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Test 2

Question 1

A company has to decide whether to select a project or not. The following information are provided:

The cost of the capital expenditure involved is $75,900

Discount rate of the project is 6%,

Company will have to spend $9,200 on net working capital that will be returned to him at the end of the project

He will depreciate his capital expenditure using straight line method over the project life.

The duration of the project is 5 years.

Tax rate of the project is 26%

His accountant has forecast a revenue of $ 19,500 annually.

Further information is provided:

Supplies expense

$1200

Supplies

$1300

Salary expenses

$1400

Unearned Revenue

$8100

Utilities

$ 950

Rental expenses

$1050

Prepaid Rent

$1500

At the end of the project he will sell the equipment purchased initially [CAPEX] at 9,000

The salvage value of CAPEX is $7500

REQUIRED

Calculate the initial investment

Calculate each year cash flow

Calculate the terminal value of the asset used

Calculate the NPV

Calculate the Profitability Index [PI]

Calculate IRR of the project

Question 2

Part A

The ABC company manufactures beds that sell for $640. Budgeted sales for May , June and July 2020 are 3000 units , 5200 units and 3500 respectively.

Each bed requires 20 square feet of cedar wood at a cost of $9 per sq foot. The company wants to maintain an inventory of bookcases equal to 12% of the following month sales. Inventory on May 1 consisted of 120 bookcases

The company wants to maintain an inventory of oak equal to 33% of the next months requirements. Materials inventory on May 1 consisted of 300 sq feet of cedar.

The company estimates an inventory of oak on hand at the end of June of approximately 650 sq feet .

Monthly fixed overhead and variable cost based on direct labor hour are provided on the table below:

Supervisors salaries

$7500

Direct labor hours for each bed

10 hours

Cost per labor hour

$11.50

Insurance

$ 1500

Depreciation of equipment [Office]

$1200

Depreciation of factory

$ 5500

Predetermined rate based on DHL

$6.00

Required

Calculate sales budget in $ for each month and total the number of beds sold in May and June

Prepare a production budgets in units for each month and in total for May and June

Prepare purchases budget in $ for Direct materials for each month and in total for first two months

Prepare a direct labour budget for each month and total of the first 2 months

Prepare a manufacturing overhead budget for each month and the total for the first two months

All questions are based on only two months [May and June]

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