Question One (20 Marks)
You recently accepted an assignment with Esprit Limited as a financial consultant. One of your first assignment is the analysis of two proposed capital investment projects.

Details of initial investments, after-tax cash flows and average annual profits are represented below:

    R R
Initial Investment   -100 000 -100 000
Cash Flows 1 30 000 25 000
  2 35 000 25 000
  3 28 000 25 000
  4 15 000 25 000
Average Annual Profits   14 000 17 000

Which project has a shorter payback period? Motivate your answer by doing the relevant calculations. (8 marks) (answers expressed in years, months and days).
Calculate the accounting rate of return for project B. (4 marks) (answer expressed to two decimal places).

Name two disadvantages of using “payback period” as a technique to evaluate capital investment decisions. (2 marks)

1.2. A machine with a purchase price of R140 000 is estimated to have an inflow of
R40 000 per year. The machine will last 5 years and have no residual value at the end of its life.

Calculate the internal rate of return. (6 marks)

Question Two (20 Marks)

Use the information provided below to calculate the following ratios for the financial year ended 31 December 2022. (Where applicable, round off answers to two decimal places.)

Profit margin (2 marks)
Current ratio (2 marks)
Return on equity (2 marks)
Inventory turnover (2 marks)
Debt to assets (2 marks)
Earnings per share (2 marks)
Debtors collection period (2 marks)

The 2021 ratios for Sheesha limited has been provided here below. The 2022 ratios have been calculated here above. In light of comparing the 2021 and 2022 ratios of Sheesha Limited, comment on the following ratios that have been calculated for Sheesha Limited. Provide two significant comments for each one.

2.2.1 Profit Margin 18.50% (2 marks)
2.2.2 Debtors Collection period 58 days (2 marks)
2.2.3 Current ratio 1:25% (2 marks)

Excerpts of financial data of Sheesha Limited for 2022 are as follows:

Statement of Comprehensive Income for the year ended

31 December 2022

Sales 7 550 000
Cost of sales 4 535 000
Operating profit 3 015 000
Interest expense 355 000
Profit before tax 2 660 000
Profit after tax 1 729 000
Statement of Financial Position as at 31 December 2022
Non-current assets 4 530 000
Inventories 405 000
Accounts receivable 1 330 000
Cash 777 000
  7 042 000
Ordinary share capital 1 250 000
Retained earnings 792 000
Long-term loan 4 150 000
Accounts payable 850 000
  7 042 000

Additional information
1. Inventories on 31 December 2021 amounted to R377 000.
2. All purchases and sales of inventory are on credit.
3. 500 000 ordinary shares have been issued by the company.
4. The credit terms offered by suppliers are 60 days.

Question Three (20 Marks)

STAR Limited is in the process of formulating plans for the first quarter of 2022.
Use the information provided below to prepare the following for STAR LIMITED for January, February and March 2022 (use separate amount columns for each month):

Debtors Collection Schedule (6 marks)
Cash Budget (14 marks)

1. The following sales figures are forecast:
Year Month Sales (R)
2021 December 540 000
2022 January 380 000
2022 February 295 000
2022                 March               320 000

2. Forty percent (40%) of the sales are expected to be for cash and the balance is on credit.
3. Twenty percent (20%) of the credit sales is expected to be collected in the month of the sale and eighty percent (80%) in the month after the sale.
4. Inventory equals 60% of the current month’s sales. All purchases are for cash in order to take
advantage of a 10% discount.
5. Wages and salaries equal 20% of the current month’s sales. Labour costs are paid for in the month in which they are incurred.
6. Property taxes are estimated to be R48 000 for 2022 and will be paid in four equal instalments in the last month of each quarter.

7. General and administrative expenses are projected to be R222 000 for 2022 and are payable monthly. These expenses are incurred evenly throughout the year.
8. Selling and distribution expenses amount to R15 000 for January 2022 and are expected to increase by 10% per month thereafter. These expenses are paid for in the month in which they are incurred.
9. Income tax payments of the Company is paid in January 2022 for an amount of R75 000.
10. The expected cash balance on 31 December 2021 is R55 000.

Answers to Above Question on Financial Accountant

Answer 1: The project that has a shorter payback period is calculated as follows:


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