Investment Appraisal, Financing, and Financial Analysis of Kapsa Corporation

1. Koda is the owner of Kapsa Corporation. The corporation has developed a new electric car, ‘Dungri’, which it plans to launch in the near future. Sales of the new car are expected to be very strong, following a favourable review by a popular Research Journal. Kapsa Corporation has been informed that the review will give the car a ‘Best Buy’ recommendation. Sales volumes, production volumes and selling prices for ‘Dungri’ over its four-year life are expected to be as follows.

Financial information on ‘Dungri’ for the first year of production is as follows: Direct material cost $5.40 per car

Other variable production cost    $6.00 per car Fixed costs $4.00 per car

• Advertising costs to stimulate demand are expected to be £650,000 in the first year of production and £100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production.
• Fixed costs represent incremental cash fixed production overheads.
• ‘Dungri’ will be produced on a new production machine costing £800,000.
• Although this production machine is expected to have a useful life of up to ten years, government legislation allows Kapsa Corporation to claim the capital cost of the machine against the manufacture of a single product.
• Capital allowances will therefore be claimed on a straight-line basis over four years.
• Kapsa Corporation pays tax on profit at a rate of 30% per year and tax liabilities are settled in the year in which they arise. Kapsa Corporation uses an after-tax discount rate of 10% when appraising new capital investments.
• You are required to ignore inflation.

(a) Calculate the net present value (NPV) of the proposed investment and Provide your comment based on your findings.
(b) Calculate the internal rate of return (IRR) of the proposed investment and comment on your findings.
(c) Critically examine ‘Why and How’ the net present value investment appraisal method is preferred to other investment appraisal methods such as payback, return on capital employed and internal rate of return.

2. Mr.Seng, the CFO, of Kapsa Corporation is of the opinion that the problem of small businesses not having ready access to sources of long-term finance still persists today and poses a major obstacle to growth. Whilst the financial plans of the business are based on a single objective, it faces a number of constraints that put pressure on the company to address more than one objective simultaneously.

(a) Recommend Koda, the owner of Kapsa Corporation, on the options available based on your reading and research on the sources of finance available to small and medium-sized businesses.

(b) Advise Kapsa Corporation on the constraints the company might face when assessing its long-term plans? Specifically refer in your answer to: (i) responding to various stakeholder groups; and (ii) the difficulties associated with managing organisations with multiple objectives.

3. Koda the owner of Kapsa Corporation is placing before Mr.Seng the CFO the following information.

Balance Sheet Accounts of Kapsa Corporation

(a) Prepare a balance sheet for 2018 and 2019

(b) You are required to list all the working capital accounts

(c) Find the net working capital for the years ending 2018 and 2019.

(d) Provide recommendations to Koda based on the change in net working capital for the year 2019.

4. The health of a company can be understood by examining its key financial ratios and the financial activities it undertakes. The financial ratios reveal performance of a company and the relationships between different accounts from financial statements. And the Activities are geared towards strengthening of the overall performance of the company. And there for Kapsa Corporation is in pursuit many major and minor business activities in a desire to provide a saleable product and/or service, and with the goal to yield a satisfactory return in business.

(a) You are required to briefly describe the financial ratios wit suitable example.

(b) A company pursues many major and minor business activities in a desire to provide a sale able product and/or service, and with the goal to yield a satisfactory return in business. You are required to identify and briefly explain any four major business activities that would help Kapsa Corporation.

5. Kapsa Corporation wants to improve on its Capital and therefore the owner of Kapsa is looking forward to your expertise on the follow specific points.

(a) You are asked to describe a company’s main sources of cash for a company?

(b) You are required to briefly describe a company’s main uses of cash?

(c) According to you what are the sources available for Kapsa Corporation to raise its capital?

(d) The different sources of capital available for Kapsa Corporation going to charge the same rate of interest. Provide your comments.