Bart Skinner is contemplating setting up an energy drinks manufacturing business from 1st January 2022 partly financing it with the 450,000 he inherited from his late father who passed away few months earlier. He has already spoken to a bank who has agreed to provide an overdraft facility of up to 100,000.

Lisa, Barts sister who also inherited 420,000 will be part of this business by investing all her inheritance money either in partnership with Bart or as a shareholder/director in the company should Bart decide to form a company. Bart is unsure as to whether the business should be in the form of a partnership or a limited company.

Last month Bart commissioned a research and marketing firm to carry out a market research whose findings indicated that the business will have a good chance of success. The market research company has provided Bart with the following information:

1. Annual demand in the first year is likely to be:
   1. 1,600,000 cans with a probability of 25%
   2. 1,860,000 cans with a probability of 60%
   3. 2,020,000 cans with a probability of 15%

The demand in each year will be seasonal. 20% of annual sales will be in the first quarter, 25% in the second quarter, 40% in the third quarter and 15% in the final quarter of the year. (you may assume that in each quarter, sales per month stays the same)

2. In the following four years,demandisexpectedtoincreaseby17.5% in year 2, 13% in year 3, 9.5% in year 4 and 4.2% in year 5. The research company is unable to forecast sales beyond year 5.
3. Selling price in the first year will be set at 1.05 per can of drink,increasing by 2.5% per year in each of the following 4 years.
4. Sales will be to retailers and on credit.It is expected that 65% of customers pay after 1 month and the rest will pay after two months.
5. Variable costs of producing one can of drink are estimated at 0.69 in the first year. These costs will increase by an average of 3.2% per year in each of the following 4 years. Purchases of raw material (variable costs) will be made monthly sufficient to cover the production for that month, and are paid for in the following month.
6. Fixedcostsofoperationincludingstaffsalariesareestimatedat196,620inthe first year increasing by 1.9% per year in each of the following four years. Fixed costs occur evenly throughout the year and are paid for on a monthly basis.

7. Suitablefactorypremiseswillberentedat72,000peryearwiththerentpayable quarterly in advance. The rent is expected to increase by 5% per year in each of the following 4 years.
8. Factoryequipmentwillcost526,000payableimmediately.Anupgradetothe equipment will be needed in year 3 costing 172,000. These equipment will need to be replaced with more modern equipment after 5 years, The scrap value of equipment at the end of the fifth year is expected to be only 34,000.
9. Thebusinesswillneed88,000ofworkingcapital.Youmayassumethiswillbe needed at the start of business. You may assume that the investment in working capital will be recovered in full at the end of year 5.

Required: (Please start your answer to each requirement on a separate page)

1. a) Discuss the advantages and disadvantages of setting up the business as a partnership or a private limited company.

(10 marks)

(Word limit 300 words +/- 10%)

2. b) Produce a cash budget for the first year of the business. Suggest how, in general, cash shortages in any month can be dealt with.

(20 marks)

3. c) Discuss thereasonswhyorganisationsneedtobudget,andthedifficulties that start-up businesses face when attempting to draw up budgets.

(10 marks)

(Word limit 300 words +/- 10%)

4. d) Calculate the following for the first year of the business:
   1. Budgeted profit for the year
   2. BEP
   3. Margin of safety
   4. What should the selling price per can of drink be at the budgeted level

of production for the business to generate 500,000 of profit? (15 marks)

5. e) Assuming this is a five-year project and ignoring all taxation implications, calculate the following: (Discount rate at 8%)
   1. The payback period
   2. The accounting rate of return
   3. The net present value

6. f) Discuss the advantages and limitations of each of the project appraisal methods listed in requirement (e) above.
7. (15 marks)