Case Number 01
General Electric Company had cash of $14,000 on hand on January 1. During the year, the
company expected the following cash collections from customers by quarter: (06)
First Second Third Fourth
Cash collections 110,000 177,500 183,700 136,000
Direct materials purchases in tons were budgeted as follows:
First Second Third Fourth
Direct materials purchase 65,000 75,000 55,000 50,000
The production budget showed the following unit production by quarter with an average
labor rate of $40.00:
First Second Third Fourth
Units to be produced 1,500 2,000 1,700 1,500
General Electric Company planned to pay dividends of $10,000 per quarter during the year.
During July, new equipment costing $60,000 will be purchased. An additional $16,000 was
planned to installation costs during the fourth quarter.
The company was required to maintain a minimum cash balance of $15,000. A line of
credit was available for short-term borrowings in increments of $1,000. All borrowings
will be made at the beginning of a quarter and repaid at the end of a quarter. Interest on the
short-term borrowings will be paid at 0.5% per quarter on the amount repaid in any quarter
when a loan repayment is made. All other interest expense will be accrued each quarter.
Requirement:
(a) Prepare a cash budget by quarter and for the year in total. 2
Case Number 02
An investor named Shadab Khan is in search for the business opportunity in Afghanistan.
After detail study and analysis, he found that massive copper reserves are available in
Logar province. China is being interested in extraction copper and made one the biggest
foreign direct investment in history of Afghanistan. Finally, he decided of make an
investment in extraction of copper by having his own mining where he will extract copper.
His company has collected the following information about the cash inflows and outflows
associated with this project:
Equipment needed for new mine: $1,000,000
Working capital required for new mine: $230,000
Expected annual cash inflow from the sale of coal: $850,000
Expected annual cash expenses associated with the new mine: $500,000
Road repairs required after 5 years: $110,000
Upgrading mine based on mining standard of the country: 55,000
The coal in the mine would be exhausted after 15 years. The equipment would be sold for its
salvage value of $250,000 at the end of 15-year period. The company uses straight line
method of depreciation and does not take into account the salvage value for computing
depreciation for tax purpose. The tax rate of the company is 30%.
Required:
1. Compute net present value (NPV) of the new coal mine assuming a 15% after-tax
cost of capital. (03)
2. On the basis of your computations in requirement 1, conclude whether the coal mine
should be opened or not. (01)
3. Discuss why net present value method is one of the most effective capital budgeting
technique for the acceptance and rejection of the projects throughout globe. (03)
Extracted text: Case Number 01 General Electric Company had cash of $14,000 on hand on January 1. During the year, the company expected the following cash collections from customers by quarter: (06) First Second Third Fourth 183,700 Direct materials purchases in tons were budgeted as follows: Cash collections 110,000 177,500 136,000 First Second Third Fourth Direct materials purchase 65,000 The production budget showed the following unit production by quarter with an average 75,000 55,000 50,000 labor rate of $40.00: First Second Third Fourth Units to be produced 1,500 2,000 1,700 1,500 General Electric Company planned to pay dividends of S$10,000 per quarter during the year. During July, new equipment costing $60,000 will be purchased. An additional $16,000 was planned to installation costs during the fourth quarter. The company was required to maintain a minimum cash balance of $15,000. A line of credit was available for short-term borrowings in increments of $1,000. All borrowings will be made at the beginning of a quarter and repaid at the end of a quarter. Interest on the short-term borrowings will be paid at 0.5% per quarter on the amount repaid in any quarter when a loan repayment is made. All other interest expense will be accrued each quarter. Requirement: (a) Prepare a cash budget by quarter and for the year in total.
Extracted text: Activ Go to S Case Number 02 An investor named Shadab Khan is in search for the business opportunity in Afghanistan. After detail study and analysis, he found that massive copper reserves are available in Logar province. China is being interested in extraction copper and made one the biggest foreign direct investment in history of Afghanistan. Finally, he decided of make an investment in extraction of copper by having his own mining where he will extract copper. His company has collected the following information about the cash inflows and outflows associated with this project: Equipment needed for new mine: $1,000,000 • Working capital required for new mine: $230,000 Expected annual cash inflow from the sale of coal: $850,000 Expected annual cash expenses associated with the new mine: $500,000 • Road repairs required after 5 years: $110,000 • Upgrading mine based on mining standard of the country: 55,000 The coal in the mine would be exhausted after 15 years. The equipment would be sold for its salvage value of $250,000 at the end of 15-year period. The company uses straight line method of depreciation and does not take into account the salvage value for computing depreciation for tax purpose. The tax rate of the company is 30%. Required: 1. Compute net present value (NPV) of the new coal mine assuming a 15% after-tax cost of capital. 2 On the basis of your computations in requirement 1, conclude whether the coal mine should be opened or not. 3. Discuss why net present value method is one of the most effective capital budgeting technique for the acceptance and rejection of the projects throughout globe. (03) (03) (01)