Test 2

Question 1

A company has to decide whether to select a project or not. The following information are provided:

The cost of the capital expenditure involved is $65,500

Discount rate of the project is 11%,

Company will have to spend $6,500

on net working capital that will be returned to him at the end of the project

He will depreciate his capital expenditure using straight line method over the project life.

The duration of the project is 4 years.

Tax rate of the project is 32%

His accountant has forecast a

revenue of $ 23,000 annually.

Further information is provided:

Supplies expense

$800

Supplies

$1300

Salary expenses

$1400

Unearned Revenue

$6100

Utilities

$ 1050

Rental expenses

$950

Prepaid Rent

$1500

At the end of the project he will sell the equipment purchased initially [CAPEX] at 10,000

The salvage value of CAPEX is $7500

REQUIRED

a) Calculate the initial investment

b) Calculate each year cash flow

c) Calculate the terminal value of

the asset used

d) Calculate the NPV

e) Calculate the Profitability Index [PI]

f)Calculate IRR of the project

Question 2 Part A

The ABC company manufactures beds that sell for $550. Budgeted sales for May , June and July 2020 are 3000 units , 4200 units and 3500 respectively.

Each bed requires 25 square feet of cedar wood at a cost of $10 per sq foot. The company wants to maintain an inventory of bookcases equal to

15% of the following month sales. Inventory on May 1 consisted of 150 bookcases

The company wants to maintain an inventory of oak equal to 35% of the next months requirements. Materials inventory on May 1 consisted of 400 sq feet of cedar.

The company estimates an inventory of oak on hand at the end of June of approximately 550 sq feet .

Monthly fixed overhead and variable cost based on direct labor hour are provided on the table below:

Supervisors salaries

$7500

Direct labor hours for each bed

10 hours

Cost per labor hour

$13.50

Insurance

$ 1500

Depreciation of equipment [Office]

$1200

Depreciation of factory

$ 6500

Predetermined rate based on DHL

$6.00

Required

1. Calculate sales budget in $ for each month and total the number of beds sold in May and June

2. Prepare a production budgets in units for each month and in total for May and June

3. Prepare purchases budget in $ for Direct materials for each month and in total for first two months

4. Prepare a direct labour budget for each month and total of the first 2 months

5. Prepare a manufacturing overhead budget for each month and the total for the first two months

All questions are based on only two months [May and June]