DILCMA IN 8us|ness Stud|es (ACCCUN1ING) LAk 2 Semester 2 A8MI 3174 I|nanc|a| Management 1utor|a| Group 11 1utor Mr L|aw Saw keong Name ID Number Ioo Mun ee 10W8D03281 ong Me| ee 10W8D0180S Loke We| I|n 10W8D04S48 Lee Woe| Lun 10W8D01820 Wong Ia| Long 10W8D030SS Ang We| Seong 10W8D04219
Question 1(a) Monthly cash budget
January February March April May June Receive: Opening debtors RM2,400 Instalments (1) RM20,000 RM60,000 RM40,000 RM40,000 RM40,000 RM200,000 ReIund deposit oI diggers(3) RM2,500 Discounts oI bricks/stone(4) RM8,500 Discounts oI TurI (5) RM4,800 sell business car RM3,000 overdrawn RM14,200
8.Leased van cost (RM 3,960 /12 month x 3vans) RM990 9. Interest overdrawn RM 14, 200 x 1 RM142
(b) The cost and beneIits oI ordering materials early By ordering the materials early, Mr. Taiko does not need to worry about the shortage oI the materials. It is because supplier needs time to allocate the order and deliver to customers. However, it is a huge cost to the company and may lead to liquidity problem. Ordering the materials early may get a lower price due to the discount oIIered Irom suppliers. By having the discount, he can save the cost oI the materials. However, supplier may provide wrong materials and the quality may not as good as other suppliers. Mr. Taiko can save time iI he order materials earlier but iI there is some unexpected situation happen, he may be aIIected because it will cause the delivery process will be delayed. Mr. Taiko might get less credit term Irom current supplier but iI the company having liquidity problem, they can negotiate with their current supplier to get longer credit term. However, iI Mr. Taiko is dealing with new supplier, he may have longer credit term but there is a risk to get the low quality materials. II he orders materials early, he may have to give up the opportunity to invest in other projects that might earn a huge return in the Iuture. But, iI he does not order early, he might have to pay higher price than other due to inIlation. When he orders the materials earlier, he can allocate the resources and Iinish the project earlier. However, iI he Iailed to do it, he may not Iinish the project and have to bare the losses on the project.
(c) The Iour external sources oI inIormation that Mr. Taiko may have to provide assurance about the creditworthiness oI the local building Iirm are mercantile agencies, trade inIormation, salesmen`s reports and local sources. 1
1 27 experLs 2009 Sources of CredlL lnformaLlon vlewed 23Lh november 2011 http]]chestofbookscom]bus|ness]reference]1he8us|nessManLncyc|oped|a]SourcesCfCred|tInformat|onhtm| "uestion 2(a) Relevant cost is cash Ilow that will happen in Iuture and it will only arise iI capital project goes ahead. Irrelevant costs is committed cost oI Iuture cash outIlow that will incurred anyway, regardless what decision will be taken such as Iixed cost expenditure. For relevant costs, only Iuture costs that are in Iorm oI cash included and non-cash items oI cost can never be relevant to investment appraisal such as depreciation. Relevant cost is increase in costs result Irom making particular decision. Costs that have already been incurred due to past decision making (sunk cost) are not relevant to current decision and consider as irrelevant cost. Opportunity cost will always be relevant cost. In this case, iI the oIIer made to buy the land been rejected, development will continue. Total construction costs or the seven hotels on the island oI RM 35 million will be the relevant costs as the cash Ilow arise when capital project goes ahead. Down payment oI RM 2 million that already spent to several construction Iirms is irrelevant cost as it is irrecoverable and committed cost. Initially, company has already spent RM 1.5 million on preparing the land Ior construction work. It consider as sunk cost so it is irrelevant cost. Opportunity cost to development will be the cost oI oIIer been made to buy the land so it is relevant cost. Depreciation Ior hotels, lodges, restaurants, and shops are consider as irrelevant cost due to it is non-cash items oI cost so it will never be relevant cost to the investment appraisal.
The net present value oI continue to develop Ior the land is higher than accept the oIIer to sell the land. So, company should not accept the oIIer and continue the project.
Year Cash Ilow RM`000 Discount Iactor 10 Present value RM`000 0 (2000)
1 (2000) 1 (74,680)
0.909 (67884.12) 2 300,50
0.826 24821.3 3 300,50
0.751 22567.55 4 300,50
0.683 20524.15 5 300,50
0.621 18661.05 NET PRESENT VALUE 16689.93
Year
Cash Ilow RM`000 Discount Iactor 10 Present value RM`000 0
(5020) 1 (5020) 1
- 0.909 - 2
- 0.826 - 3
- 0.751 - 4
- 0.683 - 5
- 0.621 - NET PRESENT VALUE
(5020) (c) Year
Cash Ilow RM`000
Discount Iactor 20 Present value RM`000 0
(2000)
1 (2000) 1
(74,680)
0.833 (62208.44) 2
300,50
0.694 20854.7 3
300,50
0.579 17398.95 4
300,50
0.482 14484.1 5
300,50
0.402 12080.1 NET PRESENT VALUE
609.41
NET PRESENT VALUE at 10 16689.93 NET PRESENT VALUE at 20 609.41
Internal rate oI return (IRR) A (a/ (a-b) * (B-A)) 10 (16689.93/ (16689.93-609.41) * (20-10) ) 20.38
(d) Net present value method oI investment appraisal contributes towards the objectives oI maximizing the wealth oI shareholders. It is most important project appraisal method compare to internal rate oI return. It can maximize wealth oI shareholders because it considered all relevant cash Ilow over whole project liIe. All cash Ilows taken into account whenever occur. Net present value method also taken account time value oI money by the discounting cash Ilow. It is qualiIying the time value oI money by given more weight to earlier cash Ilow and less weight to current cash Ilow. It also based on cash Ilow which is less subjective than proIits. Net Present Value ensures investor will compensated Ior length oI time he must work and maximizing wealth oI shareholders.