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FINANCIAL PROJECTIONS AND CAPITAL EXPENDITURE OF ELSIES LIMITED

Elsies Limited is a nationally recognised supplier of catering equipment. It offers safe and secure shopping via its online

store and its state$-$of$-$the$-$art premises in each of the provinces of South Africa. The company offers a wide selection of

catering equipment and supplies at competitive prices. The target market includes restaurants, hotels, hostels and spaza

shops. Their products carry an industry$-$leading warranty that is backed by good after$-$sales service and availability of

spares. The company was established in $2015$ with an authorised share capital of $1500000$ ordinary shares of which

$900000$ were issued at R$2$ each at the initial public offering in $2015.$

The financial manager and her team were in the process of forecasting the financial performance for $2024$ and financial

position of the company as of $31$ December $2024.$ The starting point was the following figures that were obtained from

the financial statements for the year ended $31$ December $2023$:

The sales amounted to R$9600000,$ and the cost price of the goods sold was R$7200000.$ Operating expenses totaled

R$1200000$ whilst the company tax amounted to R$336000.$ The carrying value of the fixed assets was R$4200000$ whilst

the inventories, trade debtors and cash reflected values of R$1200000,R1800000$ and R$600000$ respectively. The

ordinary share capital balance remained unchanged since the establishment of the company in $2015$ whilst the

undistributed profits of the company accumulated to R$2100000.$ An amount of R$2400000$ was owed to Jip Bank for a

long$-$term loan. The amount owed to trade creditors was R$1467000$ and the company tax payable to SARS was

R$33000.$

The following predictions were made for the financial year ended $31$ December $2024$:

Sales are expected to increase by $25\%.$ Seventy$-$five percent $(75\%)$ of the total sales is estimated to be on credit.

Company tax will be calculated at $27\%$ of the pre$-$tax profit and $10\%$ of this amount is expected to be unpaid on $31$

December $2024.$ A final dividend of R$400000$ is expected to be declared on $31$ December $2024,$ and is payable during

The unsold shares are expected to be issued on $31$ March $2024$ at R$3$ each. The amount owed by trade debtors

will be based on a collection period of $54\mathrm{.}75$ days. The company's closing inventory and the amount owed to trade

creditors are expected to change directly with the change in sales in $2024.$ A new machine with a cost price of R$700000$

will be purchased during January $2024.$ Depreciation for $2024($included in the operating expenses$)$ is expected to

amount to R$300000.$ R$760000$ will be paid to Jip Bank during $2024$ and this amount includes R$360000$ for interest. The

cash balance must be calculated $($balancing figure$).$

Elsies Limited is considering the purchase of a machine to manufacture some of the spare parts for the catering

equipment during $2025.$ The company desires a minimum required rate of return of $12\%.$ The machine will cost

R$2000000$ plus R$400000$ for installation and is predicted to have a useful life of five years. A salvage value of

R$100000$ is estimated. The machine is expected to generate cash inflows of R$800000$ per year but will require the

employment of two new machine operators at R$100000$ per year for each operator, and it will require maintenance and

repairs averaging R$40000$ per year. Depreciation will be calculated using the straight$-$line method. QUESTION $1$

Prepare the following pro forma statements:

$1\mathrm{.}1$ Statement of Comprehensive Income for the year ended $31$ December $2024$ using the

percentage$-$of$-$sales method. $(4)$

$1\mathrm{.}2$ Statement of Financial Position as of $31$ December $2024.(14)$

QUESTION $2$

Refer to the investment opportunity for $2025$ and calculate the following. $($Ignore taxes.$)$ Where discount factors

are required, use the four decimals present value tables that appear in the module guide.

$2\mathrm{.}1$ Accounting Rate of Return on average investment $($expressed to two decimal places$).(3)$

$2\mathrm{.}2$ Benefit Cost Ratio $($expressed to two decimal places$).(4)$

$2\mathrm{.}3$ Internal Rate of Return $($expressed to two decimal places$).$ Your answer must reflect two NPV

calculations $($using consecutive rates$/$percentages$)$ and interpolation.

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