Task

Clyn Contractors is preparing to replace critical earthmoving plant and equipment so that they can consolidate future bids.

The anticipated cost of the digger with a maximum-sized bucket is 85,000. It needs to be bought in 4 years time. However, the industrial development fund is willing to loan Clyn contractors at a rate of 12% per annum if they can purchase the digger today.

The accountant thinks there is a possibility of outright purchase of the digger in 4 years time if the company can create a sinking fund at a rate of 6% per annum.

1. Calculate the cost of finance to purchase the digger for 85,000 using the loan from industrial development fund. 20 Marks
2. Calculate the amount of money Clyn Contractors should reserve (sinking fund) per year for it to make an outright purchase, as proposed by the accountant. 20 Marks
3. Explain how the financial health of Clyn contractors is able to influence the decision of outright purchase using a loan today or the creation of a sinking fund for the next 4 years (400 words) 60 Marks

page1 Income statement (Profit & Loss) page2 2021 Current assets 2020 Inventories 80.30 72.60 Em m Trade and other receivables 610.90 589.20 Revenue 2,224.50 2,070.60 Current tax assets 14.70 18.70 Operating costs 2,193.70 1,963.50 Cash and cash equivalent 110.50 67.70 Amortisation of acquired intangible assets -7.90 -9.00 816.40 748.20 Other operating income 0.50 23.20 Total assets 1,444.80 1,385.00 share of post-tax results of joint venture 1.60 0.00 Operating profit/(loss) 25.00 121.30 Liabilities Finance income 0.60 3.80 Current Liabilities -17.20 -14.50 Finance costs -42.80 Loans and borrowings -48.30 Profit/(loss) before tax 8.40 110.60 -18.60 Current tax liabilities -19.10 Taxation -22.20 -23.10 -474.40 Trade and other liabilities -480.50 Profit/(loss) for the period -13.80 Provisions -10.80 -10.30 87.50 -546.60 -558.20 Statement of Financial Position (Balance sheet) Non-current liabilities -452.90 -354.60 2021 2020 Total Liabilities -999.50 -912.80 fm fm Net assets 445.30 472.20 Assets Non-current assets Equity 445.30 472.20 Intangible assets 153.40 170.90 Property, plan and equipment 422.00 399.20 Number of shares 72.00 72.00 million Investments in joint ventures 4.60 3.70 Dividends 26.30 20.80 m Deferred tax assets 26.90 39.30 Share price 4.96 9.73 Other assets 21.50 23.70 628.40 636.80 page1 Income statement (Profit & Loss) page2 2021 Current assets 2020 Inventories 80.30 72.60 Em m Trade and other receivables 610.90 589.20 Revenue 2,224.50 2,070.60 Current tax assets 14.70 18.70 Operating costs 2,193.70 1,963.50 Cash and cash equivalent 110.50 67.70 Amortisation of acquired intangible assets -7.90 -9.00 816.40 748.20 Other operating income 0.50 23.20 Total assets 1,444.80 1,385.00 share of post-tax results of joint venture 1.60 0.00 Operating profit/(loss) 25.00 121.30 Liabilities Finance income 0.60 3.80 Current Liabilities -17.20 -14.50 Finance costs -42.80 Loans and borrowings -48.30 Profit/(loss) before tax 8.40 110.60 -18.60 Current tax liabilities -19.10 Taxation -22.20 -23.10 -474.40 Trade and other liabilities -480.50 Profit/(loss) for the period -13.80 Provisions -10.80 -10.30 87.50 -546.60 -558.20 Statement of Financial Position (Balance sheet) Non-current liabilities -452.90 -354.60 2021 2020 Total Liabilities -999.50 -912.80 fm fm Net assets 445.30 472.20 Assets Non-current assets Equity 445.30 472.20 Intangible assets 153.40 170.90 Property, plan and equipment 422.00 399.20 Number of shares 72.00 72.00 million Investments in joint ventures 4.60 3.70 Dividends 26.30 20.80 m Deferred tax assets 26.90 39.30 Share price 4.96 9.73 Other assets 21.50 23.70 628.40 636.80