 years, and how should it respond to them?)
(15 marks)

7. Organisation and Conclusion: Organise your recommendation report in a proper manner

that ties the introduction, analysis, and conclusion sections nicely. The conclusion section
should follows logically from the analysis.
(20 marks)

8. Format and Referencing: Follow the Faculty of Agribusiness and Commerce (AGCM) Style
Guide. Learn more about the AGCM Style Guide at:
https://learn.lincoln.ac.nz/mod/book/view.php?id=7292.

9. Use proper APA Referencing style. Learn more about APA Referencing style at:
https://ltl.lincoln.ac.nz/advice/referencing-endnote/?target=apa-style

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 (10 marks)

[Total 100 marks]

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 COMM602 Principles of Accounting and Finance

Recommendation Report – Marking Rubric

Possible Scale
Criteria
Mark Missing Weak Poor Good V. Good Excellent
Introduction 5
Concise and ‘Coverage’ clearly 5 0 – None 1 - No substantial 2 – Identifies 3 – Identifies most 4 – Outlines all of 5 – Clearly outlines
appropriate coverage and correctly attempt some of the of the coverage the coverage coverage, well
outlined coverage framed

Analysis 65
Use of appropriate Operating decision 10 0 – None 1–2 – 3–4 – 5–6 – 7–8 – 9–10 –
approaches for each Approach is Approach is not Approach is mostly Appropriate Appropriate
decision. incorrectly correctly applied, correct, good approach, good approach, good
Identification of applied, limited some discussion number of issues, number of issues, number of issues,
relevant issues for discussion of of issues, but discussion lacking well discussed, very well discussed,
each decision. issues, little lacks in detail, mostly good very good
mention of contextualisation contextualised to contextualisation to contextualisation to
Sheffield Limited to Sheffield Sheffield Limited Sheffield Limited, Sheffield Limited,
Limited, and lacks across most/all across all issues
detail overall issues

Investing decisions 10 0 – None 1–2 – 3–4 – 5–6 – 7–8 – 9–10 –

Approach is Approach is not Approach is mostly Appropriate Appropriate
incorrectly correctly applied, correct, good approach, good approach, good
applied, limited some discussion number of issues, number of issues, number of issues,
discussion of of issues, but discussion lacking well discussed, good very well discussed,
issues, little lacks in detail, mostly contextualisation to very good
mention of contextualisation contextualised to Sheffield Limited, contextualisation to
Sheffield Limited to Sheffield Sheffield Limited across most/all Sheffield Limited,
Limited, and lacks issues across all issues
detail overall

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 Possible Scale
Criteria
Mark Missing Weak Poor Good V. Good Excellent
Possible Scale
Mark Missing Weak Poor Good V. Good Excellent
Financing decisions 10 0 – None 1–2 – 3–4 – 5–6 – 7–8 – 9–10 –
Approach is Approach is not Approach is mostly Appropriate Appropriate
incorrectly correctly applied, correct, good approach, good approach, good
applied, limited some discussion number of issues, number of issues, number of issues,
discussion of of issues, but discussion lacking well discussed, good very well discussed,
issues, little lacks in detail, mostly contextualisation to very good
mention of contextualisation contextualised to Sheffield Limited, contextualisation to
Sheffield Limited to Sheffield Sheffield Limited across most/all Sheffield Limited,
Limited, and lacks issues across all issues
detail overall

Financial Statement 20 0 – None 1–3 – 4–7 – 8–12 – 13–16 – 17–20 –

Analysis Weak discussion Weak discussion Good discussion Good discussion and Excellent discussion
and wrong and wrong and recommendation, and
recommendation, recommendation recommendation, good number of recommendation,
few weaknesses s, some some weaknesses weaknesses and good number of
and strength weaknesses and and strength strength identified weaknesses and
identified strength identified strength identified
identified

Overall of future 15 0 – None 1–2 – 3–5 – 6–9 – 10–12 – 13–15 –

direction; COVID-19 Weak discussion Weak discussion Good discussion Good discussion and Excellent discussion
and inappropriate and inappropriate and recommendation, and
recommendation, recommendation recommendation, good number of recommendation,
few weaknesses s, some some weaknesses weaknesses and good number of
and strength weaknesses and and strength strength identified weaknesses and
identified strength identified strength identified
identified

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 Possible Scale
Criteria
Mark Missing Weak Poor Good V. Good Excellent

Organisation and conclusion 20

Organisation 10 0 – None 1–2 – 3–4 – 5–6 – 7–8 – 9–10 –
Poorly organised; The information Information is Information is Information is much
no logical appears to be organised, but organised with organised with well-
progression; disorganised. paragraphs are not well-constructed constructed
Some well-constructed. paragraphs. paragraphs and
organization; subheadings.
points jump
around
Conclusion follows 10 0 – None 1–2 – 3–4 – 5–6 – 7–8 – 9–10 –
logically from Conclusion is Conclusion made Some detailed Several Numerous detailed
analysis vague, with but refers to little conclusions are detailed conclusions are
minor/no of the evidence reached from the conclusions are reached from the
reference to the analysis analysis reached from the analysis
analysis analysis

Format and Referencing 10

Presentation – layout, The font and line 2 0 – Does not 1 – Follows some of the Style Guide 2 – Follows most/all of the Style Guide
font, line spacing; spacing follows the follow Style
Grammar and spelling; Style Guide Guide
Concise and clear Correct grammar 2 0 – Numerous 1 – Minor errors 2 – Few/no errors
writing and spelling being errors
used
The writing is 1 0 – Poorly 0.5 – Some good sections, could be better 1 – Well written
concise and clear written
Proper referencing 5 0 – No 1–2 – 3–5 –
using APA referencing Poor referencing Good referencing
Referencing style