The management committee of Flint Ltd is considering investing $1 0 million in non current assets for expansion purposes, and an additional $200,000 for working capital (e g , inventories and trade receivables) Currently, the profit generated by the company is $500,000, which represents a 5 0 return on revenue of $10 0 million The investment proposal was presented to the board of directors for consideration and approval To finance the $1 2 million investment, Flint's CFO explained that a certain portion of the expansion would be financed by internally generated cash (operating activities) He indicated that (1) the revenue for the budget year would show a 10 increase over the current year, and (2) the return on revenue (as a result of cost cutting activities, particularly in manufacturing) would be increased to 7 0 Profit would be allocated as follows Sixty percent for internal use half of the funds would be allocated toward working capital (current assets) and the rest to non current assets and Forty percent would be used for external purposes, of which 60 would be used to pay dividends and the rest to reduce the principal on the debt Based on the feasibility study prepared by the controller's department, he explained that the capital expansion program would generate lucrative profits In order to finance the purchase of these assets, he would have to raise capital funds from a lending institution at a cost estimated at 10 (before tax) The shareholders were prepared to invest $200,000 toward the capital projects, and an amount of $100,000 would be obtained from the bank for financing the working capital requirements The shareholders are looking for at least a 12 return on their investment The board of directors indicated that if the project generated 15 , they would consider approving it However, before approval, they wanted answers to the following questions Questions How much cash would be generated internally (operating activities) How much cash would have to be raised from external sources (financing activities) How does the return on assets of the project (investing activities) compare to the weighted average cost of capital (financing activities)

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The management committee of Flint Ltd. is considering investing $1.0 million in non-current assets for expansion purposes, and an additional $200,000 for working capital (e.g.,

The management committee of Flint Ltd. is considering investing $1.0 million in non-current assets for expansion purposes, and an additional $200,000 for working capital (e.g., inventories and trade receivables). Currently, the profit generated by the company is $500,000, which represents a 5.0% return on revenue of $10.0 million. The investment proposal was presented to the board of directors for consideration and approval. To finance the $1.2 million investment, Flint's CFO explained that a certain portion of the expansion would be financed by internally generated cash (operating activities). He indicated that (1) the revenue for the budget year would show a 10% increase over the current year, and (2) the return on revenue (as a result of cost-cutting activities, particularly in manufacturing) would be increased to 7.0%. Profit would be allocated as follows:
• Sixty percent for internal use; half of the funds would be allocated toward working capital (current assets) and the rest to non-current assets; and
• Forty percent would be used for external purposes, of which 60% would be used to pay dividends and the rest to reduce the principal on the debt. Based on the feasibility study prepared by the controller's department, he explained that the capital expansion program would generate lucrative profits. In order to finance the purchase of these assets, he would have to raise capital funds from a lending institution at a cost estimated at 10% (before tax). The shareholders were prepared to invest $200,000 toward the capital projects, and an amount of $100,000 would be obtained from the bank for financing the working capital requirements. The shareholders are looking for at least a 12% return on their investment. The board of directors indicated that if the project generated 15%, they would consider approving it.
However, before approval, they wanted answers to the following questions:
Questions: How much cash would be generated internally (operating activities)? How much cash would have to be raised from external sources (financing activities)? How does the return on assets of the project (investing activities) compare to the weighted average cost of capital (financing activities)?