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FN502 Additional Problems

The document contains three questions and solutions related to financial management. The first question calculates the cash cycle for a company. The second question estimates the working capital required for a new project. The third question determines if extending credit terms from one month to two months is desirable based on expected sales increase and required rate of return.

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36 views3 pages

FN502 Additional Problems

The document contains three questions and solutions related to financial management. The first question calculates the cash cycle for a company. The second question estimates the working capital required for a new project. The third question determines if extending credit terms from one month to two months is desirable based on expected sales increase and required rate of return.

Uploaded by

dpr7033
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FN502: Financial Management II

Additional Problems with Solutions

Q1. The following information is available for NCEP Limited.

Profit and Loss Account Data Balance Sheet Data

Beginning of 20X6 End of 20X6

Sales 6000 Inventory 800 820


Cost of goods sold 4000 Accounts receivable 500 490
Accounts payable 290 205

What is the duration of the cash cycle?

Solution:

(800 + 820) / 2
Inventory Period = = 73.91
4000 / 365

(500 + 490) / 2
Accounts receivable = = 30.11
period 6000 / 365

(290 + 205) / 2
Accounts payable = = 22.58
4000 / 365

Cash cycle = 81.44 days


Q2. While preparing a project report, on behalf of a client, you have collected the following
facts. Estimate the new working capital required for the project.

You may assume that production is carried on evenly throughout the year (52 weeks) and
wages and overheads accrue similarly. All sales are on credit basis only.

Amount per unit (Rs)


Estimated cost per unit of production is:
Raw Material 50.00
Direct Labour 24.00
Overheads (exclusive of depreciation) 38.00
Total Costs 112.00
Additional Information:
Selling price Rs. 120.00 per unit
Level of activity of production per annum 100,000
Raw material in stock Average 4 weeks
Work-in-progress (assume 50% completion Average 2 weeks
stage)
Finished goods in stock Average 4 weeks
Credit allowed by suppliers Average 4 weeks
Credit allowed to debtors Average 8 weeks
Lag in payment of wages Average 1.5 weeks
Cash at bank is expected to be Rs. 125,000.
Add 10 per cent to your computed figure to allow for contingencies.

Solution

Per unit Total


Raw material 50 50,00,000
Direct labour 24 24,00,000
Overheads 38 38,00,000
Total cost 112 1,12,00,000
Profit 18 18,00,000
Selling price 120 1,20,00,000
Units produced & sold 1,00,000
Sales 1,20,00,000
Raw material consumption 50,00,000
Cost of production 1,12,00,000

Current assets: Weeks Amount


Raw material inventory 4 3,84,615
Materials in process 2 4,30,769
Finished goods 4 8,61,538
Debtors 8 18,46,154
Cash balance (given) 1,25,000
Total current assets 36,48,077

Current liabilities:
Creditors 4 3,84,615
Wages 1 1/2 69,231
Total current liabilities 4,53,846
31,94,231
Add: 10% contingencies 3,19,423
Net working capital 35,13,654

Q3. A company is currently selling 100,000 units of its product at Rs. 50 each unit. At the
current level of production, the cost per unit is Rs. 45, variable cost per unit being Rs. 40. The
company is currently extending one month’s credit to its customers. It is thinking of extending
credit period to two months in the expectation that sales will increase by 25 percent. If the
required rate of return (before-tax) on the firm’s investment is 30 percent, is the new credit
policy desirable? (Assume all sales are in credit)

Solution:
Incremental Sales = 25,000 units

Incremental Contribution = 25,000 x 10 = Rs. 250,000

If the credit is increased to 60 days, new level of receivable = (125,000 x 50) x 60


360
= 1,041,667
Old level of receivables = (100,000 x 50) x 30
360

= 416,667

Incremental investment in receivables = 625,000

Incremental rate of return = 250,000 / 625,000 = 40 percent

Since the incremental rate of return (40%) is greater than the required rate of return (30%) the
firm should change its credit period.

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