Calculate the payback period

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Reference no: EM131010

Question 1

Mr X would like to open a business he is not sure of the type of business but he wants to be able to do general dealing in a variety of areas he is familiar with, such as merchandising, wholesaling and franchising or a food outlet; he does not  have  enough  capital  and  he  is  not  a  specialist  in  any  of  the  areas mentioned above, he would like to have independence in management though he knows this might not be possible if he get a partner or a bank loan.

Advise Mr X on which business to open.

Question 2 

Company Y opens a business. It invests R100 000 and receives the following:

Cash flows

Year

Amount (R)

1

28 000

2

25 000

3

30 000

4

25 000

5

24 000

Requirements:

2.1 Calculate the payback period.

2.2 Calculate the discounted payback period.

2.3 Calculate the net present value.

2.4 Calculate the IRR.

2.5 Comment on your answer.

Question 3

You are the financial manager of a mining company; you are looking at an investment that requires 10 years to start paying back. This is in a third world country, what factors would you consider and why?

Question 4 

Financial statement analysis assists the financial manager in understanding the financial performance of the company. What other factors will a financial manager need to consider to getting a full picture of the performance or future

prospects of the company?

Question 5

XYZ Ltd.

Statement of Comprehensive Income for Year ended December 2012

 

2012

R'000

Sales revenue

5 743

Cost of sales

(4236)

Gross profit

1 507

Administrator expenses

(471)

Markets expense

(451)

Other expenses

(272)

Profit before interest and tax

313

Interest

(104)

Profit before tax

209

Income tax expenses                                                     (59)

Profit from continuing operation                                      150

 

XYZ Ltd

Statement of financial position as it at December 2012

Equity and liabilities

Capital

400

Profit/loss

315

Equity attributable to owners

715

 

Non-current liabilities

 

 

Long-term loan

 

372

 

Current liabilities

 

 

Creditors

 

80

Short-term loan

50

Total liabilities

502

Total equity and liability

Assets

1 217

 

Non-current assets

 

 

Plant and equipment

 

925

 

Current assets

 

 

Stock

 

150

Debtors

100

Bank

42

Total current assets

292

 

1 217

Calculate the following ratios and comment on each ratio in your answers in relation to industry averages:

Each ratio is worth 3 marks. 1 mark is awarded for the calculation and 2 marks awarded for the interpretation and discussion there of.

5.1

Current ratio

(3)

5.2

Quick ratio

(3)

5.3

Inventory turnover

(3)

5.4

Average collection period

(3)

5.5

Asset turnover

(3)

5.6

Debt ratio

(3)

5.7

Debt to agent

(3)

5.8

Times interest earned

(3)

5.9

Gross profit margins

(3)

5.10

Return on equity

(3)

Industry averages

Current ratio                          3.00

Quick ratio                              2.00

Inventory turnover                 20 times

Average collection period        30 days

Fixed asset turnover                10 times

Debt ratio                                 20 %

Debt to equity                         50%

Times interest earned              1

time Gross profit margins        50%

Return on Equity                     10%

Reference no: EM131010

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