Improvements in the working capital accounts

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Reference no: EM13257060

The management committee of Lucknow Co. is considering investing $800,000for the purchase of machinery and equipment in order to increase theproductivity of the plant.  In2000, the company's sales revenue amounted to $2,800,000, goods purchased fromsuppliers totaled $600,000 and income after taxes was $280,000.  The company's 2000 balance sheet is asfollows:

Lucknow Co.

Balance Sheet

Forperiod ending Dec31,2000



       Cash                                                      $20,000

       Account Receivable                              400,000

        Inventory                                             300,000            

TotalCurrent Assets                                                                  $720,000

CapitalAssets (net)                                                                  1,000,000

TotalAssets                                                                            $1,720,000             


Liabilitiesand Equity


       AccountsPayable                                $170,000

       WorkingCapital Loan                            150,000

TotalCurrent Liabilities                                                             $320,000

Longterm Debts                                                                         500,000


       Common Shares                                   200,000

       Retained Earnings                               700,000

TotalShareholder Equity                                                          $900,000      

TotalLiabilities and Equity                                                       $1,720,000   

In2001, management expects sales revenue to increase by 10% and, with cutbacks indifferent segments of their operations, return on sales is expected to improveto 12%.  Cost of goods sold as apercentage of sales revenue is expected to show an improvement and reach20%.  Depreciation is expected tototal $100,000.


1. What are the company's current assets?

2. What are the company's current liabilities?

3. What are the company's total assets?

4. What are the company's total liabilities?

5. What are the company's total liabilities?

6. Calculate the company's return on assets for the year 2000.

7. What is the net income after taxes for 2001?

8. Calculate the company's average daily sales in 2000?

9. Calculate the company's average collection period for 2000.

10. Calculate the company's inventory turnover?

11. Management also expects improvements in the working capital accounts.  The company's objective isto improve accounts receivable by eight days, and turn inventory around by 0.2turns faster. a) How much cashwill be generated from accounts receivable in 2001?  b) From inventory in 2001?

12. If the cash that will be generated by internal operations in 2001 is$517, 471 then how much will management have to borrow to proceed with the$800,000 investment?  (This mightbe easier than you think?)

13. Suppose that to raise the $800,000 the company had $150,000 in retainedearnings they were willing to use. Normally they would expect a 10% return on this money. The bank has agreed to lend them$200,000 at an interest rate of 9%. The remaining amount will come from a second bank loan at 14%.  If the company expects to pay 30%income tax what will their after tax cost of capital be for the equipment?

Reference no: EM13257060

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