Statement of profit or loss (Extract)
	AED	AED
Sales		500,000
Less: Cost of Sales
Opening inventory	120,000
Purchases	300,000
	420,000
Less: Closing inventory	(80,000)
		340,000
Gross profit		160,000

Statement of Financial position (Extract)
	AED	AED
Current Assets
Inventory	80,000
Receivables	93,000
Cash	17,000
		190,000
Current Liabilities
Payables		55,000

Delicious Cakes.com makes and sells speciality cakes in the Gulf region.

This is a large public limited company which has a Treasury department which runs a strict investment policy. This has been established in a set of Policies and Procedures. These establish the authorities and responsibilities given to its Treasury staff and the types of investment that are permissible.

The manual includes the following policy for investing short term surplus funds.

DELICIOUS CAKES.COM GUIDELINES FOR INVESTING SHORT TERM FUNDS

• The investment must be convertible to cash in 30 days
• The maximum amount to be invested in any one type of investment is AED 1 million
• The interest rate must be at least 1% above bank base rate
• The investment must not include any form of investment in shares-direct or indirect
• No deposits should be placed with a financial institution outside the UAE
• Only low or medium risk investments are to be selected.

The Treasury is reviewing its investment options at the beginning of the month and has selected 4 options for AED 1 million which it has available for an investment over one month. The bank base rate is currently 1%.

Option 1 ADB Mixed fund

Investment in a 30-day notice period fund; medium risk; investment portfolio includes shares; interest rate is 2.8% per annum, lowest investment AED500,000.

Option 2 UAE National bank plc money market account

This is a UAE bank money market based low risk product. The minimum investment allowed is AED 500,000. There is no upper limit on investment. There is a 7-day notice period; interest rate is 1.5% above base rate; does not include investment in shares.

Option 3 International banking corporation

Investment with an overseas bank; high risk; projected interest rates is 5% and a minimum investment of AED800,000 is required; 7-day notice period.

Option 4 QED Online treasury account

Online account with a well-rated international bank; no notice period (immediate withdrawals); interest rate is 1.5% above base rate; low risk; does not include investment in shares. Minimum investment of AED2 million.

The quarterly budgeted and actual figures for Delicious Cakes.com are as shown below

	Budgeted	Actual
Receipts from receivables	97300	91400
Cash sales	23700	18910
Payments to payables	(56190)	(58400)
Cash purchases	(11420)	(13140)
Capital expenditure	-	(12500)
Wages	(21100)	(16800)
General expenses	(16400)	(4600)
Net cash flow	15890	4870
Opening bank balance	5610	5610
Closing bank balance	21500	(10480)

Delicious cakes.com are also planning to expand the companys production facilities within its premises at Marina Mall.

These expansions include:

-new production machinery costing AED150,000

-an estimated working capital injection of AED20,000

The expansion program will take approximately 6 months to complete.

The directors have come up with two possible plans for funding this expansion and need advice on which plan to adopt.

Plan A lone

The proposal which has already been discussed with companys bank, is that the new company should apply for a AED150,000 bank business loan to finance the new production machinery.

The loan would be over 5 years with repayments in equal annual instalments at the end of each year.

The interest rate will be fixed at 5% per annum on a reducing balance and will be paid with each of the annual instalments and calculated on the loan amount outstanding immediately before the repayment.

An arrangement fee is 1% is payable at the time the loan is first drawn.

The bank is also offering an overdraft facility of AED20,000 at an annual rate of 8%.

The cash flow projections estimate that the average overdraft over the year will be at a level of AED15,000. The arrangement fee is 1.5% of the overdraft limit.

Plan B

This proposal made by a few of the directors, who have approached another bank, is that the total borrowing requirement of AED170,000 (the expansion cost and working capital) should be covered by a fixed five-year loan to be repaid by equal instalments at each year end.

The interest rate will be fixed at 6% for the first year but will be charged at 5% over bank base for the remaining four years.

An arrangement fee of 1.5% is payable at the time the loan is first drawn down.