M $$ Extract of class examples and questions

Class assignment $4$

WELLDONE MOTORS LTD

Two years ago, Dave Brink and Richard Mpiso formed a company to buy a Car Service

Station which had just been managed into bankruptcy. The Car Service Station had

been an agency of a well$-$known motor manufacturer in a large town of the NorthWestern Province, while the previous owner was the son of the founder of Welldone

Motors.

Mostly because it was conservatively and frugally managed with no debt but also

because it was situated on a prime spot as motorists entered the town, the founder

managed Welldone Motors to one of the best$-$known garages in the North Western

Province. The name "Welldone" signifies the founder's objective of having his clients

say "well done" after their cars have been serviced.

After finishing matric and living life in the fast lane, among other things a few

moderately successful years in selling real estate, the son of the founder became the

new owner of Welldone Motors. As new owner he continued his habit of both spending

more than average on the entertainment account as well as annually spending a few

December weeks in Switzerland. To improve the company's cash flow in an innovative

way, he required all owners of accounts to deposit R$1000$ before filling up and replace

this as it becomes depleted. Some accounts were closed, but working capital

increased over the short$-$term. Rumours have it that working capital was used to

service the entertainment account. Eventually financial stress forced the company to

file for bankruptcy. It was at this point that Brink and Mpiso bought the Service Station.

Brink and Mpiso added a small supermarket to the filling station as part of the

business. This is mainly for customers' convenience, to be able to buy a few

necessities while filling up their cars. This did, however, increase the types of problems

likely to be encountered. Some of the financial problems they would like to solve follow.

$11$

$2020$ PPM $$ Extract of class examples and questions

A$.$ Originally both Mpiso and Brink each invested R$200000$ personal capital and

the company borrowed R$300000$ from the Small Business Development

Corporation $($SBDC$)($Total financing was therefore R$700000).$ The loan from

the SBDC is at a fixed annual interest rate of $12\%$ and has to be repaid in equal

annual payments at the end of each year for the next $10$ years.

What is the amount of each payment if the instalments are calculated on an

annual, semi$-$annual$/$quarterly$/$monthly basis?

$*$note $$ you are required to do $4$ calculations. After two years of owning the business, the equity of each of Brink and Mpiso$$s

share in the business are $($currently$)$ worth about R$288000,$ having paid out no

dividends during the past two years. They expect that the equity of each one

will continue to increase at the same average annual percentage over the next

$10$ years as it has increased over the last two years. What is the expected value

of each one's equity after ten years from today?

C$.$ Mpiso would like to buy Brink's share of the business after $12$ years from now,

expecting that Mpiso$$s equity would be worth R$2157696$ at that stage. Assmue

that Mpiso can invest in a savings account at an interest rate of $16\%$ per year

$($compounded annually$).$

How much will Mpiso have to save annually at the end of each year for the next

$12$ years to afford buying Brink$$s share in the business?

D$.$ Two years ago, the partners decided to start saving money to build a new

building at an estimated cost of R$1$m on the adjacent vacant plot at the end of

the five years. Welldone Motors started two years ago making equal payments

at the end of each six$-$month period into a fund earning $16\%$ per annum. Now,

after two years of payments $($that is$,$ at present$),$ escalating costs lead Brink and

Mpiso to revise their planning and increase the semi$-$annual payments so that

the fund will contain R$1,2$ million at the scheduled time of building.

Calculate the increased payment required for the remaining three year