1

YearCash Flow

RMDiscount

Factor 10%NPVRM

Discount Factor15%

NPVRM

0 (100,000) 1 (100,000) 1 (100,000)

1 90,000 0.9091 81,819 0.8696 78,264

2 25,000 0.8264 20,660 0.7561 18,902.50

3 1,000 0.7513 751.30 0.6575 657.50

4 1,000 0.6830 683 0.5718 571.80

NPV 3,913.30 (1,604.20)

Project S

2

Project S

(i) NPV = RM 3,913.30(ii) IRR = 10% + { [3,913.30 ÷ (3,913.30+1,604.20)] x (15-10)}%

= 13.55%(iii) Payback period = 1year + (10,000/25,000)

= 1.4 years

3

YearCash Flow

RMDiscount

Factor 10%NPVRM

Discount Factor15%

NPVRM

0 (100,000) 1 (100,000) 1 (100,000)

1 0 0.9091 0 0.8696 0

2 25,000 0.8264 20,660 0.7561 18,902.50

3 40,000 0.7513 30,052 0.6575 26,300

4 80,000 0.6830 54,640 0.5718 45,744

NPV 5,352 (9,053.50)

Project L

4

Project L

(i) NPV = RM5,532(ii) IRR = 10% + { [5,532÷ (5,532+ 9,033)] x (15-10)}%

= 11.86%(iii) Payback period = 3 year + (35,000/80,000)

= 3.44 years

5

(B) Suggest with reason(s) the project that the company should invest.

The projects are mutually exclusive, therefore the company can only

choose 1 project.

The company should invest in project L.

Project L gives a higher NPV value, hence maximising

shareholder’s wealth.

Project S < Project L

(RM3,913.30) (RM5,352)

6

• Shareholder’s wealth is maximised by selecting projects that

gives a positive NPV.

• NPV method takes into account the time value of money.

• Cash flow is used when calculating NPV, it is less subjective

than profit.

(C) Advantages for using net present value (NPV) method for

evaluating investment projects.

7

Question 2(a) Prepare Cash budget for

each quarter

8

Mines Corporate

Cash Budget for the Quarter ending 31 December

QUARTER 1

RM

QUARTER 2

RM

QUARTER 3

RM

QUARTER 4

RM

RECEIPTS

Cash from credit sales

(W1)240,000 256,000 184,000 368,000

Trade Receivables b/d 60,000 - - -

Total Receipts 300,000 256,000 184,000 368,000

PAYMENTS

Variable Manufacturing

Cost (W2)247,500 93,500 140,250 349,250

Fixed Overheads (W3) 20,000 20,000 20,000 20,000

Machinery - - 215,000 -

Total Payments 267,500 113,500 375,250 369,250

Cash Surplus/(Deficit) 32,500 142,500 (191,250) (1,250)

Opening Bank Balance 0 32,500 175,000 (16,250)

Closing Bank Balance 32,500 175,000 (16,250) (17,500)9

Workings

QUARTER

1

QUARTER

2

QUARTER

3

QUARTER

4

Budgeted Sales Units 5,000 2,000 2,500 6,000

60% of credit sales

collected during the

quarter (RM)

240,000 96,000 120,000 288,000

40% of credit sales

collected at the following

quarter (RM)

- 160,000 64,000 80,000

Total Cash from Credit

Sales (RM)240,000 256,000 184,000 368,000

W1

10

Workings

QUARTER

1

QUARTER

2

QUARTER

3

QUARTER

4

Budgeted

Production Units4,500 1,700 2,550 6,350

Raw materials

@RM 35 per unit

(RM)

157,500 59,500 89,250 222,250

Labour

Costs@RM20 per

unit (RM)

90,000 34,000 51,000 127,000

Variable

Manufacturing

Cost (RM)

247,500 93,500 140,250 349,250

W2

11

W3

Fixed overheads for every quarter

(excluding depreciation)

= RM30,000-RM10,000

=RM20,000

12

2b) Suggest 2 ways to improve cash

deficit

Ways of improving cash deficit:

I. Speeding up collection from debtors by

giving cash discount to the trade

receivables or providing shorter credit

term.

II. Arrange for leasing or hire purchase to

acquire non current assets.

13

Question 3

14

a) Suggest two(2) ways of reducing the length of cash operating cycle?

Average Inventory Turnover Period (stock days)• Reduce the time between buying inventory and using it

to create a sale. For example, by using advance technology to process the inventories.

Receivables Collection Period (Debtor days)

• Reduce time from making a sale to receiving payment from customer. For example, by making calls and sending out notices to the customers to settled the outstanding payments.

15

b) Discuss the symptoms following:

i) Overcapitalization (Under-trading)

– Current ratio higher than 2:1

– Quick ratio more than 1:1

– Inventory and receivables collection periods being too long

– Too much capital invested in unproductive fixed assets

– Low assets utilization particularly with a lot of fixed assets and small revenue generated

16

ii) Overtrading (Under-capitalization)

Rapid increase in sales

A rising bank overdraft

Increase in receivables and longer time to pay

Taking longer credit from suppliers

A falling of current ratio and quick ratio

b) Discuss the symptoms following:

17

c) Explain credit scoring and illustrate your answer with and example

• Credit scoring is a technique that enables companies to apply a systematic approach to the granting of credit, by building up a score to assess the customer’s credit rating.

• Examples of business that uses credit scoring would be banks, financial consumer agencies.

18

d) Briefly discuss the reasons for rejecting an application for credit.

• Poor credit scoring

• No track record (new business)

• Customer already be heavily in debt

• Information from third parties

19

Question 4

20

21

22

23

24

25

Question 5

26