Question
A. Capital Investment Decision is probably the most important decision for an organization. i) Explain the meaning of the above statement clearly stating the meaning
A."Capital Investment Decision is probably the most important decision for an organization".
i)Explain the meaning of the above statement clearly stating the meaning and the importance of capital investment decision. What are the other key finance decisions related to capital investment decision? (5 marks)
ii)Let Us Grow Ltd (LUG) has the opportunity to invest in two mutually exclusive investment projects. Project "A" would cost $300,000 and provide net after-tax cash benefits of $80,000 a year for six years. Project "B" would cost $200,000 and provide net after-tax cash benefits of $50,000 a year for six years.
LUG's cost of capital is 11%. For each project, compute the net present value (NPV), internal rate of return (IRR) and pay-back period (PBP). Recommend which project should be accepted. (5 marks)
iii)Critically explain the limitations of using Accounting Rate of Return (ARR) and pay-back period (PBP) as project evaluation techniques and explain why IRR is useful to compare projects. (5 marks)
B.A budget could be defined as "a quantified plan of action relating to a given period of time".
i)Preparation of budgets important for all the organizations and critically explain the main purposes of preparing budgets with examplaes.(5 marks)
ii)The following information relates to Victory (Pvt) Limited. Forecasted Income and expenses of the company for the next six month of the operation are as follows.
MonthSalesPurchasesSalaries Overhead
January 5,0003,500500700
February 6,500 4,000650800
March9,0006,0008001,000
April11,0007,0001,9001,300
May14,0009,0001,2001,600
June19,00011,0001,6001,900
The following additional information is also available for you.
10% of the sales will be on cash basis and the balance will be on credit. Credit sales will be recovered in the second month following the month of sale.
20% of the purchases will be on cash while the balance will be on credit basis. Credit purchases will be settled in the month following the month of purchase.
Salaries will be paid within the month they are incurred.
All overhead expenses are paid in the month of incurring such expenses. Overhead expenses include monthly depreciation charges amounting to 200.
Company is planning to sell an old machine for 700 in the month of April. A new machine will be purchased in April for 12,000 and 60% of the purchase cost will be paid in the same month and the balance will be paid in the following month.
Company is planning to obtain a bank loan of 10,000 in April to finance part of the purchase cost of machine.
Cash balance of the company as at 31st March is estimated to be 1,500.
From the above information, you are required to prepare the cash budget of Victory (Pvt) Limited for the months April to June on monthly basis. Give a brief interpretation about the cash position of the company.
(5 marks)
iii)What is meant by "Top-down budgeting" approach in developing the budgets for an organization? Explain the advantages and disadvantages of this approach and any alternative approaches available to an organization to minimize the disadvantages.(5 marks)
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