Part A - Lynam PLC
You are a financial manager at Lynam PLC, a garden tool manufacturer. The Board of Director's have looked into the financial statements of the company for the last two years and have raised a concern about the company's profitability and liquidity. The financial statements of Lynam PLC for the last two years are given below:
Income Statement for the year ended 31 December
2014 2015
£000 £000
Revenue 3,671 3,924
Cost of sales (2,062) (2,328)
Gross profit 1,609 1,596
Operating expenses (750) (775)
Depreciation (133) (146)
Operating profit 726 675
Interest (134) (233)
Profit before taxation 592 442
Taxation (177) (133)
Profit for the year 415 309
Statements of financial position as at 31 December
2014 2015
£000 £000
ASSETS
Non-current assets
Property, plant, and equipment 2,660 2,793
Current assets
Inventories 678 758
Trade receivables 567 708
Cash 218 149
1,463 1,615
Total assets 4,123 4,408
EQUITY AND LIABILITIES
Equity
Ordinary Share Capital:
(£1 shares fully paid) 588 588
Retained earnings 207 227
795 815
Non-current liabilities
Borrowings - bank loan 2,383 2,668
Current liabilities
Trade payables 400 359
Other payables and accruals 213 194
Taxation 106 106
Short-term borrowing (all overdraft) 226 266
945 925
Total equity and liabilities 4,123 4,408
Required:
Prepare a report for the Board of Directors that evaluates the performance of Lynam PLC in relation to profitability, liquidity, gearing and asset utilisation. Your report must be supported by the calculation of relevant ratios in the four evaluation areas mentioned above.
Calculate the Working Capital Cycle in days for Lynam PLC based on the information above, assuming 365 days, for the years 2015 and 2014 AND briefly comment on the company's liquidity position in 2015 compared to 2014. (round to the nearest day)
All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.
Part B - Cox Co.
In each quarter of every year, the maximum capacity of Cox Co. Factory is 4,500 hours available for sorting and re-packing two sorts of imported apples in special boxes where each box contains only one ton of either green or red apples. The monthly common committed fixed costs of the company are £150,000 and the following estimates are presented in relation to the coming quarter which will start 1st January 2014:
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Green Apples
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Red Apples
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Maximum Demand in the local market
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160 boxes
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324 boxes
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Selling price per box
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£18,000
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£11,000
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Sorting and re-packing time required per box
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14 hours
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10 hours
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Contribution margin per box
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£5,250
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£5,900
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Required:
Do you consider the sorting and re-packing hours that are expected to be available in the 1st quarter of the coming year a scarce resource to Cox Co.? Explain your answer
What is the optimal imports mix Cox Co. should consider for the first quarter of 2014 in the light of the data available.
What is the relevance - if any - of the company's committed fixed costs to the decision of determining the optimal budget of imports? Discuss in details referring to the concept of relevant information for decision making purposes.
Part C - Clays Ltd.
Clays Ltd. a food manufacturer is considering purchasing a new machine for £3,500,000. The company is expecting an annual cash inflow of £875,000 from the sale of products and an annual cash outflow of £112,500 for each of the seven years of the machine's useful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using the straight-line method. The machine is expected to last for seven years, with a residual value estimated to be 20% of the original cost of the machine. The cost of capital for Clays Ltd. is 10%.
Required:
Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine:
The Payback Period.
The Accounting Rate of Return.
The Net Present Value.
The Internal Rate of Return (to two decimal places)
Briefly evaluate the benefits and limitations of each of the above differing investment appraisal techniques.
Explain and critically evaluate the main sources of finance that could be utilised by Clays Ltd. to finance the project.