QUESTION ONE

A.Alfred Banda, a legal practitioner, has just won lottery amounting to $2,000,000. There has been an agreement between the Lottery Company and Alfred regarding the way payments will be made. The two parties have agreed to an equal annual instalments of $500,000. The lottery is not paying him immediately. The first payment will be made at the end of the sixth year. Assume that the opportunity cost of capital is 15%.

i.Find the future value of the payment.[5 Marks]

ii.Suppose that the alternative to receiving the money in instalments is to receive immediate cash amounting to $1,500,000. Which option would you advise Alfred to accept? Explain.[5 Marks]

B.Suppose, instead, that Alfred has been told that he will receive his money in Twelve (12) equal monthly instalments with the first payment being made at the end of month 1. The lottery company has also assured Alfred of a 5% interest on the remaining balance.

i.Use an appropriate structure or computation to show the periodic payments and the associated interest.[20 Marks]

ii.How much will Alfred have received in total by the beginning of the 7^th Month?[3 Marks]

iii.Consider the amount you have found in (ii) above. What is the present value of that amount if the monthly interest rate is 12%?[4 Marks]

iv.Refer to (iii) above. Suppose that the alternative is to receive $1,400,000 today, then the remaining amount to be paid in equal instalments for a specified remaining period of part (ii) above . Which option is the best and why?[3 Marks]

C.Suppose that Alfred has analysed the situation in (A) and in (B). In his conclusion , he thinks the better way to receive his money is for the lottery company to pay him the money in 10 months and that the lottery company should be reducing the amount of the moneythey owe him by $200,000 per month. If a 5% interest is still considered, use an appropriate structure or computation to show the periodic payments and the associated interest.[10 Marks]

[TOTAL: 50 MARKS]

QUESTION TWO

The following information was extracted from ABC Ltd's financial statements for the year ended 31 December 2019.

a.Sales on 30 November 2019 were $100 million and $110 million on 31 December 2019. For the year 2020, sales are expected to double at a constant monthly rate.

b.80% of the sales made are on account; the remainder on cash.

c.From past experience, 5% of the receivables have turned out to be irrecoverable.

d.Credit customers pay as follows:

i.75% in the month following the sale;

ii.15% two months after the sale month.

e.Inventory levels are maintained at 20% of the following month's sales.

f.Accounts payables are at settled at 30 days after purchase.

Required:

i. come up with a collections schedule for the three-month period from January to March 2020. [5 Marks]

ii. come up with a cash forecast for the three-month period from January to March 2020. [5 Marks]

iii.Assess the Operating Cycle ratios and their implication on the working capital requirements of the company for the forecast period.

[15 Marks]

[TOTAL: 25 MARKS]