2nd finance prob solve

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Financial Management-Suggestion

Capital Budgeting:

1. Bajaj Ltd. is considering two mutually exclusive projects X and Y. Thefollowing details are made available to you.

Rs. lakhs

Particulars

Project X

Project Y

Project Cost 700700

------

-------

Cash Inflows: Year 1 200400

Year 2 100500

Year 3 400

100

Year 4 350200

Year 5 600

100---------

--------Total 1,6501,300

--------

---------

Assume no residual values at the end of the fifth year. The firm’s cost of capital is

10%. Required in respect of each of the two projects: (i) NPV, using 10% discounting

(ii) IRR Method .

PV of Re 1

Year 10% 25% 26% 27% 28% 36% 37% 38% 40%

1 0.909 0.800 0.794 0.787 0.781 0.735 0.730 0.725 0.714

2 0.826 0.640 0.630 0.620 0.610 0.541 0.533 0.525 0.510



3 0.751 0.512 0.500 o.488 0.477 0.398 0.389 0.381 0.364

4 0.683 0.410 0.397 0.384 0.373 0.292 0.284 0.276 0.260

5 0.621 0.328 0.315 0.303 0.291 0.215 0.207 0.200 0.186

[ICWA Inter June 1995]

Statement showing NPV of Project X & Y

Year Cash Inflows

X Y

PV @ 10% p.a Present Value

X Y

1

2

3

4

5

Total PV

Less: Initial

investment NPV

200 400

100 500

400 100

350 200

600 100

.909

.826

.751

.683

.621

181.80 363.60

82.60 413.00

300.40 75.10

239.05 136.60

372.60 62.10

--------- ---------

1,176.45 1050.40

700.00 700.00---------- ---------

476.45 350.40

NPV at lower rateIRR = Lower Rate + ---------------------------------- * Difference in rate

Difference in NPV between

Lower and higher rate

= 10 + 350.40

-------------------- * 30

350.40 +52.40

10 + 26.10 = 36.10%.



2. A company is considering to purchase one of the following two machines, the

details of which are given below.

Profit before Depreciation and Tax

Year Machine A Machine B(Rs) (Rs)

1 150,000 1,20,000

2 1,48,000 1,36,000

3 89,000 1,25,0004. 1,09,000 78,000

5 56,000 95,000

Cost of Machine Rs 1,86,000 1,50,000

Additional working Capital Rs 14,000 12,000

Life of the Machine 5 Years 5 Years

Scrap value of machineAt the end of life Rs 6,000 Rs 4,000

Tax rate 40% 40%

Calculate the average rate of return of machines and give your comment.

Ans:

Statement showing Profit after Depreciation and Tax of Mach. AYear Profit before

Dep. and tax

Depreciation Profit before

tax

Tax @ 40% Profit after

Tax

1

2

3

4

1,50,000

1,48,000

89,000

1,09,000

36,000

36,000

36,000

36,000

1,14,000

1,12,000

53,000

73,000

45,600

44,800

21,200

29,200

68,400

67,200

31,800

43,800



5 56,000 36,000 20,000 8,000 12,000

-------------

2,23,200------------

Average Annual Profit after Depreciation & Tax * 100

ARR = -----------------------------------------------------------------

Total Average Investment of the Project

= Rs 44,640*100

--------------------------------------------------------------------Rs 1,10,000

= 40.58%

Total Profit after Depreciation & Tax

Where, Average Earning = --------------------------------------------------------

Estimated Number of Years of Project

2,23,200

= --------------------------------------------------------

5 years

= Rs 44,640

Average Investment = (Initial Investment – Scrap value) /2 + Additional Working Capital+ Scrap Value

= ( Rs 1,86,000 – 6,000) /2 + Rs 14,000 + Rs 6,000

= Rs 1,10,000



Statement showing Profit after Depreciation and Tax of Mach.BYear Profit before

Dep. and tax

Depreciation Profit before

tax

Tax @ 40% Profit after

Tax

1

2

3

4

5

1,20,000

1,36,000

1,25,000

78,000

95,000

29,200

29,200

29,200

29,200

29,200

90,800

1,06,800

95,800

48,800

65,800

36,320

42,720

38,320

19,520

26,320

54,480

64,080

57,480

29,280

39,480

-------------

2,44,800------------

Average Annual Profit after Depreciation & Tax * 100

ARR = -----------------------------------------------------------------

Total Average Investment of the Project

= Rs 48,960*100

--------------------------------------------------------------------

Rs 89,000

= 55.01%

Total Profit after Depreciation & Tax

Where, Average Earning = --------------------------------------------------------

Estimated Number of Years of Project

2,44,800

= --------------------------------------------------------



5 years

= Rs 48,960

Average Investment = (Initial Investment – Scrap value) /2 + Additional Working Capital

+ Scrap Value

= ( Rs 1,50,000 – 4,000) /2 + Rs 12,000 + Rs 4,000

= Rs 89,000

Comment: As ARR of Machine B is greater than Machine A, Machine B should be

preferred.

3. A Company has to make a choice between two projects namely A and B. Theinitial capital outlay of two projects is Rs 1,35,000 and Rs 2,40,000 respectively for A

and B. There will be no scrap value at the end of the life of both the projects. The

opportunity cost of capital of the company is 16%. The annual incomes are as under:

Year Project A Project B Discounting factor @

16%

1 -- 60,000 0.862

2 30,000 84,000 0.743

3 1,32,000 96,000 0.641

4 84,000 1,02,000 0.552

5 84,000 90,000 0.476

You are required to calculate for each project:

(i) Discounted Pay-back period

(ii) Profitability Index(iii) NPV



Ans:

Statement showing Cumulative Present ValueYear Annual Income

A B

Discount

Rate @ 16%

PV

A B

Cumulative PV

A B

1

2

3

4

5

--- 60,000

30,000 84,000

1,32,000 96,000

84,000 1,02,000

84,000 90,000

.862

.743

.641

.552

.476

--- 51,720

22,290 62,412

84,612 61,536

46,368 56,304

39,984 42,840

-- 51,720

22,290 1,14,13

1,06,902 1,75668

1,53,270 2,31,97

1,93,254 2,74,81

(i) Discounted Pay-back period

Pay-back period of project A

= 3 years + ( 28,098/46,368) = 3.61 years.

Pay-back period of project B

= 4 years + ( 8,028/42,840) = 4.19 years.

(ii) Profitability Index

PV of net cash inflowsPI = -------------------------------

Initial cash outlays

Rs 1,93,254

Project A = ----------------- = 1.43

Rs 1,35,000

Rs 2,74,812Project B = ----------------- = 1.15



Rs 2,40,000

(iii) Net Present Value:

NPV = PV of net cash inflows – Initial investment

Project A = Rs 1,93,254 – Rs 1,35,000 = Rs 58,254

Project B = Rs 2,74,812 – Rs 2,40,000 = Rs 34,812.

4. A Company is considering to purchase a machine. Two machines A and B are

available, each costing Rs 5 lakhs. In comparing the profitability of the machines, adiscounting rate of 10% is to be used and machine is to be written off in five years by

Straight line method of depreciation with nil residual value.

Cash inflows after tax are expected as follows:

Rs ( lakhs)Year Machine A Machine B

1 1.5 0.5

2 2.0 1.5

3 2.5 2.0

4 1.5 3.0

5 1.0 2.0

Indicate which machine would be profitable using the following methods of ranking

investment proposals: (i) Pay-back Method (ii) NPV Method (iii) PI Method (iv)Average Rate of Return Method. The discounting factors at 10% are

Year 1 2 3 4

5Discounting

Factor 0.909 .826 .751 .683

.621

[ CS Final June 1998]



Ans:

(i) Pay-back period:

Statement showing Cumulative Cash InflowsYear Cash Inflows

Mach. A Mach. B

Cumulative cash inflows

A B1

2

3

4

5

1.50 0.50

2.00 1.50

2.50 2.00

1.50 3.00

1.00 2.00

1.50 0.50

3.50 2.00

6.00 4.00

7.50 7.00

8.50 9.00

Pay-back period

Machine A = 2 year + (1.50/2.50) = 2.6 years

Machine B = 3 year + (1.00/3.00) = 3.33 years.

(ii) NPV Method:

Statement showing NPV

Year Cash Inflows

Machine A Machine B


Machine A Machine B

1

2

3

4

5

6

Total PV

Less: Initialinvestment

NPV

1.50 0.50

2.00 1.50

2.50 2.00

1.50 3.00

1.00 2.00

.909

.826

.751

.683

.621

.507

1.36 0.45

1.65 1.24

1.88 1.50

1.02 2.05

0.62 1.24

-- 6,084--------- ---------

6.53 6.48

5.00 5.00

---------- ---------

1.53 1.48



(iii) Profitability Index

PV of net cash inflowsPI = -------------------------------

Initial cash outlays

Rs. 6.53

Machine A = ----------------- = 1.306

Rs. 5.00

Rs 6.48

Machine B = ----------------- = 1.296Rs. 5.00

(iv) ARR Method:

Statement Showing Earning After Tax and Depreciation

Machine A Machine B

Total Cash inflows 8.50 9.00Less: Total depreciation 5.00 5.00

---------

---------

Earning after tax and depreciation 3.50 4.00---------- --------

-Life of Machine 5 years 5

years

Average annual earnings 0.70 0.80

Average annual earnings

ARR = ---------------------------------- * 100

Initial investment

0.70 *100

Machine A = ---------------- = 14%5

o.80 * 100

Machine B = -------------- = 16%5



Rankings:

Method Machine Remarks

----------------------

A B

(i) Pay-back Method I II Shorter Pay-back

period

of Machine A.

(ii) NPV Method I II Machine A gives

higher NPV.

(iii) PI Method I II Machine A has higher

PI.

(iv) ARR Method II I Machine B has higher return percentage.

5. Precision Instruments is considering two mutually exclusive projects X and Y.

The following details are made available to you.

Rs. lakhs

Particulars

Project X

Project YProject Cost 700

700

-------------

Cash Inflows: Year 1 100

500Year 2 200

400

Year 3 300200



Year 4 450

100

Year 5 600100

---------

--------Total 1,650

1,300

-----------------

Assume no residual values at the end of the fifth year. The firm’s cost of capital is

10%. Required in respect of each of the two projects: (i) NPV, using 10% discounting(ii) IRR Method (iii) PI Method.

PV of Re 1

Year 10% 25% 26% 27% 28% 36% 37% 38% 40%

1 0.909 0.800 0.794 0.787 0.781 0.735 0.730 0.725 0.714

2 0.826 0.640 0.630 0.620 0.610 0.541 0.533 0.525 0.510

3 0.751 0.512 0.500 o.488 0.477 0.398 0.389 0.381 0.364

4 0.683 0.410 0.397 0.384 0.373 0.292 0.284 0.276 0.260

5 0.621 0.328 0.315 0.303 0.291 0.215 0.207 0.200 0.186

[ICWA Inter June 1995]

Ans:

Statement showing NPV of Project X & Y

Year Cash Inflows

X Y


X Y

1

2

3

4

5

100 500

200 400

300 200

450 100

600 100

.909

.826

.751

.683

.621

90.90 454.50

165.20 330.40

225.30 150.20

307.35 68.30

372.60 62.10

--------- ---------



Total PV

Less: Initialinvestment

NPV

1161.35 1065.50

700 700

---------- ---------

461.35 365.50

IRR of Project X

Statement showing NPV at 10% and 28%

Year Cash Inflows

Discounting rate

10% 28%

Present Value

10% 28%

1

2

3

4

5

Total PV

Less: Initial

investment NPV

100

200

300

450

600

.909 .781

.826 .610

.751 .477

.683 .373

.621 .291

90.90 78.10

165.20 122.00

225.30 143.10

307.35 167.85

372.60 174.60

--------- ---------1161.35 685.65

700.00 700.00---------- ---------

461.35 (-) 14.35

NPV at lower rateIRR = Lower Rate +------------------------------------ * Difference in rate



= 10 + 461.35

-------------------- * 18461.35 + 14.35

10 + 17.46 = 27.46%.

IRR of Project Y

Statement showing NPV at 27% and 38%

Year Cash Inflows

Discounting rate

27% 38%

Present Value

27% 38%

1 100 .787 .725 78.70 362.50



2

3

4

5

Total PV

Less: Initial

investment NPV

200

300

450

600

.620 .525

.488 .381

.384 .276

.303 .200

124.00 210.00

146.40 76.20

172.80 27.60

181.80 20.70

--------- ---------

703.70 697.00

700 700---------- ---------

3.70 (-) 3.00

IRR = Lower Rate + NPV at lower rate---------------------------------- * Difference in rate



= 27 + 3.70

-------------------- * 11

3.70 + 3.00

27 + 6.07 = 33.07%.

PI Method at 10% Discounting Rate

PI = Total PV of Cash Inflows--------------------------------------

Initial Investment

Project X = 1161.35

---------------- = 1.659

700

Project Y = 1065.50

---------------- = 1.522

700

**************************************************************



Cost Of Capital

Problem 1: A Company has issued 10% Debenture of Rs 5,00,000. Corporate tax rate is40%. Calculate the cost of debt if issued (i) at par (ii) at a premium of 10% (iii) at a

discount of 5%, assume the debt is irredeemable.

Ans: (i) Issued at par

Kd = [R(1-T)]

= 10(1-.40)

= 6%

(ii) Issued at a premium of 10%

Kd = [I / IP (1-T)]

= [50,000 /5,50,000 (1-.40)]

= 5.45%

(ii) Issued at 10% discount

Kd = [I/IP (1-T)]

= [50,000/4,75,000 (1-.40)]

= 6.32%

Problem 2: A Company issued 8% Debenture redeemable at the end of 6 years at at Rs

95. The face value of Debenture is Rs 100. Corporate tax rate is 50%. Find out cost of

debt.

Ans:

[ I + (RP – IP)/N ] (1-T)

Kd = ------------------------------------

[ RP + IP] / 2

[ 8 + (100-95) / 6] (1-.50)

= ------------------------------------



(100+95)/2

= 4.53%

Problem 3: A Company has issued 12% Debenture of Rs 100 each redeemable at the end

of 10 years. Tax rate is 40%. Floatation cost is 2%. Find out the cost of debt if issued (i)at par (ii) at a premium of 10% (iii) at a discount of 5%.

Ans:

(i) If Debenture are issued at par

[ I + (RP – IP)/N ] (1-T)

Kd = ----------------------------------------

[ RP + IP] / 2

[12 + (100-98) /10] (1-.40)

Kd = -----------------------------------------------

[ 100 + 98] / 2

= 7.32 /99 = 7.39%

(ii) If Debenture is issued at 10% premium:

[ I + (RP – IP)/N ] (1-T)

Kd = -----------------------------------------

[ RP + IP] / 2

[12 + (100 – 107.80) /10] (1-.40)

= --------------------------------------------------

[ 100 + 107.80] / 2

= 6.732/ 103.90



= 6.48%

Note: IP = (2,20,000 -4,400) = 2,15,600

(iii) If debentures are issued at 10% discount

[ I + (RP – IP)/N ] (1-T)

Kd = ----------------------------------------

[ RP + IP] / 2

[12 + (100 – 93.10) /10] (1-.40)

Kd = ----------------------------------------------

[ 100 + 93.10] / 2

= 7.614 / 96.55

= 7.89%

Problem 4:.Calculate the average cost of capital before tax and after tax from the

following information. Assume that tax rate is 55%.

Types of capital Proportion in capital Before tax cost of capital (%)

Structure (%)

Equity capital 25 24.44

Preference capital 10 27.29

Debentures 50 7.99

Retained earnings 15 18.33



Ans:

Statement showing average cost of capital (before tax)

Types of capital Proportion

in new

capital

structure

Before tax cost of capital Average cost of

capital

1. Equity share

capital (Ke)

2. Preference share

capital( Kp)

3. Debenture (Kd)

4. Retainedearnings (Kr)

WACC

25%

10%

50%

15%

24.44

27.29

7.99

18.33

611.00

272.90

399.50

275.00

-------------

1558.40

Average cost of capital after tax

WACC (before tax) * (1-tax rate)

= 1558.40 (1-.55) = 7.02%

Problem 5:. A Company’s capital structure is given below:

Sources of finance Amount Proportion(%) Cost after tax

(%)

Equity share capital 10,00,000 50% 12

Retained earnings 3,00,000 10 11

Preference share capital 2,00,000 20 10

Long term loan 4,00,000 20 12

Calculate Weighted average cost of capital of the company.



Ans:

Statement showing Weighted Average Cost of Capital

Sources Amount Cost after tax

(%)

Cost after tax (Rs)

1. Equity share capital (Ke)

2. Retained earnings (Kr)

3. Preference share capital (Kp)

4. Long term debt (Kd)

10,00,000

3,00,000

2,00,000

4,00,000

12

11

10

12

1,20,000

33,000

20,000

48,000

-------------2,23,000

WACC = Rs 2,23,000 / Rs 19,00,000 *100 = 11.74%

LEVERAGE

1. The data relating to two companies are given below:

Company A Company B

Equity capital Rs 6,00,000 Rs 3,50,000

12% Debentures Rs 4,00,000 Rs 6,50,000

Output (units) p.a. 60,000 15,000

Selling price / unit Rs 30 Rs 250

Fixed cost p.a. Rs 7,00,000 14,00,000

Variable cost p.a. Rs 10 Rs 75

You are required to calculate the operating leverage, financial leverage and

combined leverage of two companies.



[ C.A. PE-II Nov. 2002]

Ans:

Statement showing Profit before Tax

Company A Company B

Rs Rs

Sales 18,00,000 37,50,000

Less: Variable Cost 6,00,000 11,25,000

--------------------

------------------Contribution 12,00,000 26,25,000

Less: Fixed cost 7,00,000 14,00,000

--------------- ---------------

Profit before Interest & Tax [PBIT] 5,00,000 12,25,000

Less: Interest 48,000 78,000

------------------ -----------------

Profit before tax [PBT] 4,52,000 11,47,000

------------------- -----------------

(i) Operating Leverage (OL) = Contribution / PBIT

Company A = 12,00,000 /5,00,000 = 2.4

Company B = 26,25,000 / 12,25,000 = 2.14

(ii) Financial Leverage (FL) = PBIT / PBT

Company A = 5,00,000 / 4,52,000 = 1.11

Company B = 12,25,000 / 11,47,000 = 1.07

(iii) Combined Leverage = Operating Leverage * Financial Leverage (OL *

FL)

Company A = 2.4 * 1.11 = 2.66



Company B = 2.14 * 1.07 = 2.29

2. Prepare the income statement of a firm which gives the following details

relating to its operations:

Operating Leverage 4

Financial Leverage 2

Annual interest paid Rs 10 lakhs

Contribution / Sales 0.40

Tax rate 40%[ICWA Inter, Dec, 2002]

Ans:

PBIT

F.L = (PBIT) / (PBIT – interest)

2 = PBIT / (PBIT – Rs 10,00,000)

Or PBIT = Rs 20,00,000

Contribution

OL = Contribution / PBIT

4 = Contribution / 20,00,000

Or Contribution = Rs 80,00,000

SalesContribution / Sales = 0.40

80,00,000 / Sales = 0.40

Sales = Rs 200,00,000



Fixed Cost

Total Contribution – Fixed Cost = PBIT

Or 80,00,000 – Fixed Cost = Rs 20,00,000

Or Fixed Cost = Rs 60,00,000

Income Statement of the Firm

Rs

Sales 200,00,000

Less: Variable Cost (60% of sales) 120,00,000

--------------

Contribution 80,00,000

Less: Fixed Cost 60,00,000

---------------PBIT

20,00,000

Less: Interest 10,00,000

---------------

PBT 10,00,000

Less: Tax @ 40% 4,00,000

---------------

Profit after Tax (PAT) 6,00,000--------------

3. The following details of A Ltd for the year ended 31.3.06 are furnished.

Operating Leverage 3:1

Financial Leverage 2:1

Interest charges per annum Rs 20 lakh

Corporate tax rate 50%

Variable cost as percentage of sales 60%

Prepare the Income Statement of the company.[ ICWA Inter, Dec 1995]

Ans:

PBIT

F.L = (PBIT) / (PBIT – interest)



2 = PBIT / (PBIT – Rs 20,00,000)

Or PBIT = Rs 40,00,000

Contribution

OL = Contribution / PBIT

3 = Contribution / 40,00,000

Contribution = 120,00,000 (Rs)

Fixed Cost

Total Contribution – Fixed cost = PBIT

12,00,000 – Fixed Cost = 40,00,000

Fixed Cost = Rs 80,00,000

Sales & Variable Cost

Variable Cost = 60% of Sales

P.V. Ratio = 100% - 60% = 40% of Sales

P.V. Ratio = Contribution / Sales

.40 = 120,00,000 / Sales

Or Sales = Rs 300,00,000

Variable Cost = Rs 300,00,000 * 60%

= Rs 180,00,000



Income Statement of the Firm

Sales 300

Less: Variable Cost (60% of sales) 180

------------

Contribution 120

Less: Fixed Cost 80

------------PBIT

40

Less: Interest ( 40 * 50%) 20

------------

PBT 20

Less: Tax @ 50% 10

------------

Profit after Tax (PAT) 10

-------------

4. The following financial data have been furnished by A Ltd and B Ltd. For

the year ended 31.3.05.

A Ltd B Ltd

Operating Leverage 3:1 4:1Financial Leverage 2:1 3:1

Interest charges p.a. Rs 12 lakhs Rs 10 lakhs

Corporate tax rate 40% 40%

Variable cost 60% 50%

Prepare Income Statements of the companies. Also comment on the financial

position and structure of the two companies.

Ans:

A Ltd:

Financial Leverage = PBIT / PBIT-Interest

2 =PBIT /PBIT – 12 lakhs



Or PBIT = Rs 24 lakhs

Operating Leverage = Contribution / PBIT

3 = Contribution / 24 lakhs

Contribution = Rs 72 lakhs

Now, Total contribution – Fixed Cost = EBIT

72 lakhs – Fixed cost = Rs 24 lakhs

Fixed cost = Rs 48 lakhs

Variable cost as % of sales = 60%

PVR = 100% - 60% = 40%

PVR = Contribution / Sales

.40 = 72 / Sales

Sales = Rs 180 lakhs

B Ltd

Financial Leverage = PBIT / PBIT-Interest

3 =PBIT /PBIT – 10 lakhs

Or PBIT = Rs 15 lakhs

Operating Leverage = Contribution / PBIT

4 = Contribution / 15 lakhs

Contribution = Rs 60 lakhs

Now, Total contribution – Fixed Cost = EBIT



Rs 60 lakhs – Fixed cost = Rs 15 lakhs Fixed cost = Rs 45 lakhs

Variable cost as % of sales = 50%

PVR = 100% - 50% = 50%

PVR = Contribution / Sales

.50 = 60 / Sales

Sales = Rs 120 lakhs

Income Statement

Rs in lakhs

A Ltd B

Ltd

Sales 180 120Less: Variable Cost

( % of sales) 108 60--------------- ------------------

Contribution 72 60Less: Fixed Cost 48 45

---------------- ---------------PBIT 24 15Less: Interest 12 10

------------ ------------PBT 12.00 5.00Less: Tax @ 40% 4.80 2.00

------------ -----------PAT 7.20 3.00

Comments: The following are the noticeable points of thetwo companies.

(a) PV ratio of B Ltd is more than A Ltd.



(b) OL of B Ltd is higher than A Ltd i.e. it indicates fixed costas a percentage of sales of B Ltd are greater than A Ltd.

Fixed cost as a percentage of sales

A Ltd = (48 * 100) /180 = 26.67%

B Ltd = (45 * 100) / 120 = 37.50%

(c) FL of B Ltd is 3 against 2 for A Ltd. This indicates moreproportion of debt in the capital structure of B Ltd. If wecalculate % of interest on sales the following result isobtained.

A Ltd = (12 * 100) /180 = 6.67%

B Ltd = (10 * 100) / 120 = 8.33%

(d) Though PV ratio of B Ltd is higher than A Ltd but both FLand OL of B Ltd is higher than A Ltd. As a consequencepercentage of PAT on the basis of sales gives a differentpicture.

A Ltd = (7.2 *100) /180 = 4%

B Ltd = (3 * 100) / 120 = 2.5%*************************************************************************

WORKING CAPITAL MANAGEMENT

1. From the following information presented by a manufacturing company, prepare a working capital forecast statement for the coming year.

Expected monthly sales- 32,000 units at Rs 10 per unit. The anticipated rates of

cost to selling prices are: Raw materials 40%, Labour 30%, Budgeted Overhead Rs64,000 per month.

Stock will include raw materials for Rs 96,000 and 16,000 units of finished goods.

Material will stay in process for 2 weeks.

Credit allowed to Debtors is 5 weeks.Credit allowed by Creditors is one month.

Lag in payment of overhead is 2 weeks.



Wages will be paid on the last day of the week of the work.

Cash in hand is expected to be Rs 20,000.

Assume that production is carried on evenly throughout the year and overheadaccrue similarly and a time period of 4 weeks is equivalent to a month.

[ Kalyani University (H) 1997]

Ans: Statement showing Cost and Profit per week

Particulars Per Week (Rs)

Raw material (32000 *10 * 40%/4 )

Labour (32,000 *10 * 30%/4 )Overheads ( 64,000 / 4)

Total Cost

Profit

Sales

32,000

24,00016,000

----------------

72,0008,000

----------------80,000

Statement Showing Working Capital Requirement Forecast

Details Period

( In

Weeks)

Raw

material

WIP Finished

Goods

Debtors Cre

(A) Raw Materials

- In Store

- In WIP- In Finished Goods

- To Debtors

Less: Credit from Creditors

(B) Labour

- In WIP

- In Finished Goods- To Debtors

Less: Lag in payment

(C) Overheads- In WIP

- In Finished Goods

3

22

5

124

8

1

2

5

-----------

81

7

12

96,000

64,000

24,000

16,000

64,000

48,000

32,000

1,60,000

1,20,000

80,000

1,2

24,



- To Debtors


(D) Profit:- To Debtors

5

8

2

6

5

40,000

32,

96,000 1,04,000 1,44,000 4,00,000 1,8

Net Working Capital = Rs 5,60,000

Add: Cash in hand = Rs 20,000

------------------

5,80,000-----------------

Working Note:

Raw Material Storage Period = Estimated stock of Raw Material

------------------------------------------

Weekly requirement of Raw Material

= Rs 96,000

--------------------------------------------Rs 32,000

= 3 weeks

Finished goods storage Period = Estimated stock of finished goods

------------------------------------------Weekly production of finished goods

= 16,000--------------------------------------------

8,000

= 2 weeks

2. From the following details concerning a manufacturing enterprise estimate theamount of working capital needed to finance an activity level of 50%. The capacity of the

concern is to produce 2,40,000 units p.a.

Expected selling priceRs 10 per unit.



Cost of Raw materialsRs 3 per unit

Direct labour cost Rs 2.50

Overhead ( including depreciation Rs 50,000) Rs 2,50,000.Raw materials are in stock on an average for one month. Materials are in process

on an average for two months. Finished goods are in stock on an average for two months.

Credit allowed to debtors three months and that received from suppliers of raw materialsone month. Lag in payment of wages half a month and overhead one month. Cash in hand

and at bank- 10% of net working capital.

You may assume that production is carried on evenly throughout the year andoverheads accrue similarly. One forth of the outputs is sold against cash.

[ C.U. (H) 1992]

Ans: Statement showing Cost and Profit per Month

Particulars Per Month (Rs)

Raw material (1,20,000 *3 / 12)Labour (1,20,000 *2.50 / 12)

Variable Overheads (2,00,000 / 12)

Fixed Overhead ( 50,000 / 12)

Total Cost

Profit

Sales ( 1,20,000 * 10 /12)

30,00025,000

16,667

4,167

75,834

24,166

1,00,000


Details Period( InMonth

s)

Rawmaterial

WIP FinishedGoods

Debtors Cred

(A) Raw Materials

- In Store


- To Debtors

( 30,000*3*3/4)


(B) Labour

- In WIP


( 25,000 * 3 * ¾)

1

22

3

8

1

7

1

2

3

6

30,000

60,000

25,000

60,000

50,000

67,500

56,250

30,0




(C) Variable Overheads

- In WIP


( 16,667 * 3 * ¾)Less: Lag in payment


( 24,166*3*3/4)

1/2

51/2

1

23

61

5

-------

--

3

16,667

33,334

37,501

54,374

12,5

16,6

30,000 1,01,667 1,43,334 2,15,625 59,1

Working Capital = Rs 4,31,459Add: Cash in hand ( Rs 4,31,459 * 10/90) = Rs 47,940

------------------

4,79,399

-----------------

3. From the following information presented by a manufacturing company, prepare a working capital requirement forecast statement for the coming year.

Expected monthly sales of 32,000 units at Rs 10 per unit.

The anticipated ratios of cost to selling price are: Raw material- 40%, Labour-30%, Budgeted overhead Rs 16,000 per week.

Overhead expenses include depreciation of Rs 4,000 per week. Planned stock willinclude raw materials for Rs 96,000 and 16,000 units of finished goods.

Material will stay in process for 2 weeks. Credit allowed to debtors is 5 weeks.Credit allowed by creditors is 1 month. Lag in payment of overhead is 2 weeks.

25% of sales may be assumed against cash and cash in hand is expected to be Rs

25,000.



Assume that production is carried on evenly throughout the year and wages and

overhead accrue similarly. A time period of 4 weeks is equivalent to a month.

[ CU (H) 1987]

Ans: Statement showing Cost and Profit per Week

Particulars Per Week (Rs)

Raw material (32,000 *10*40% / 4)

Labour (32,000 *10*30% /4)Variable Overheads (16,000-4,000)

Fixed Overhead

Total Cost

Profit

Sales ( 32,000 * 10 /4)

32,000

24,00012,000

4,000

72,000

8,000

80,000


Details Period

( In

Weeks)

Raw

material

WIP Finished

Goods

Debtors Cre

(A) Raw Materials

- In Store


- To Debtors

( 32,000*5*3/4)


(B) Labour

- In WIP

- In Finished Goods

- To Debtors( 24,000 * 5 * ¾)

(C) Variable Overheads


- To Debtors

3

22

5

124

8

1

2

5

8

1

2

5

96,000

64,000

24,000

12,000

64,000

48,000

24,000

1,20,000

90,000

45,000

1,2

24,



( 12,000 * 5 * ¾)



( 8,000*5*3/4)

82

6

--------

-

5 30,000

96,000 1,00,000 1,36,000 2,85,000 1,5

Working Capital = Rs 4,65,000Add: Cash in hand ( Rs 4,31,459 * 10/90) = Rs 25,000

------------------

4,90,000

-----------------

Working Note:

Raw Material Storage Period = Estimated stock of Raw Material------------------------------------------

Weekly requirement of Raw Material

= Rs 96,000

--------------------------------------------Rs 32,000

= 3 weeks

Finished goods storage Period = Estimated stock of finished goods

------------------------------------------

Weekly production of finished goods

= 16,000

--------------------------------------------8,000

= 2 weeks

2nd finance prob solve

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