QUESTION 1.

Negative cash balances could be avoided by

1. Bob taking no salary for the first two months.
2. Renting premises where he pays at the end of the quarter (i.e. 31st March).
3. Buying inventory on credit from the beginning of February.
4. Buying 30% less bicycles at the start.

QUESTION 2.

Assuming a cost of capital of 1% per month, the present value of the operating cash flows for the first 3 months will be:

1. (9,480)
2. (9,464)
3. 11,328
4. 11,520

PART 1 When Bob is made redundant, he decides to run a business selling e-bikes. In order to do this, he sets up a limited company, Envirobike Limited. He plans to deposit 1,000 in the company's bank account on 1 January 2022 and issue 1,000 shares, with a nominal value of 1 each, in his own name. He also plans to lend the company 20,000 using his redundancy payment. Bob will rent premises for his business at 2,300 a month. He will pay 10,000 for tools and equipment. At the start, he will pay 9,000 for bicycles and components for resale. At the end of the first month, he will pay 4,500 for more bicycles and components. At the end of the second month, he will pay 5,000 for bicycles and components. At the end of them third month he hopes to buy 5,500 of bicycles and components on credit, paying the following month At the outset, he will hire an assistant, at a cost of 2,200 a month, to work in the shop, whilst he does some work in the shop and all the administration. He will pay himself 1,200 a month in salary and plans to take further income as dividends. He estimates that he will use 160 worth of electricity per month, paid quarterly in arrears. At the beginning of January he will pay 1,440 for 12 months' insurance. Other expenses paid for during the period will be: Advertising Mileage per month 260 220 He expects his first three months' sales to be as follows: January February March 8,500 9,500 11,000 At the end of 3 months he expects to have unsold inventory, which would had cost him 10,000. He will depreciate non-current assets at a rate of 20% of original cost per year. Envirobike Ltd Cash budget for January-March 2022 Jan Feb Mar Total Cash in Shares Loan Sales 1,000 20,000 8,500 1,000 20,000 29,000 9,500 11,000 Total 29,500 9,500 11,000 50,000 2,300 2,300 Cash out Rent Tools Goods for resale Assistant Bob's salary Electricity Insurance Advertising Mileage Total 2,300 10,000 13,500 2,200 1,200 5,000 2,200 1,200 6,900 10,000 18,500 6,600 3,600 2,200 1,200 1,440 260 220 31,120 260 220 11,180 260 220 6,180 1,440 780 660 48,480 1,520 Net cash in Opening balance Closing balance (1,620) (1,680) 4,820 0 (1,620) (3,300) (1,620) (3,300) 1,520