QUESTION 1

Majimbos (Pty) Limited is considering a project that would require an initial investment of $924 000 and would have a useful life of 8 years. The annual cash receipts would be $600 000 and the annual cash expenses would be $240 000. The salvage value of the assets used in the project would be $138 000. The company uses a discount rate of 15%. Additional Working Capital of $400 000 will be required for the project.

Required:

a. Compute the net present value of the project

b. Compute the payback period.

c. Would you recommend the investment

QUESTION 2

Diamond (Pty) Ltd has a sales budget for March of $440 000. About 10% are cash sales and the remainder is sold on account. The company expects that 60% of credit sales will be collected in the month of the sale, 25% in the next month and 10% in the following month.

Materials purchased on account are expected to be $250 000. Allan pays 35% in the month of the purchase, 50% in the month following the purchase and the remaining 15% in the second month after the purchase. Salaries and wages of the workers are approximately $45 000 per month. The employees are paid weekly so on average 95% of their wages are paid in the month to which they relate and the remaining 5% is paid in the following month.

Utilities average $4 300 per month, Rent on the building is $9 000 per month, Insurance is $3 000 per month and advertising costs are $1 000 per month. February sales were $320 000 and purchases of materials in February were $170 000, January sales were $200 000 and purchases of materials in January were $130 000. The cash balance on March 1st is $5 400.

Required:

a. schedule of cash receipts

b. schedule of cash payments (Accounts payable payments)

c. cash budget