Case Study Case study: A Real Life CAPEX Proposal of M/s V Limited for Consideration M/s...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Case Study Case study: A Real Life CAPEX Proposal of M/s V Limited for Consideration M/s V Limited, which wishes to improve its competitive position in the market, is considering expediting its delivery time to customers by increasing the levels of finished stocks held. Dependent upon the degree of increase in finished stocks, it estimates that its existing sales of 3,00,000 units per annum would change as shown in the following table. Finished Stock New sales equal New sales equal New sales equal New sales equal increase by to 3,10,000 units to 3,20,000 units to 3,30,000 units to 3,40,000 units (%) (Probabilities) (Probabilities) (Probabilities) (Probabilities) 10% 0.45 0.40 0.15 15% 0.30 0.45 0. 25 20% 0.15 0.50 0.30 0.05 25% 0.40 0.40 0.20 Other changes resulting from increase in finished stock would be as under: a) Extra storage accommodation would be required. If the stocks increase up to 10%, construction costs of Rs 1,80,000 and annual maintenance costs of Rs 22,500 would be required. If stocks increase above 10%, the construction costs would be Rs 4,12,500 and annual maintenance costs Rs 67,500. The company treats investments of this kind as having a life of seven years requiring a 15% DCF yield. b) Extra handling equipment would be required as well. If the stocks increase is up to 15%, new equipment costing Rs 60,000, with additional running costs of Rs 8,250 per annum would be required. If the finished stocks increase were above 15%, new equipment of Rs 1,42,500 with annual running costs of Rs 11,250 would be required. For this type of investments, the company's criterion is 20% DCF with a life of 4 years. c) The present value of an annuity of Rs 1 for 7 years at 15% is Rs 4.16 and for four years at 20% is Rs 2.59. d) Additional raw material and work in process (WIP) inventory needs to be held as well. If finished stocks level increased by less than 20%, both raw materials and WIP inventory would go up by 15% each. However, if increase in finished stock is 20% or more, both raw material and WIP inventory would increase by 25% each. e) The present levels of stocks held are finished stock Rs 1,20,000, raw materials Rs 20,000 and WIP Rs 40,000. f) Extra warehouse staff would also be required. Extra staff costs per annum would be Rs 4,500, Rs 4,750, Rs 5,000, and Rs 5,250 for finished stock increase by 10%, 15%, 20% and 25% respectively. g) Other relevant information: the average selling price of products is Rs 45 per unit, variable cost is Rs 27 per unit, the company finances its entire inventories through bank overdraft and interest on bank overdraft is 12%, currently stocks are insured at an annual premium of Rs 15000 and such premium would increase proportionately for all additional inventories. Discussion Question: What would be your recommendation to the concerned company if we assume an effective corporate income tax rate of 40% for your calculations? Case Study Case study: A Real Life CAPEX Proposal of M/s V Limited for Consideration M/s V Limited, which wishes to improve its competitive position in the market, is considering expediting its delivery time to customers by increasing the levels of finished stocks held. Dependent upon the degree of increase in finished stocks, it estimates that its existing sales of 3,00,000 units per annum would change as shown in the following table. Finished Stock New sales equal New sales equal New sales equal New sales equal increase by to 3,10,000 units to 3,20,000 units to 3,30,000 units to 3,40,000 units (%) (Probabilities) (Probabilities) (Probabilities) (Probabilities) 10% 0.45 0.40 0.15 15% 0.30 0.45 0. 25 20% 0.15 0.50 0.30 0.05 25% 0.40 0.40 0.20 Other changes resulting from increase in finished stock would be as under: a) Extra storage accommodation would be required. If the stocks increase up to 10%, construction costs of Rs 1,80,000 and annual maintenance costs of Rs 22,500 would be required. If stocks increase above 10%, the construction costs would be Rs 4,12,500 and annual maintenance costs Rs 67,500. The company treats investments of this kind as having a life of seven years requiring a 15% DCF yield. b) Extra handling equipment would be required as well. If the stocks increase is up to 15%, new equipment costing Rs 60,000, with additional running costs of Rs 8,250 per annum would be required. If the finished stocks increase were above 15%, new equipment of Rs 1,42,500 with annual running costs of Rs 11,250 would be required. For this type of investments, the company's criterion is 20% DCF with a life of 4 years. c) The present value of an annuity of Rs 1 for 7 years at 15% is Rs 4.16 and for four years at 20% is Rs 2.59. d) Additional raw material and work in process (WIP) inventory needs to be held as well. If finished stocks level increased by less than 20%, both raw materials and WIP inventory would go up by 15% each. However, if increase in finished stock is 20% or more, both raw material and WIP inventory would increase by 25% each. e) The present levels of stocks held are finished stock Rs 1,20,000, raw materials Rs 20,000 and WIP Rs 40,000. f) Extra warehouse staff would also be required. Extra staff costs per annum would be Rs 4,500, Rs 4,750, Rs 5,000, and Rs 5,250 for finished stock increase by 10%, 15%, 20% and 25% respectively. g) Other relevant information: the average selling price of products is Rs 45 per unit, variable cost is Rs 27 per unit, the company finances its entire inventories through bank overdraft and interest on bank overdraft is 12%, currently stocks are insured at an annual premium of Rs 15000 and such premium would increase proportionately for all additional inventories. Discussion Question: What would be your recommendation to the concerned company if we assume an effective corporate income tax rate of 40% for your calculations?
Expert Answer:
Related Book For
Financial Accounting for Decision Makers
ISBN: 978-0273763451
6th Edition
Authors: Peter Atrill, Eddie McLaney
Posted Date:
Students also viewed these accounting questions
-
To improve its competitive position Martin Manufacturing is planning to implement a major equipment modernization program Included will be replacement and modernization of key manufacturing equipment...
-
A large public company wishes to improve its payroll accounting systems and is seeking out-side help to do this. The external auditors of the company are a large firm of accountants that has a...
-
1. What resources underlie Verizons strong competitive position in the U.S. wireless tele-communications industry? 2. Apply the VRIO framework and describe to what extent these resources can be...
-
Determine which sets of vectors are orthogonal. 3 -2 1 3 -1 3 -3 4 3 8 7 0
-
1. Make a case both for and against executive perks. Do you agree that such perks should be cut? Why? 2. Do you think paying the taxes on top of the perks is ethical? 3. Would you turn down the perks...
-
Prem Company acquired 60 percent ownership of Cooper Company's voting shares on January 1, 20X2. During 20X5, Prem purchased inventory for $20,000 and sold the full amount to Cooper Company for...
-
Suppose \(\mathbf{x} \sim M N(n, \boldsymbol{\pi})\) follows a multinomial distribution of size \(n\) and probability \(\pi\). Derive the variance matrix of \(\mathbf{x}\).
-
Refer to the information in Exercise 17-26. Suppose that Trendy uses the FIFO method instead of the weighted-average method in all of its departments. The only changes to Exercise 17-26 under the...
-
Assume that Twigs has hired you as a database consultant to develop it's operational database having the three tables described at the end of Chapter 6. Assume that Twigs personnel are the owner, an...
-
Your company is considering investing in its own transport fleet. The present position is that carriage is contracted to an outside organization. The life of the transport fleet would be five years,...
-
Read the case May 2, 1927 The U.S. Supreme Court Decided Buck v. Bell 1. Identify the sources and functions of values that guide human practices in science and technology. And 2. Reflect on how...
-
Think about the concepts of public goods and externalities that have been explained. Which concept would be best suited for you to use to accurately describe the characteristics of health care within...
-
Briefly explain whether you agree with this statement: Real GDP in 2018 was $18.6 trillion. This value is a large number. Therefore, economic growth must have been high during 2018.
-
What are the implications of monopolistically competitive firms having excess capacity?
-
Are long-run profits equal to zero only when firms charge a price equal to their marginal cost, and produce an average total cost-minimizing quantity of output? Briefly explain.
-
What is a patent, and how do governments use patents as incentives or barriers for companies to enter into an industry?
-
A pareto optimal resorting of students to different colleges is Question 8 options: a solution to mismatch that ensures that on average students will be better off. a solution to mismatch that...
-
In Problem use geometric formulas to find the unsigned area between the graph of y = f(x) and the x axis over the indicated interval. f(x) = x + 5; [0, 4]
-
On Thursday, the fourth day of his business venture, Paul, the street trader in wrapping paper, bought more inventories for 53 cash. During the day he sold inventories that had cost 33 for a total of...
-
Giant plc bought a majority shareholding in Jack Ltd, on 31 March. On that date the statements of financial position of the two companies were as follows: Required: Assume that the statement of...
-
Some people are about to form a company, as a vehicle through which to run a new business. What are the advantages to them of forming a private limited company rather than a public one?
-
Smart Manufacturing Systems Pty Ltds accountant recently prepared the following data from the companys accounting records for the year ended 30 June 2019. Factory overhead is applied at the rate of...
-
During the year ended 30 June 2019, Beautiful Bottles Pty Ltd incurred the following costs in connection with its production activities. Required (a) Calculate the relationship between factory...
-
Telecommunications company Toronto Ltd signed a 15year deal to sell capacity on its cable network to a rival company for $200 million. The deal was completed on the last day of Toronto Ltds financial...
Study smarter with the SolutionInn App