General Electric Company had cash of $14,000 on hand on January 1. During the year, the company expected the following cash collections from customers by quarter: (06) First Second Third Fourth Cash collections 110,000 177,500 183,700 136,000 Direct materials purchases in tons were budgeted as follows: First Second Third Fourth Direct materials purchase 65,000 75,000 55,000 50,000 The production budget showed the following unit production by quarter with an average labor rate of $40.00:
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Case Number 01
General Electric Company had cash of $14,000 on hand on January 1. During the year, the
company expected the following cash collections from customers by quarter: (06)
First Second Third Fourth
Cash collections 110,000 177,500 183,700 136,000
Direct materials purchases in tons were budgeted as follows:
First Second Third Fourth
Direct materials purchase 65,000 75,000 55,000 50,000
The production budget showed the following unit production by quarter with an average
labor rate of $40.00:
First Second Third Fourth
Units to be produced 1,500 2,000 1,700 1,500
General Electric Company planned to pay dividends of $10,000 per quarter during the year.
During July, new equipment costing $60,000 will be purchased. An additional $16,000 was
planned to installation costs during the fourth quarter.
The company was required to maintain a minimum cash balance of $15,000. A line of
credit was available for short-term borrowings in increments of $1,000. All borrowings
will be made at the beginning of a quarter and repaid at the end of a quarter. Interest on the
short-term borrowings will be paid at 0.5% per quarter on the amount repaid in any quarter
when a loan repayment is made. All other interest expense will be accrued each quarter.
Requirement:
(a) Prepare a
Case Number 02
An investor named Shadab Khan is in search for the business opportunity in Afghanistan.
After detail study and analysis, he found that massive copper reserves are available in
Logar province. China is being interested in extraction copper and made one the biggest
foreign direct investment in history of Afghanistan. Finally, he decided of make an
investment in extraction of copper by having his own mining where he will extract copper.
His company has collected the following information about the cash inflows and outflows
associated with this project:
Equipment needed for new mine: $1,000,000
Expected annual
Expected annual cash expenses associated with the new mine: $500,000
Road repairs required after 5 years: $110,000
Upgrading mine based on mining standard of the country: 55,000
The coal in the mine would be exhausted after 15 years. The equipment would be sold for its
salvage value of $250,000 at the end of 15-year period. The company uses
method
depreciation for tax purpose. The tax rate of the company is 30%.
Required:
1. Compute
cost of capital. (03)
2. On the basis of your computations in requirement 1, conclude whether the coal mine
should be opened or not. (01)
3. Discuss why net present value method is one of the most effective capital budgeting
technique for the acceptance and rejection of the projects throughout globe. (03)
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