Q1

Skip is keen to work in an environmentally friendly environment where he and his organisation are socially and corporately responsible.

Skip has been running his lunch delivery business 'Skips Lite Lunches' in London for the last 5 years and is looking at how he can collect and recycle the packaging that he uses for the lunches.

He has spent 500 on a report about small business recycling machines that he could use.

The initial investment in the recycling machine would be 13,000 (and includes the above mentioned report).

The machine would have a 4 year life span and a disposal value of 1,500. He expects that he would make net cash flows of 2,500 in year 1, 3,500 in Year 2, 4,500 in year 3 and 5,000 in year 4 from his more environmentally friendly business model.

He requires all projects to have a 12% required rate of return.

3a)Explain which (if any) of Skip's costs are IRRELEVANT and give reasons why.

3b)Calculate the Accounting rate of return for Skip Lite Lunches

3c)Calculate the Net present value of Skip Lite Lunches

3d)Using your financial calculations above, should Skip go ahead with the purchase of the recycling machine.Justify your answer.

3e)Discuss in detail two non-financial factors that Skip should be considered before purchasing this machine.

Q2.

TASK 4 (adapted AQA question)

Ebes Ltd produces a single product, the Flet.Each Flet sells for 16.The cost per unit are:

Direct materials 8.60

Direct labour 3.40

On 1 March 2021, there were 270 unit in inventory.

Predicted sales are:

units

March

2,700

April

2,800

May

2,600

June

2,700

Each month's losing inventory is to be maintained at 10% of the following month's sales.

4a) calculate a production budget for each of the three months ending 30^th June 2021

4b) Unfortunately the only cutting machine on the production line broke down on 14^th March 2021 and all production stopped.Only 1,600 units has been completed for March.The production manager is worried that the production targets will not be met for the next few months (as the machine cannot be mended for several weeks).

Therefore, the production manager purchased the short fall in units for May from Ogo Ltd at a cost of 11 each.Each unit has already been cut but requires 3 of further production costs.

Explain the financial implication of the production managers decision to purchase from Ogo Ltd.

4c) At the end of March it was clear that the machine could not be repaired so the production manager had the choice of the following two options.

Option 1:

Lease a machine for 4 years at a cost of 6,000 per month from 1^st April 2021.This machine can produce 28,000 units per ear and all maintenance costs will be included in the the cost of the lease.

Option 2:

Purchase a replacement machine at a cost of 275,000 on 1^st April 2021.The machine can produce 30,000 units per year and will last 4 years.

The company has a cost of capital of 10%.The selling price an direct costs will remain the same. Fixed costs are currently 25,000 ad are expected to rise by 10% in Year 3.

Assumed all production is sold.

Calculate the NPV for both options.

Thank you