Answered: Project A and Project B. An investment…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Using attached, Accounting Rate of Return on average investment of Project A (expressed to two
decimal places).

Transcribed Image Text:STARPLUS LIMITED: PLANNING FOR 2023 Starplus, Limited is well known for its focus on customer satisfaction and this is highlighted in the company profile. Their "About Us" page on their website tells a story of service and growth, all centred around their customers. This, combined with the excellent quality products offered, has contributed to its success in the marketplace. At the end of 2022 the fixed assets (at carrying value) totalled R5 300 000, inventories amounted to R5 200 000, R2 100 000 was owed by trade debtors, cash in the bank amounted to R400 000, the ordinary share capital balance was R4 500 000, the accumulated undistributed profits amounted to R1 700 000, an amount of R5 900 000 was owed to Zap Bank in respect of a long-term loan and R900 000 was owed to the trade creditors. The sales of Starplus, Limited for 2022 amounted to R8 000 000. The following projections are forecasts were made for 2023: Machinery with a cost price of R1 000 000 and accumulated depreciation of R1 000 000 is expected to be scrapped at the end of 2023. Machinery with a cost price of R6 400 000 will be purchased to replace it. Total depreciation for 2023 is estimated to be R800 000. The sales (all on credit) for 2023 are expected to increase by 30%. The gross margin and net profit margin ratios are estimated to be 30% and 15% respectively. Purchases for 2023 (all on credit) are projected at R6 600 000. Accounts receivable is based on a collection period of 36.5 days. The company expects to show a net increase in cash of R130 000 during 2023. 250 000 ordinary shares are expected to be issued at R4 each during January 2023. Dividends of R800 000 are expected to be recommended by the directors at the end of December 2023. The dividends will be paid out during 2024. R1 500 000 will be paid to Zap Bank during 2023. This includes R500 000 for interest on loan. Accounts payable must be calculated using the percentage-ofsales method. The amount of external funding (non-current debt) required must be calculated. In keeping with the company's growth strategy, the directors have identified two possible investment opportunities for 2023 viz. Project A and Project B. An investment of R4 000 000 is required for each project and a scrap value of R400 000 is anticipated for Project A only. The useful life of each project is estimated to be five years. Project A is expected to generate net profits of R700 000 (Year 1), R650 000 (Year 2), R600 000 (Year 3), R450 000 (Year 4) and R400 000 (Year 5). Project B is expected to generate net a net profit of R520 000 per year over its useful life. Depreciation is calculated on a straightline basis. The company's cost of capital is predicted to be 15%. The decision of which project to invest in, if any, will be made at a later stage.

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Follow-up Question

Internal Rate of Return of Project B (expressed to two decimal places) using
interpolation.

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Follow-up Question

Isnt the scrap value of R400 000, included in the calculation for the ARR?

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