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PART A: Dan Delite (P) Ltd. manufactures and sells battery operated toys. For its new project, the given estimates were made:

Initial investment:  € 10,000
Annual production:  (Units) 1,000
Life of the project:  5 years
Selling price per unit:  € 10 (under a contract)
Cost per unit:  € 5 in the first year and will raise by 10% per annum

Required:

If the company’s cost of capital is 18% and the rate of inflation is 12% per annum, comment on the viability of the project.

PART B:

ABC Ltd. has been approached by its bankers to ascertain the need for overdraft facilities throughout the coming year. You are provided the following information in connection with the preparation of a forecast for the year ending 31st December, 2004.

a) Sales in January are expected to be € 50,000 rising by € 4,000 per month until 31st July and then falling by € 2,000 per month to 31st December.

b) Wages will be € 8,000 per month until 31st May and then increase to € 9,200 per month for the rest of the year.

c) Overhead expenditure will be € 2,200 per month until 31st August and then fall to € 2,000 per month.

d) The company makes a standard 25% gross profit on sales, before deducting wages and aim to have adequate stock at the end of each month to cover the next two months sale.

e) Debtors take an average of two months. Creditors have to be paid in the month following that in which goods are purchased.

f) On 31stDecember, 2003 trade creditors were € 44,000, expenses € 21,000, debtors € 94,000 comprising € 46,000 outstanding from November, stock on hand € 78,000, bank overdraft € 42,000.

Required:

a)  To make cash budget on a monthly basis exhibiting the maximum overdraft facilities needed throughout the year ending 31st December, 2004.

b)  Comment in brief on your results.

Financial Accounting, Accounting

  • Category:- Financial Accounting
  • Reference No.:- M95839

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