Question a: Blue Ltd is considering an investment which requires the purchase of a machine costing €550.000 in January o
Posted: Wed May 04, 2022 6:22 am
Question a: Blue Ltd is considering an investment which requires
the purchase of a machine costing €550.000 in January of current
year. Cash inflows from the project are expected to be €75.000 in
year 1 and increasing by 5% per year over the next 5 years.
Purchases of raw materials are €35,000 in year 1 and increasing by
6% per year over the next 5 years. At the end of the investment, it
is estimated that the residual (scrap) value of the machine is
€75.000. The company has as year-end in December and pays tax at
12.5% one year in arrears. The company’s real cost of capital is
8.5% and the general inflation rate is 7.5%. WDAs are at 20% using
the reducing balance method. Required: Decide whether the company
must accept the investment. (11 marks)
Question b: Describe the financial and non-financial objectives
of a company and state which one you consider more important from
each category and why? (2 marks)
Question c: Pink Ltd has daily demand for product A of 50 for
each of the 365 working days of the year. The product A is
purchased from a local supplier for €2.50 each. The cost of placing
an order is €57 per order, regardless of the size of the order. The
inventory holding cost per unit per year is equal to the 27% of the
purchase price. Required: Calculate the economic order quantity. (2
marks)
Question d: A company has annual credit sales of €26 million and
related cost of sales of €17 million. The company has the following
targets for the next year: Trade receivables days 90, Inventory
days 30, trade payables 60 days Assume there are 365 days in the
year. Required: Calculate the net investment in working capital
required for next year. (2 marks
the purchase of a machine costing €550.000 in January of current
year. Cash inflows from the project are expected to be €75.000 in
year 1 and increasing by 5% per year over the next 5 years.
Purchases of raw materials are €35,000 in year 1 and increasing by
6% per year over the next 5 years. At the end of the investment, it
is estimated that the residual (scrap) value of the machine is
€75.000. The company has as year-end in December and pays tax at
12.5% one year in arrears. The company’s real cost of capital is
8.5% and the general inflation rate is 7.5%. WDAs are at 20% using
the reducing balance method. Required: Decide whether the company
must accept the investment. (11 marks)
Question b: Describe the financial and non-financial objectives
of a company and state which one you consider more important from
each category and why? (2 marks)
Question c: Pink Ltd has daily demand for product A of 50 for
each of the 365 working days of the year. The product A is
purchased from a local supplier for €2.50 each. The cost of placing
an order is €57 per order, regardless of the size of the order. The
inventory holding cost per unit per year is equal to the 27% of the
purchase price. Required: Calculate the economic order quantity. (2
marks)
Question d: A company has annual credit sales of €26 million and
related cost of sales of €17 million. The company has the following
targets for the next year: Trade receivables days 90, Inventory
days 30, trade payables 60 days Assume there are 365 days in the
year. Required: Calculate the net investment in working capital
required for next year. (2 marks