1UNkU A8DUL kAnMAN CCLLLGL (1AkC)

SCnCCL CI 8USINLSS S1UDILS (S8S)

DILCMA IN 8us|ness Stud|es (ACCCUN1ING)
LAk 2 Semester 2
A8MI 3174 I|nanc|a| Management
1utor|a| Group 11
1utor Mr L|aw Saw keong
Name ID Number
Ioo Mun ee 10W8D03281
ong Me| ee 10W8D0180S
Loke We| I|n 10W8D04S48
Lee Woe| Lun 10W8D01820
Wong Ia| Long 10W8D030SS
Ang We| Seong 10W8D04219

Question 1(a)
Monthly cash budget

January February March April May June
Receive:
Opening debtors RM2,400
Instalments (1) RM20,000 RM60,000 RM40,000 RM40,000 RM40,000 RM200,000
ReIund deposit oI
diggers(3) RM2,500
Discounts oI
bricks/stone(4) RM8,500
Discounts oI TurI (5) RM4,800
sell business car RM3,000
overdrawn RM14,200

Total receive: RM36,600 RM62,500 RM48,500 RM43,000 RM44,800 RM200,000
Payments:
Creditors: Materials RM6,600

Miscellaneous RM2,570
Hire diggers cost (2) RM6,000
Deposit oI diggers(3) RM2,500
Purchased: Soil RM12,600
Sand RM2,200
Cement RM3,100

Bricks/Stones RM85,000
TurI RM48,000
Shrubs RM16,700
Other
materials RM2,000 RM2,000 RM2,000 RM2,000 RM2,000 RM2,000
Waste disposal RM8,500
Employees salary(6) RM9,000 RM9,000 RM9,000 RM9,000 RM9,000 RM9,000
Employees bonus(7) RM7,500
Leased van cost(8) RM990 RM990 RM990 RM990 RM990 RM990
New car RM18,500
Interest overdrawn(9) RM142

Total payments: RM50,902 RM11,990 RM17,290 RM30,490 RM113,690 RM67,490
Balance b/I (RM14,302) RM36,208 RM67,418 RM79,928 RM11,038
Net cash Ilow (RM14,160) RM50,510 RM31,210 RM12,510 (RM68,890) RM132,510
Balance c/I (RM14,302) RM36,208 RM67,418 RM79,928 RM11,038 RM143,548
Working:

1. Instalments: January RM 400,000 x 5 RM 20,000

February RM 400,000 x 15RM 60,000

March RM 400,000 x 10RM 40,000
April RM 400,000 x 10RM 40,000

May RM 400,000 x 10RM 40,000

June RM 400,000 x 50RM200,000


2.Hire diggers cost RM 1,200 x 5 RM 6,000
3.(Deposit/ReIund deposit) oI diggers RM 500 x 5 RM 2,500

4.Discount oI bricks/stone RM 85,000 x 10 RM 8,500

5.Discount oI TurI RM 48,000x 10 RM 4,800

6.Employees salary (RM 21,600 / 5) / 12month RM 9,000
7.Employees bonus RM 1,500 x 5 RM 7,500

8.Leased van cost
(RM 3,960 /12 month x 3vans)
RM990
9. Interest overdrawn
RM 14, 200 x 1
RM142

(b) The cost and beneIits oI ordering materials early
By ordering the materials early, Mr. Taiko does not need to worry about the shortage oI the materials. It
is because supplier needs time to allocate the order and deliver to customers. However, it is a huge cost to the
company and may lead to liquidity problem.
Ordering the materials early may get a lower price due to the discount oIIered Irom suppliers. By having
the discount, he can save the cost oI the materials. However, supplier may provide wrong materials and the
quality may not as good as other suppliers.
Mr. Taiko can save time iI he order materials earlier but iI there is some unexpected situation happen, he
may be aIIected because it will cause the delivery process will be delayed.
Mr. Taiko might get less credit term Irom current supplier but iI the company having liquidity problem,
they can negotiate with their current supplier to get longer credit term. However, iI Mr. Taiko is dealing with
new supplier, he may have longer credit term but there is a risk to get the low quality materials.
II he orders materials early, he may have to give up the opportunity to invest in other projects that might
earn a huge return in the Iuture. But, iI he does not order early, he might have to pay higher price than other due
to inIlation.
When he orders the materials earlier, he can allocate the resources and Iinish the project earlier.
However, iI he Iailed to do it, he may not Iinish the project and have to bare the losses on the project.



(c) The Iour external sources oI inIormation that Mr. Taiko may have to provide assurance about the
creditworthiness oI the local building Iirm are mercantile agencies, trade inIormation, salesmen`s reports and
local sources.
1



1
27 experLs 2009 Sources of CredlL lnformaLlon vlewed 23Lh november 2011
http]]chestofbookscom]bus|ness]reference]1he8us|nessManLncyc|oped|a]SourcesCfCred|tInformat|onhtm|
"uestion 2(a)
Relevant cost is cash Ilow that will happen in Iuture and it will only arise iI capital project goes ahead.
Irrelevant costs is committed cost oI Iuture cash outIlow that will incurred anyway, regardless what decision
will be taken such as Iixed cost expenditure.
For relevant costs, only Iuture costs that are in Iorm oI cash included and non-cash items oI cost can
never be relevant to investment appraisal such as depreciation.
Relevant cost is increase in costs result Irom making particular decision. Costs that have already been
incurred due to past decision making (sunk cost) are not relevant to current decision and consider as irrelevant
cost. Opportunity cost will always be relevant cost.
In this case, iI the oIIer made to buy the land been rejected, development will continue. Total
construction costs or the seven hotels on the island oI RM 35 million will be the relevant costs as the cash Ilow
arise when capital project goes ahead. Down payment oI RM 2 million that already spent to several
construction Iirms is irrelevant cost as it is irrecoverable and committed cost.
Initially, company has already spent RM 1.5 million on preparing the land Ior construction work. It
consider as sunk cost so it is irrelevant cost. Opportunity cost to development will be the cost oI oIIer been
made to buy the land so it is relevant cost. Depreciation Ior hotels, lodges, restaurants, and shops are consider
as irrelevant cost due to it is non-cash items oI cost so it will never be relevant cost to the investment appraisal.

(b)


























Cash inIlow
Year 0
RM`000
1
RM`000
2
RM`000
3
RM`000
4
RM`000
5
RM`000
Hotels revenue

- - 13,000 13,000 13,000 13,000
Lodges rental
income

- - 15,600 15,600 15,600 15,600
Restaurant and
shop net
income

- - 4730 4730 4730 4730
Depreciation

- - 1500 1500 1500 1500
TOTAL

0 0 34,830 34,830 34,830 34,830
Cash OutIlow
Year 0
RM`000
1
RM`000
2
RM`000
3
RM`000
4
RM`000
5
RM`000
Cost oI land

2,000
Hotels
construction
costs

35,000
Lodges
construction
costs

20,000
Cost oI
Iurnishing

3200
Swimming
pools

480
6 restaurants

12,000
Shops



4000
Annual cash
overhead

2000 2000 2000 2000
Maintenance
costs

280 280 280 280
Interest on
money

2500 2500 2500 2500
TOTAL

2000 74,680 4780 4780 4780 4780
Net cash (2000) (74,680) 300,50 300,50 300,50 300,50




















The net present value oI continue to develop Ior the land is higher than accept the oIIer to sell the land. So,
company should not accept the oIIer and continue the project.

Year Cash Ilow
RM`000
Discount Iactor
10
Present value
RM`000
0 (2000)

1 (2000)
1 (74,680)

0.909 (67884.12)
2 300,50

0.826 24821.3
3 300,50

0.751 22567.55
4 300,50

0.683 20524.15
5 300,50

0.621 18661.05
NET PRESENT VALUE 16689.93

Year

Cash Ilow
RM`000
Discount Iactor 10 Present value
RM`000
0

(5020) 1 (5020)
1

- 0.909 -
2

- 0.826 -
3

- 0.751 -
4

- 0.683 -
5

- 0.621 -
NET PRESENT VALUE

(5020)
(c)
Year

Cash Ilow
RM`000

Discount Iactor 20 Present value
RM`000
0

(2000)

1 (2000)
1

(74,680)

0.833 (62208.44)
2

300,50

0.694 20854.7
3

300,50

0.579 17398.95
4

300,50

0.482 14484.1
5

300,50

0.402 12080.1
NET PRESENT VALUE

609.41

NET PRESENT VALUE at 10 16689.93
NET PRESENT VALUE at 20 609.41

Internal rate oI return (IRR)
A (a/ (a-b) * (B-A))
10 (16689.93/ (16689.93-609.41) * (20-10) )
20.38

(d) Net present value method oI investment appraisal contributes towards the objectives oI maximizing the
wealth oI shareholders. It is most important project appraisal method compare to internal rate oI return. It can
maximize wealth oI shareholders because it considered all relevant cash Ilow over whole project liIe. All cash
Ilows taken into account whenever occur.
Net present value method also taken account time value oI money by the discounting cash Ilow. It is
qualiIying the time value oI money by given more weight to earlier cash Ilow and less weight to current cash
Ilow. It also based on cash Ilow which is less subjective than proIits. Net Present Value ensures investor will
compensated Ior length oI time he must work and maximizing wealth oI shareholders.