Q.1.

From the following information available to you, on 1st January, prepare the working capital
requirement forecast for the year.
Production during the previous year was 30,000 units. It is planned that this level of activity should
be maintained during the current year. The expected rations of the cost to selling prices are Raw
materials 60%, direct wages 10% and Overheads 20%. Raw materials are expected to remain in stores
for an average of 2 months before, issue to production. Each unit of production is expected to be in
process for 1 month, the raw materials being fed into the pipeline immediately and the labour and
overheads cost accruing evenly during the month. Finished goods will be in the storehouse approximately
for 3 months before being dispatched to customer. Creditors allow 2 months credit from the date of
delivery of raw materials. Credit allowed to debtors is 3 months from the date of dispatch. Selling price is `
10 per unit. The cycle of production and sales is regular. Wages are paid 15 days in arrears. Cash in hand
with the company is normally ` Rs20,000. Assume 30 days to a month.

Q. 2. The Board of Directors of Maria Ltd. requires you to prepare working capital estimation for the
coming year. The details of the company are as follows:
The number of units being produced currently is 50,000 units per annum.
The Raw Material cost is ` Rs180 per unit.
The wages are ` Rs40 per unit.
The Fixed Overheads are ` Rs100 per unit.
The Selling Price per unit ` Rs680.
Other Details are :
(a)

Raw Materials are in store on an average for 1 month along with Finished Goods.

(b)

Materials in Progress is on an average for 15 days.

(c)

Credit allowed by suppliers is for 1 month.

(d)

Time lag in collection from debtors is 4 months.

(e)

Time lag in payment of Wages is 1 month and that of Overheads it is 3 months.

(f)

20% of the output is sold against credit. Cash in hand and in Bank is expected to be ` Rs3,00,000.

Q.3. A factory produces 96,000 units during the year and sells them @ ` Rs50 per unit. Cost structure of
a product is as follows :
60%
Raw Material
15%
Labour
10%
Overheads
85%
15%
Profit
100%
Selling Price
The following additional information is available :
(i)

The activities of purchasing, producing and selling occur evenly throughout the year.

(ii)

Raw Materials equivalent to 1 months supply is stored in go down.

(iii)

The production process takes 1 month.

(iv)

Finished goods equal to three months production are carried in stock.

(v)

Debtors get 2 months credit.

(vi)

Creditors allow 1 % months credit.

(vii) Time lag in payment of wages and overheads is month.

(viii) Cash and Bank Balance is to be maintained at 10% of the working capital.
(ix)

10% of the sales are made at 10% above the normal selling price.

Draw a forecast of working capital requirements of the factor.

Q.4. From the following information prepare an estimate of working capital required to finance a level of
activity of 3,12,000 units p.a. (52 weeks)
Particulars

Per Unit (Rs`)

90

Raw Material
40
Wages
Overheads :
30
Manufacturing
40
Administrative
10
Selling
210
40
Profit
250
Selling price
Other Information :
(i)
Raw materials are held in stock for a period of 4 weeks.
(ii)

Materials remain in process for 2 weeks requiring 50% wages and 40% overheads.

(iii)

Finished goods remain in stock for a period of 4 weeks.

(iv)

Credit allowed to customers is 8 weeks but 20% of the invoice price is collected immediately.

(v)

Time lag in payment of wages is 1.5 weeks and in overheads is 4 weeks.

(vi)

Credit available from suppliers is 4 weeks but 20% of the creditors are paid 4 weeks in advance.

(vii) Bank balance is to be maintained at ` Rs60,000.

Q.5. Computers India Ltd. produced and sold 6,000 Laptops in 2001 and their cost structure was as
under :

Per unit in (Rs`)

12,000
Raw Material
9,000
Labour
8,000
Manufacturing Overheads
3,000
Administration and Selling Overheads
25% of Total Cost
Profit
In 2002 they plan to Manufacture 7,800 Laptops and sell 7,280 units. In the mean time, it is estimated
that:
(a)

Raw material cost will go up by 10% p.a.

(b)

Labour will reduce by 5% p.a.

(c)

Manufacturing overheads will go up by 10% p.a.

(d)

Administration and selling overheads per unit will remain unchanged.

(e)

Selling price per unit will rise by 10% over last year

It is further informed that :

(1) Raw Materials will remain in stores for 4 weeks before issue to production.
(2)

Process period is 3 weeks.

(3)

25% of sales will be on cash basis, 25% of sale will be against Bills of Exchange maturing in 8

weeks, balance will be sold at 4 weeks credit.

(4)

25% of Purchases are on cash basis. 25% of Purchases are from Japan and suppliers are to be

given advance payment of 6 weeks. Balance suppliers allow a credit of 6 weeks.

(5)

Wages and Manufacturing Overheads remain outstanding for 2 weeks, whereas Administration and

Selling overheads are paid 2 weeks in advance.

(6)

Cash and Bank Balance shall be maintained at `Rs 75,000/-.

(7)

Company shall get Bank Overdraft equal to 50% of stock of raw material and finished goods.

Work out working capital requirements for the year 2002.

Q.6. Q.

A trader whose current sales are in the region of ` Rs6 lakhs per annum and an average

collection period of 30 days wants to place a more liberal policy to improve sales. A study made by a
management consultant reveals the following information :
Increase in Collection

Increase in Sales (in

Percentage Default

Credit Policy

Period (Days)

Units)

Anticipated (in %)

10

30,000

1.5%

20

48,000

2%

30

75,000

3%

45

90,000

4%

Selling price per unit is Rs10`, average cost per unit is `Rs 2.25 and variable cost per unit is `Rs 2.
Current bad debts loss is 1%. Required return on additional investment is 20%. Assume 360 days a year.
Which of the above policies would you recommend for adoption?

Q.7 Through a network of dealers as sales are on credit and the dealers are given one month time to
settle their bills. The company is thinking of changing the credit period with a view to increase its overall
profits. The marketing department has prepared the following estimates for different period of credit.
Present Policy

Plan I

Plan II

Plan III

30 days

45 days

60 days

90 days

120

130

150

180

30

30

35

40

0.5

0.8

Credit Period
Sales (`Rs in lakhs)
Fixed costs (`Rs in lakh)
Bad Debts (% of Sales)
The company has a contribution / sales ratio of 40%. Further it requires a pre-tax return on investment @
20%. Evaluate each of the above proposals and recommend the best credit period for the company.

Q.8. Present Situation :

Sales = ` Rs50 lacs, variable cost = ` Rs40 lacs.
Fixed costs = ` Rs6 lacs. Credit to Debtors = 30 days.
Proposed Credit Period

Sales (` Rs in lacs)

45 days

56

60 days

60

75 days

62

90 days

63

Determine the credit period that should be allowed by the company. Assume ROI @ 10%. Assume 360
days in a year.

Q.9. Elam Ltd. has total capital employed of ` Rs75,00,000. The break up is as under :
15% Debt 30%
12% Preference capital 10%
Equity capital and retained earnings are proportion of 3 : 1
All shares and debt are in units of ` Rs100 each. The tax rate applicable is 40%.
Equity share holders expect dividend @ 15%. Cost of retained earnings is to be considered @ 10%.
You are required to ascertain :
(a)

Composite cost of capital.

(b)

If earnings before interest and tax is ` Rs15,00,000. Calculate :

(i)

EPS

(ii)

Market Price of Equity Shares.

Q.10. Bata Ltd. wishes to raise additional funds of ` Rs20,00,000 for meeting its investment plans. It has `
Rs4,00,000 in the form of retained earnings available for investment purposes. The following are further
details :
(1)

Debt/Equity mix 40% / 60%.

(2)

Cost of debt :

Upto ` Rs5,00,000
Beyond ` Rs5,00,000

10% (before tax)

12% (before tax)

(3)

Last Year Earnings per share ` Rs4.

(4)

Dividend Pay out 50% of earnings.

(5)

Expected growth rate in dividend 10%.

(6)

Current market price per share ` Rs44.

(7)

Rate of Income tax 50%.

You are required to determine:

(i)

Pattern for raising the additional finance.

(ii)

Post tax average cost of additional debt.

(iii)

Cost of retained earnings and equity.

(iv)

Weighted average after tax cost of additional finance.

Q.11. Navniman Ltd. is considering four capital projects for the year 2010 and 2011. The company is
financed by equity entirely and its cost of capital is 12%. The expected cash flows of the projects are as
below:
Year and Cash flows (`Rs. 000)
Project

2010

2011

2012

2013

(40)

(30)

45

55

(50)

(60)

70

80

(90)

55

65

(60)

20

40

50

Note : Figures in bracket present cash outflows.

All projects are indivisible i.e. size of investment cannot be reduced. None of the projects can be
delayed or undertaken more than once. Calculate which project(s) Navnirman Ltd., should undertake if
the capital available for investment is limited to ` Rs1,10,000 in 2010 and with no limitation in subsequent
years. For your analysis use the following present value factors.

Q.12 Pioneer Chemicals is evaluating two alternative systems for waste disposal, Systems A and B which
have lives of 6 years respectively. The initial outlay and operative costs for the two systems are expected
to be as follows :
System A

System B

Initial Outlay

` Rs4 million

`Rs 3 million

Annual Operating Costs

`RS 1.2 million

` Rs1 million

If the discount rate is 13% which system should Pioneer choose? Ignore salvage value.

Q.13 M/s. Kurthade is considering two projects, M and N, each of which requires an initial outlay of ` Rs50
million. The expected cash inflows in million `Rs from these projects are :

(a)

Year

Project M

Project N

11

38

19

22

32

18

37

10

What is the simple payback period for each of the projects?

(b)

What is the discounted payback period and discount payback profitability for each of the projects if

the cost of capital is 12%.

(c)

Advise which project should be selected.

Q. 14 A Project requires an investment of ` Rs60,000. The plant and machinery required under the
project will have a scrap value of ` Rs3,000 at the end of its useful life of 5 years. The profits after tax and
depreciation are estimated to be as follows:
Year

PAD & T (Rs)`

5,000

15,000

20,000

30,000

20,000

Calculate the Accounting Rate of Return.

Q.15 Suhail Enterprises Ltd. is a manufacturer of high quality running shoes.
Ms. Dhanlakshmi, President, is considering computerizing the companys ordering, inventory and
billing procedures. She estimates that the annual savings from computerization include a reduction of ten
clerical employees with annual salaries of ` Rs15,000 each, ` Rs8,000 from reduced production delays
caused by raw materials inventory problems, ` Rs12,000 from lost sales due to inventory stock outs and `
Rs3,000 associated with timely billing procedure. The purchase price of the system is ` Rs2,00,000 and
installation costs are ` Rs50,000. These outlays will be capitalized (depreciated) on a straight line basis to
a zero book (salvage) value which is also its market value at the end of five years. Operation of the new
system requires two computer specialists with annual salaries of ` Rs40,000 per person. Also annual
maintenance and operation (cash) expenses of ` Rs12,000 are estimated to be required. The companys
tax rate is 30% and its required rate of return (cost of capital) for this project is 12%.
You are required to:
(a)

Find the projects initial net cash outlay.

(b)

Find the projects operating and terminal value cash flows over its 5 year life.

(c)

Evaluate the project using NPV method.

(d)

Evaluate the project using Pl method.

(e)

Evaluate projects simple payback period.