Capital Investment

SCS – L3 – Q15 – Environment analysis

Analyze the general environment of Beta Pure Water Ltd using PESTEL framework.

Question

(a)Assess the general environment in which Beta Pure Water Ltd operates

(b) Analyse the nature of competition faced by Beta Pure Water Ltd. (c) Advise management on the best option between lease or buy. Support your advice with relevant calculations. (d)Explain TWO other factors you will consider in reaching your conclusion in (c) above.

Answer

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Tags: Beta Pure Water, Capital Investment, Depreciation, Investment decisions, Lease vs Buy, NPV, Tax Savings
Level: Level 3

Topic: Investment decisions

FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

Question

AquaPure Ltd is a leading producer of mineral water in Zamora. The company sells all of its output to wholesalers on credit terms net 40. The company’s collection policy is somewhat relax, and so the receivables turnover days is currently 53 days. This fairly liberal credit policy has resulted in significant increases in sales revenue in recent years. However, the company has been facing cash flow problems as a significant number of customers take longer than the credit period to settle their accounts. The company typically falls on overdraft facilities from its bankers when it fails to generate adequate cash flows from operations to meet working capital requirements. The average cost of the overdraft facilities is 15% per annum.

Last week, the management team met and discussed the company’s cash flow and liquidity problems with a view to finding solutions to the problems. In that meeting, two proposals were offered to help solve the problems:
Proposal 1: Introduce early settlement discount of 1.5% on accounts that are settled within 10 days in which invoice is sent while the current credit period is maintained. It is estimated that 60% of accounts will be paid within the discount period.
Proposal 2: Switch from financing working capital requirements using the bank overdraft facilities at 15% interest to financing working capital requirements using supplier’s trade credit. Suppliers are willing to supply on credit terms 1/10, net 40. Proponents of the proposals believe that the implementation of their proposal will improve on the company’s financial situation.

Set out below are the company’s statement of profit or loss and statement of financial position for the past three years:

Statement of profit or loss for the year ended 31st December

	20X5 (GH¢’000)	20X6 (GH¢’000)	20X7 (GH¢’000)
Revenue	40,000	60,000	122,000
Cost of sales	(15,000)	(31,000)	(58,000)
Gross profit	25,000	29,000	64,000
Selling and administrative expenses	(11,000)	(17,500)	(24,000)
Operating profit	14,000	11,500	40,000

Statement of financial position as at 31st December

	20X5 (GH¢’000)	20X6 (GH¢’000)	20X7 (GH¢’000)
Noncurrent assets:
Property, plant and equipment	13,400	19,000	22,500
Current assets:
Inventory	8,000	15,500	25,500
Trade receivables	6,900	11,210	24,210
Cash	1,110	–	–
Total current assets	16,010	26,710	49,710
Total assets	29,410	45,710	72,210
Equity:
Stated capital	100	100	100
Income surplus	18,510	28,110	36,810
Shareholders’ equity	18,610	28,210	36,910
Non-current liabilities:
Medium-term loan	3,000	2,500	2,000
Current liabilities:
Trade payables	2,200	3,500	8,600
Dividend payable	5,600	6,400	7,500
Bank overdraft	–	5,100	17,200
Total current liabilities	7,800	15,000	33,300
Total liabilities	10,800	17,500	35,300
Total equity and liabilities	29,410	45,710	72,210

Required:
(a) Considering the background information and financial data provided above, would you conclude that AquaPure Ltd is experiencing overtrading? Explain with relevant computations.

(b) Appraise the proposal for early settlement discount (i.e. Proposal 1) and advise on whether it should be accepted for implementation or not. Your appraisal should focus on how the discount policy will influence the company’s profitability. Show all relevant computations.

(c) Appraise the proposal to switch from financing working capital needs using bank overdraft to using suppliers’ trade credit, and advise management accordingly. Show all relevant computations.

(d) Assuming AquaPure Ltd cannot raise additional funds from external sources such as borrowing and new share offer, suggest to management three steps they can take to ease the cash shortages the company is facing.

Answer

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Tags: Asset Sales, Capital Investment, Cash Management, Cash Shortages, Credit Control, Dividend Policy, Financial management, Inventory Reduction, Liquidity, Working Capital
Level: Level 2

Topic: Cash Management

FM – L2 – Q78 – Discounted cash flow

Calculate NPV for Woodland Enterprises' new product investment with inflation and advise on project viability.

Question

Woodland Enterprises plans to invest GH₵7 million in a new product. Net contribution over the next five years is expected to be GH₵4.2 million per annum in real terms. Marketing expenditure of GH₵1.4m per annum will also be needed. Expenditure of GH₵1.3m per annum will be required to replace existing assets which will now be used on the project but are getting to the end of their useful lives. This expenditure will be incurred at the beginning of each year. Additional investment in working capital equivalent to 10% of contribution will need to be in place at the start of each year. Working capital will be released at the end of the project. The following forecasts are made of the rates of inflation each year for the next five years:

Contribution	Marketing	Assets	General prices
8%	3%	4%	4.70%

The real cost of capital of the company is 6%. All cash flows are in real terms. Ignore tax.

Required:
Calculate the net present value of the project and appraise whether it is a worthwhile project.

Answer

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Tags: Capital Investment, Contribution, Cost of Capital, Discounted cash flow, Inflation, NPV, Working Capital
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

Question

TechNova Ltd

(a) TechNova Ltd, a software company, has developed a new game “Zestora” which it plans to launch in the near future. Sales volumes, production volumes, and selling prices for “Zestora” over its four-year life are expected to be as follows:

Year	Sales and production (units)	Selling price (GH₵ per game)
1	15,000	45
2	25,000	40
3	20,000	38
4	10,000	35

Financial information relating to the production of Zestora:

Item	GH₵ per game
Direct materials	6
Direct labour	8
Variable production overheads	4

Additional information:

Annual fixed production overheads will be GH₵150,000.
Initial investment in equipment will be GH₵800,000.
Additional working capital of GH₵50,000 will be needed at the beginning of the project and will be released at the end of year four.
Tax at the rate of 25% is payable on profits one year in arrears.
Capital allowance is available at 25% per year on a reducing balance basis.
TechNova Ltd’s cost of capital is 10%.
The equipment will have no residual value at the end of year four.

Required: Calculate the net present value of the proposed investment and comment on your findings.

Answer

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Tags: Capital Investment, Cost Estimation, Discounted cash flow, Financial analysis, Inflation, NPV, Project Appraisal, Sales Forecast, Software Industry, Taxation
Level: Level 2

Topic: Taxation and Inflation

Tag (SQ): Capital Investment

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SCS – L3 – Q15 – Environment analysis

Analyze the general environment of Beta Pure Water Ltd using PESTEL framework.

FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

FM – L2 – Q78 – Discounted cash flow

Calculate NPV for Woodland Enterprises' new product investment with inflation and advise on project viability.

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

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SCS – L3 – Q15 – Environment analysis

Analyze the general environment of Beta Pure Water Ltd using PESTEL framework.

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FM – L2 – Q118 – Working Capital Management

Assess if AquaPure Ltd is overtrading using financial data and compute relevant ratios.

You're reporting an error for "FM – L2 – Q118 – Working Capital Management"

FM – L2 – Q78 – Discounted cash flow

Calculate NPV for Woodland Enterprises' new product investment with inflation and advise on project viability.

You're reporting an error for "FM – L2 – Q78 – Discounted cash flow"

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

You're reporting an error for "FM – L2 – Q74 – Discounted Cash Flow"

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