- 20 Marks
CML – APRIL 2023 – L3 – Q3 – Critical Examination of Agro-Processing Equipment Finance
Critically examine a USD 540,000 equipment purchase request from Pistashio Cashew Nuts Ltd, using background and financials (exchange rate GHC13/USD).
Question
Pistashio Cashew Nuts Ltd. is a producer of roasted cashew nuts for sale in the local and international markets. The company was established fifteen years ago by Professor Joel Amo, a professor in Agriculture at the University of Ghana with some support from his expatriate friend Mr. Peter Deitrich, a German national. Mr. Deitrich aged 75 is an experienced industrialist with vast experience in many agro-based outfits. He serves as the Board Director of the Company. Mr. Joel aged 70 also serves as the CEO and COO for the business.
Mrs. Amo aged 65 a seasoned chartered accountant serves as the CFO and Head of HR for the company. She joined the company five years ago when she retired as Head of Internal Audit for Bank of Ghana.
Mr. Kweku Dadzie aged 68 has served as the factory manager for the company since his retirement from Gold Coast Aluminum Works as factory supervisor eight years ago.
The company is embarking on an expansion project in order to meet the burgeoning demand for its product which is selling very fast on the international market as well as the local market. The company supplies roasted cashew to a number of hotels and supermarkets in the country (about 40% of its output and exports the rest to UK, France, Greenland USA and South America.
The company has a state of the art factory located at Ada a few miles drive from Tema. Your visit to the premises show that the machinery in use are rather aged which Joel explains as the reason for the fast deterioration in account performance over the past year.
The customer tells you he has received an increase in orders from overseas which makes it imperative to procure a larger set of cashew roasting and packaging equipment. He shows you an invoice for a set costing in total USD 540,000 including equipment cost, transportation costs and installation costs. (USD exchange rate is GHC13.00/USD)
Critically examine this proposition using the information above and the related financial statements provided below.
Pisticashio Cashew Nuts Ltd Profit and Loss Extracts for the year ending 31 Dec
| 2020 GHC | 2021 GHC | 2022 GHC | |
|---|---|---|---|
| Sales | 1,850,000 | 2,571,500 | 3,985,825 |
| Opening Inventory | 245,000 | 289,000 | 442,800 |
| Purchases & Production | 1,239,500 | 1,748,620 | 2,790,078 |
| 1,484,500 | 2,037,620 | 3,232,878 | |
| Closing Inventory | 289,000 | 442,800 | 770,500 |
| Cost of Sales | 1,195,500 | 1,594,820 | 2,462,378 |
| Gross Profit | 654,500 | 976,680 | 1,523,447 |
| Overheads | 175,000 | 298,000 | 476,800 |
| Depreciation | 259,000 | 312,400 | 372,400 |
| Operating Profit | 220,500 | 366,280 | 674,247 |
| Interest Paid | 125,000 | 145,000 | 158,000 |
| Profit Before Tax | 95,500 | 221,280 | 516,247 |
| Tax | 23,875 | 55,320 | 129,062 |
| Profit After Tax | 71,625 | 165,960 | 387,185 |
| Noncurrent Assets | 2020 | 2021 | 2022 |
|---|---|---|---|
| Building | 684,000 | 831,600 | 929,200 |
| Plant & Machinery | 360,000 | 240,000 | 390,000 |
| Motor Vehicles | 270,000 | 380,000 | 360,000 |
| Furniture and Fixtures | 110,000 | 160,000 | 110,000 |
| Total | 1,424,000 | 1,611,600 | 1,789,200 |
| Current Assets | |||
| Inventory | 289,000 | 442,800 | 770,500 |
| Receivables | 258,000 | 254,700 | 574,000 |
| Prepayments | 25,600 | 36,800 | 47,800 |
| Bank | 125,000 | 85,400 | 75,800 |
| 697,600 | 819,700 | 1,468,100 | |
| Current Liabilities | |||
| Trade Creditors | 148,000 | 184,700 | 435,200 |
| Overdraft | 854,900 | 1,544,920 | 1,426,827 |
| Total Current Liabilities | 1,002,900 | 1,729,620 | 1,862,027 |
| Net Current Assets | -305,300 | -909,920 | -393,927 |
| Net Assets | 1,118,700 | 701,680 | 1,395,273 |
| Capital | |||
| Share Capital | 1,000,000 | 500,000 | 1,000,000 |
| Income Surplus | 118,700 | 201,680 | 395,273 |
| 1,118,700 | 701,680 | 1,395,273 |
Ratios
| 2020 | 2021 | 2022 | |
|---|---|---|---|
| Sales Growth | 39.00% | 55.00% | |
| Receivable Days | 51 | 36 | 53 |
| Payable Days | 44 | 39 | 57 |
| Inventory Turnover Days | 88 | 101 | 114 |
| Gross Margin | 35% | 38% | 38% |
| Overhead % | 9% | 12% | 12% |
| Net Margin | 5% | 9% | 13% |
| Interest Cover | 1.76 | 2.53 | 4.27 |
| Current Ratio | 0.70 | 0.47 | 0.79 |
| Quick Ratio | 0.41 | 0.22 | 0.37 |
| Tax Rate | 25% | 25% | 25% |
| Dividend Payout RATIO | 50% | 50% | 50% |
| Inventory to Sales | 16% | 17% | 19% |
| Receivables to Sales | 14% | 10% | 14% |
| Payables to Sales | 8% | 7% | 11% |
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