Read the following case study and answer the questions:

FINANCIAL PROJECTIONS AND CAPITAL EXPENDITURE OF ELSIES LIMITED

Elsies Limited is a nationally recognised supplier of catering equipment. It offers safe and secure shopping via its online store and its state

$-$

of

$-$

the

$-$

art premises in each of the provinces of South Africa. The company offers a wide selection of catering equipment and supplies at competitive prices. The target market includes restaurants, hotels, hostels and spaza shops. Their products carry an industry

$-$

leading warranty that is backed by good after

$-$

sales service and availability of spares. The company was established in

$2$

$0$

$1$

$5$

$$with an authorised share capital of

$1$

$5$

$0$

$0$

$0$

$0$

$0$

$$ordinary shares of which

$9$

$0$

$0$

$0$

$0$

$0$

$$were issued at R

$2$

$$each at the initial public offering in

$2$

$0$

$1$

$5$

$.$

$$

The financial manager and her team were in the process of forecasting the financial performance for

$2$

$0$

$2$

$4$

$$and financial position of the company as of

$3$

$1$

$$December

$2$

$0$

$2$

$4$

$.$

$$The starting point was the following figures that were obtained from the financial statements for the year ended

$3$

$1$

$$December

$2$

$0$

$2$

$3$

:

The sales amounted to R

$9$

$6$

$0$

$0$

$0$

$0$

$0$

$,$

$$and the cost price of the goods sold was R

$7$

$2$

$0$

$0$

$0$

$0$

$0$

$.$

$$Operating expenses totaled R

$1$

$2$

$0$

$0$

$0$

$0$

$0$

$$whilst the company tax amounted to R

$3$

$3$

$6$

$0$

$0$

$0$

$.$

$$The carrying value of the fixed assets was R

$4$

$2$

$0$

$0$

$0$

$0$

$0$

$$whilst the inventories, trade debtors and cash reflected values of R

$1$

$2$

$0$

$0$

$0$

$0$

$0$

$,$

$$R

$1$

$8$

$0$

$0$

$0$

$0$

$0$

$$and R

$6$

$0$

$0$

$0$

$0$

$0$

$$respectively$.$ The ordinary share capital balance remained unchanged since the establishment of the company in

$2$

$0$

$1$

$5$

$$whilst the undistributed profits of the company accumulated to R

$2$

$1$

$0$

$0$

$0$

$0$

$0$

$.$

$$An amount of R

$2$

$4$

$0$

$0$

$0$

$0$

$0$

$$was owed to Jip Bank for a long

$-$

term loan. The amount owed to trade creditors was R

$1$

$4$

$6$

$7$

$0$

$0$

$0$

$$and the company tax payable to SARS was R

$3$

$3$

$0$

$0$

$0$

$.$

$$

The following predictions were made for the financial year ended

$3$

$1$

$$December

$2$

$0$

$2$

$4$

:

Sales are expected to increase by

$2$

$5$

$\%$

$.$

$$Seventy

$-$

five percent

$($

$7$

$5$

$\%$

$)$

$$of the total sales is estimated to be on credit. Company tax will be calculated at

$2$

$7$

$\%$

$$of the pre

$-$

tax profit and

$1$

$0$

$\%$

$$of this amount is expected to be unpaid on

$3$

$1$

$$December

$2$

$0$

$2$

$4$

$.$

$$A final dividend of R

$4$

$0$

$0$

$0$

$0$

$0$

$$is expected to be declared on

$3$

$1$

$$December

$2$

$0$

$2$

$4$

$,$

$$and is payable during

$2$

$0$

$2$

$5$

$.$

$$The unsold shares are expected to be issued on

$3$

$1$

$$March

$2$

$0$

$2$

$4$

$$at R

$3$

$$each$.$ The amount owed by trade debtors will be based on a collection period of

$5$

$4$

$.$

$7$

$5$

$$days$.$ The company

$$

s closing inventory and the amount owed to trade creditors are expected to change directly with the change in sales in

$2$

$0$

$2$

$4$

$.$

$$A new machine with a cost price of R

$7$

$0$

$0$

$0$

$0$

$0$

$$will be purchased during January

$2$

$0$

$2$

$4$

$.$

$$Depreciation for

$2$

$0$

$2$

$4$

$($

included in the operating expenses

$)$

$$is expected to amount to R

$3$

$0$

$0$

$0$

$0$

$0$

$.$

$$R

$7$

$6$

$0$

$0$

$0$

$0$

$$will be paid to Jip Bank during

$2$

$0$

$2$

$4$

$$and this amount includes R

$3$

$6$

$0$

$0$

$0$

$0$

$$for interest. The cash balance must be calculated

$($

balancing figure

$)$

$.$

Elsies Limited is considering the purchase of a machine to manufacture some of the spare parts for the catering equipment during

$2$

$0$

$2$

$5$

$.$

$$The company desires a minimum required rate of return of

$1$

$2$

$\%$

$.$

$$The machine will cost R

$2$

$0$

$0$

$0$

$0$

$0$

$0$

$$plus R

$4$

$0$

$0$

$0$

$0$

$0$

$$for installation and is predicted to have a useful life of five years. A salvage value of R

$1$

$0$

$0$

$0$

$0$

$0$

$$is estimated. The machine is expected to generate cash inflows of R

$8$

$0$

$0$

$0$

$0$

$0$

$$per year but will require the employment of two new machine operators at R

$1$

$0$

$0$

$0$

$0$

$0$

$$per year for each operator, and it will require maintenance and repairs averaging R

$4$

$0$

$0$

$0$

$0$

$$per year. Depreciation will be calculated using the straight

$-$

line method.

QUESTION

$1$

$$

Prepare the following pro forma statements:

$1$

$.$

$1$

$$Statement of Comprehensive Income for the year ended

$3$

$1$

$$December

$2$

$0$

$2$

$4$

$$using the percentage

$-$

of

$-$

sales method.

$($

$4$

$)$

$2$

$.$

$1$

$$Accounting Rate of Return on average investment

$($

expressed to two decimal places

$)$