QUESTION 2 (27 MARKS)

As a procurement officer, you are expected to implement robust cost cutting measures within your organization. Not only that, you are also expected to come up with mechanisms that would aid your organization to realize its strategic goals. The issue of ever increasing fuel prices across the globe has compelled numerous businesses to revist their cost control measures. This includes encouraging voluntary retrenchments provided it is done within the confinement of labour laws. One of the most hit industries by the ongoing economic headwinds is the contruction sector. Suppose you are currently working for one of the construction companies. Unlike its rivals that are finding hard to make ends meet, your company has a contingent plan since the dawn of COVID-19. As part of its financial prudent measures, it saves N$100 000 at the beginning of each year effective January 2020, and this arrangement is expected to remain in force until end of 2024. The companys Chief Financial Officer is of the view that this will help the company to deal with incidental cases such as voluntary retrenchments, and unexpected disruptions within its supply chain management, and the likes. The savings are made with Bank Windhoek at an interest rate of 10% p.a., compounding monthly.

REQUIRED: Carefully answer the following within their respective context.

(2.1.) Differentiate between an ordinary annuity, and annuity due, and clearly indicate which one of the two is apparent in this scenario. 2

(2.2.) What will the total saving be at the end of 2024?

(2.3.) Suppose indications are that the company will have a high staff turnover as of January 2025, which is likely to cost not less than N$10 million in payouts. This includes three of its top executives who have been with the company for more than 20 years and are due to retire in early 2025. Given your answer in (2.2) above, are the funds raised through saving adequate to finance the expected development? If not, how much should your organization source from external sources?

(2.4.) Given your answer in (2.3), suppose the external sources are willing to advance such funds (shortfall, if there is any) at 12% per annum payable in six yearly equal instalments at the end of each year.

REQUIRED: Prepare an amortization table clearly indicating the Beginning balance, Periodic instalment, Interest, Principal amount and Ending balance.