Page 2 - CIMA MCS Workbook February 2019 - Day 2 Suggested Solutions

CIMA FEBRUARY 2019 – MANAGEMENT CASE STUDY

These include the assumption that the asset will be replaced with the same asset, with the same
costs, over and over again. This may mean that the technique is not as useful for some assets as
others.

It may be reasonable to assume that certain assets, such as non‐technical furniture, will be
replaced with very similar items on an ongoing basis. But Crowncare is always looking to use the
latest equipment to service its patients and maintain its reputation for quality care and service.
This means that for such technological items as the dentists’ chairs, we are very unlikely to
replace an old chair with an identical one on an ongoing basis.

The technique also assumes no inflation, which can be very unrealistic over the long time periods
being considered.

Limited cash available for capital purchases

The purchase of capital assets can mean a significant cash outlay for the business, especially if it is
decided that all assets or all of a particular class of assets should be replaced at a particular time.

One technique for dealing with undertaking large investments with limited cash is to use capital
rationing tools. These are used to focus on those investments which are more efficient in their
use of cash to generate returns for the business, and as such is very useful when comparing
different types of projects. It would be very useful, for example, when determining whether to
acquire a competitor or to spend the money growing existing practices.

However, it may have more limited use in the type of investment we are considering. All the
practices will need to undergo an asset refresh. We aren’t comparing different types of projects
against each other, but are faced with one large project for which we may not have the money.

The project is necessary in order to ensure that our strategy of high quality service using the latest
equipment is achieved.

We therefore need to think of more practical ways to address the issue.

Leasing

Leasing is a way of spreading the cost of new assets over their effective lifespans. This would
mean that much less cash would be needed at a single point in time than if we purchased them
outright. This would ease the pressure on our cash position.

It would mean that we would be taking on a form of debt finance, something we don’t currently
have, and would leave us with long‐term liabilities on our statement of financial position.

Stagger the asset replacement cycle

Rather than undertaking a complete refresh of assets at one point in time, we could stagger the
refresh over a couple of years so that we can spread the cash burden of the investment.

This would have a similar effect to leasing, but would not leave us with a large debt liability. It
could also mean that we are not tied to a particular asset type for the full term of the lease for all

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