Case Study 2 - Budgeting Ahead Management Report

Analysis of Investment Proposals using NPV and IRR

Case Study 2 – Budgeting Ahead

On Jan 1, 2020, Siemax is attempting to budget cash flows through Mar 31, 2020. On this latter date, an unsecured note will be payable in the amount of $15 million, at 3.4% per annum. This amount was borrowed on Sep 30, 2019 to carry the company through the seasonal peak in Oct through Dec 2019. Cash Interest payment are settled monthly. A cash dividend of $14 million will be due end of Feb. Selected balances from Siemax’s book of accounts on Jan 1 are as follows:

Cash

Inventory

Accounts Payable

$3 200 000

$1 500 000

$4 832 000

The company only transact on credit sales. A discount of 5% is given to all customers who pay within one month. 30% of the accounts receivable will be received in the month of sale. 50% will be collected in the following month, and 20% will be received 2 months after sale. The average selling price of the company’s products is $100 per unit. Actual and projected sales are: November (actual)

$ 32 580 000

December (actual)

$ 34 700 000

January (estimated)

$ 30 200 000

February (estimated)

$ 28 600 000

March (estimated)

$ 30 400 000

April (estimated) $ 29 500 000

Total estimated sales for year ending 31 Dec $ 360 000 000 The average purchase cost is $40 per unit. Purchases are made on basis of 80% the following month’s projected sales units. Half of the purchases are paid for in the month of purchase, and a 5%prompt settlement discount is received. The remainder is paid in full the following month. The company aims to maintains a safety monthly closing cash balance of $5 million. Total budgeted fixed operating expenses for the year are $70 million (this includes $10 million of annual machinery depreciation). Fixed costs are accrued evenly through the year. The operating variable costs is determined to be $20 per unit, which accrued evenly with unit sales. Both fixed and variable operating expenses are paid in the month incurred.

Source: Costing Accounting, A managerial Emphasis, 15e, Charles T Hongren, Pearson, 2012Requirements:

You will be required to write a management report in which the following points should be discussed.

• Analyse the Investment proposals by using NPV and IRR and provide recommendations. You should also briefly comment on other investment proposal techniques that Siemax may use, and the limitations of using these techniques.

• Provide an explanation on the different sources of funding available to the company, and their advantages and disadvantages and make recommendations as to how these funding sources are appropriate to the planned investment project.

• Analyse the level of breakeven required if Siemax proceeds with the investment.

• Prepare a forecasted cash budget for January to March 2020.

• An evaluation of Siemax’s performance or position during the same period.

• A detailed Literature Review of the tools you have used such as capital investment techniques, breakeven analysis and budgets and their importance to the business case.

• Other issues for management to consider that you think are vital for them to survive and make a profit.