Part A (60 marks) Inwood Gifts Corporation begins business today, December 31, Year 1. Rebecca Ortiz, the president, is trying to prepare the company's master budget for the first three months (January, February, and March) of Year 2. Since you are her good friend and an accounting student, Ms. Ortiz asks you to prepare the budget based on the following specifications. Required Round all computations to the nearest whole number. a. January sales are estimated to be $500,000, of which 30 percent will be cash and 70 percent will be credit. The company expects sales to increase at the rate of 10 percent per month. Prepare a sales budget. b. Tue company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts. c. Tue cost of goods sold is 50 percent of sales. The company desires to maintain a minimt1m ending inventory equal to 20 percent of the next month's cost of goods sold. However, ending inventory of March is expected to be $66,000. Assume that all purchases are made on account Prepare an inventory purchases budget. d. The company pays 60 percent of accounts payable in the mont11. of purchase and the remaining 40 perc,e11t in the following month. Prepare a cash payme11ts budget for inventory purchases. e. Budgeted selling and administrative expenses per month follow: Salary expense (fixed) $50,000 Sales commissions 8% of sales Supplies expense 4% of sales Utilities (fixed) $ 3,600 Depreciation on store fixtures (fixed)* $10,000 Rent (fixed) $14,400 Miscellaneous (fixed) $ 4,000 "The capital expenditures budget indicates that Inwood will spend $700,000 on January 1 for store fixtures. The fixture are expected to have a $100,000 salvage value and a five-year(60-month) useful life. Use this information to prepare a selling and administrative expenses budget. f. Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses. g. The company borrows funds, in increments of $1,000, and repays them on the first day of the month. Repayments may be made in any amount. The company also pays its vendors on the last day of the month. It pays interest of l.5 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $100,000 cash cushion. Prepare a cash budget h. Prepare a pro forma income statement for the quarter. l. Prepare a pro forma balance sheet at the end of the quarter. j. Prepare a pro forma statement of cash flows for the quarter.

Part B (40 marks) Lauren Steel Company is considering investing in manufacturing equipment expected to cost$160,000. The equipment has an estimated useful life of five years and a salvage value of $40,000. It is expected to produce incremental cash revenues of $64,000 per year. Laurel has an effective income tax rate of 25 percent and a desired rate of return of JO percent. Required Round your financial figures to the nearest dollar and all other figures to two decimal points. a. Determine the net present value and the present value index of the investment, assuming that Laurel Steel uses straight-line depreciation for financial and income tax reporting. b. Determine the net present value and the present value index of the investment, assuming that Laurel Steel uses double-declining-balance depreciation for financial and income tax reporting. c. Why do the net present values computed in Requirements a and b differ? d. Determine the payback period and unadjusted rate of return (use average investment), assuming that Laurel Steel uses straight-line depreciation. e. Determine the payback period and unadjusted rate of return (use average investment), assuming that Laurel Steel uses double-declining-balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.) f. Why are there no differences in the payback period or unadjusted rate of return computed in Requirements d and e?