1.Delcom Chemicals is considering the purchase of a new industrial business for $800,000. The current owners have provided Delcom Chemicals with their financial information which has shown that they will expect a profit of $200,000 in year one, $210,000 in year two, $300,000 in year three, $320,000 in year four, and $340,000 in year five.
Using the information above, Calculate the net present value (assuming a discount rate of 13%), payback period and accounting rate of return (disregarding depreciation).
Net Present Value
200,000/(1+.13)+210,000/(1+.13)2+300,000/(1+.13)3+ 320,000/(1+.13)4+ 340,000/(1+.13)5- 800,000= $253,907.01 using the formula.
Using the table=
2.In your own words using appropriate references, provide a discussion about what these ratios calculate and whether they show that this investment should go ahead or not.
3.Delcom has also been provided with the opportunity to purchase an existing chemical plant for $800,000. Information to help them determine their future cash flow for the new business if they were to purchase it is shown below for the next 4 months starting in January. Assume that there is 4 weeks in every month.
Total monthly running costs:
- 14 staff members who will work 7.5 hours a day, 5 days a week at $26.50 per hour.
- Raw materials $300,000
- Electricity $100,000
- Administration $40,000
Delcom has been told by the current owners that they sell 400 tons of chemicals per month at a cost of $1600.00 per ton. If the business is purchased, Delcom intends to have $100,000 in the business bank account.
Using the information above, construct a sales budget and a labour budget for January, February, March and April.
4.In your own words using appropriate references, describe what each of these budgets are and state what they tell you about this business.
5.In your own words using appropriate references, critically analyse, describe and state which business should be purchased.