Financial statements This Assignment marks the final learning


Question Description:

25

Financial statements This Assignment marks the final learning activity for the accounting and finance portion of this module and will challenge you to apply the last of this topic’s fundamental concepts to real-world situations. As the last Assignment for this section of the module, you will focus on techniques for working capital management and sources for business financing. You will complete two questions and submit them as you have in previous weeks. To complete this Assignment: Compile your responses to the questions in one MS Word file and then submit it to Turnitin link. The assignment should have explanations for all your answers with min. 1000 words including three academic or peer review references and in-text citation with Harvard style by using https://www.citethisforme.com/ Q1: MedCo is a large manufacturing company, currently using a large printing press in its operations, and is considering two replacements: the PDX341 and PDW581. The PDX341 costs £500,000 and has annual maintenance costs of £10,000 for the first 5 years and £15,000 for the following 5 years. After 10 years, MedCo would scrap the PDX341 (salvage value is zero). In contrast, PDW581 costs £50,000 and requires maintenance of £30,000 a year for its 10-year life. The salvage value of the PDW581 would be zero in 10 years. MedCo must replace its current printing press because it has stopped functioning. Assume that MedCo has a 10% cost of capital and that all cash flows are after tax. Required: Use the NPV approach to calculate which replacement press is the more appropriate. Q2: Read the Peavler (2014) article and answer the required questions. Peavler, R. (2014) Pros and cons of the discounted payback period [Online]. Available from:http://bizfinance.about.com/od/Capital-Budgeting/a/discounted-payback-period.htm (Accessed 26 March 2015). ABC Computer, a computer manufacturing company, is considering opening three retail stores in Manchester, UK. To do this, ABC requires a £600,000 initial investment and expects to make £120,000 per year in the first 4 years and £240,000 every year for the next 3 years. Required: What is the payback period? One of the disadvantages of the payback method is that the time value of money is not considered when you calculate payback period. If the discount rate is 8%, what is the discounted payback period? Q3: ABC Wines Company is considering the acquisition of a new irrigation system for its extensive vineyards. ABC Wines could either buy the system outright for £10 million or secure a finance lease requiring three annual payments in advance of £3.7 million. The leasing company is not the supplier or manufacturer of the equipment. The new system is expected to give the following pre-tax net cash savings over the existing system in use: Year 1 £6 million 2 £5 million 3 £3 million The system would require replacement in 3 years’ time and have no residual value. The outright purchase would be financed by a loan with an interest rate of 8%. Assume that corporation tax is charged at 25% and is payable 1 year in arrears. Writing down allowances are available on the depreciation of the equipment. The company uses the reducing balance method for depreciation at 25%. Lease payments are allowable for tax in full. The company has no gearing at present and a cost of capital of 13%. Required Evaluate whether or not ABC Wines should install the new irrigation system and whether it should use the purchase or the lease option. (Tip: You should use NPV to perform the analysis, and you should take into consideration writing down allowances.) Explain the primary ways in which finance leases differ from operating leases. Q4: ABC Ltd. produces an MP3 player. The market for this product is increasing, and for this reason, ABC is planning to expand its production capacity. This plan requires new machinery and an increase in working capital that would be financed by borrowing. Required What are the main sources of finance that can …

Answer

25