Financial Management B (AMF3872) Assignment 1 2020

Question 1 (20 marks)

Oshakati Motors is considering buying a new equipment with an initial investment value of N$350 000.

The equipment has a 5-year life and no residual value at the end of the five years. There are many

uncertainties in the industry and, therefore, the company has estimated cash inflows for three different

scenarios: pessimistic, most likely and optimistic. The following table lists the company's cost of capital

is 10.5%, and expected cash flows.

Expected cash flows

Year Pessimistic (N$) Most likely(N$) Optimistic(N$)

1 55 000 68 000 85 600

2 400 00 58 700 76 300

3 56 200 78 500 125 200

4 36 800 72 500 114 420

5 29 500 42 260 91 100

Required:

a) Calculate the NPV for each given scenario. (18 marks)

b) Should Oshakati Motors make this investment? Why or why not? (2marks)

Question 2 (25 marks)

The sales director of Omaruru Ltd estimated that if the period of credit allowed to customers were

reduced to 55 days, this would result in a 20% reduction in sales but would probably eliminate about N$

3 million bad debts per annum. It would be necessary to spend an additional N$1 million per annum on

credit control. The company at present relies heavily on overdraft finance, costing 12% per annum. The

following is an extract from its financial statement for the last three years:

Year 1 Year 2 Year 3

N$000 N$000 N$ 000

INVENTORY Raw materials 10,800 14,580 18,500

Work -in -

progress

7,560 9,720 9,400

Finished goods 8,640 12,960 14,500

Purchases 66,800 91,260 94,480

Cost of goods sold 64,800 81,000 90, 000

Sales 86,400 108,000 119,000

Debtors 17,280 25,920 30,000

Trade Creditors 8,640 10,530 12,800

Required:

a) Calculate the effects these changes. Base your calculations on the Year 3 level of sales, and

assume that purchases and stockholdings would be reduced proportionally to the reduction in

sales value. (23 marks)

b) Advise the Sales Director whether the changes would be financially justified. (2 marks).