NORDIC LIMITED: WORKING CAPITAL AND CAPITAL BUDGETING

Nordic Limited commenced operations on $01$ January $2023.$ Its mission was to provide an innovative product whilst

ensuring creative customer experiences. Its talented staff are guided by the values, social conscience and customer$-$

centric mindset espoused by the board of directors. The company is committed to successful growth by delivering

excellent service to its customers to whom it offers quality and value. Its success is also attributable to the successful

management of its working capital. Although it has been in operation for a short period, it actively seeks opportunities for

expansion.

The following information was made available by Nordic Limited for $2023$:

It successfully negotiated credit terms of $4\mathrm{.}5/10$ net $60$ days with its creditors whilst credit terms of $2/10$ net $30$ days were

granted to debtors. The purchase cost of the product sold by Nordic Limited was R$100$ per unit. The cost of keeping

each unit in inventory was $10\%$ of the unit cost. The cost of placing an order for the product was R$30.$ The selling price

was R$140$ per unit and the sales for the year totalled $52000$ units, of which $90\%$ was on credit. The company purchased

$60000$ units of which $80\%$ was on credit. It took approximately $10$ days for the goods to be delivered to Nordic Limited

each time an order was placed with the supplier. Nordic Limited was open for business for all the days in $2023$ except for

the weekends. On $31$ December an amount of R$600000$ was owed to suppliers for goods purchased on credit whilst an

amount of R$500000$ was owed by customers for credit sales. The company had an inventory turnover of $18\mathrm{.}25$ times.

Nordic Limited assumes a $365-$day year in its calculations.

In keeping with the companys growth initiatives, the directors have identified two possible investment opportunities for

$2025$ viz. Project A and Project B$.$ An investment of R$4000000$ is required for each project and a scrap value of

R$400000($not included in the figures below$)$ is anticipated for Project A only. The useful life of each project is estimated

to be five years. Project A is expected to generate net cash flows of R$1420000($Year $1),$ R$1370000($Year $2),$

R$1380000($Year $3),$ R$1170000($Year $4)$ and R$1120000($Year $5).$ Project B is expected to generate net cash flows of

R$1320000$ per year and net profits of R$520000$ per year over its useful life. The companys cost of capital is predicted

to be $15\%.$

REQUIRED

Answer the following questions related to $2023$:

$1.$ Calculate the cost $($as a percentage, expressed to two decimal places$)$ to Nordic Limited of not

accepting the settlement discount offered by the suppliers. $(4$ marks$)$

$2.$ Calculate the economic order quantity. $(3$ marks$)$

$3.$ Determine the level of inventory at which an order should be placed for the replacement of

inventory. $(3$ marks$)$

$4.$ Calculate the cash conversion cycle $($expressed to two decimal places$).(5$ marks$)$

Calculate the following related to the two possible investment opportunities for $2025.$ Ignore taxes. Where

applicable use the discount factors from the four decimals present value tables.

$5.$ Payback Period of both Projects $($expressed in years, months and days$).(6$ marks$)$

$6.$ Accounting Rate of Return on average investment of Project B $($expressed to two decimal places$).$

$(3$ marks$)$

$7.$ Profitability Index of both projects $($expressed to two decimal places$).(6$ marks$)$