Finance homwork | Business & Finance homework help

Q1

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XYZ Ltd. is an online book company. The table below summarises the past 2 years of financial statements of XYZ Ltd.

Item

Fiscal Year 2015

Fiscal Year 2014

Revenue

£5,103,000

£4,510,000

COGS

£3,533,000

£3,555,000

Inventory

£1,310,000

£1,272,600

Accounts/receivable

£98,100

£90,500

Accounts/payable

£818,800

£745,100

Assume that all sales and purchases are made on credit. Amazon, the biggest competitor, presented a cash conversion cycle (CCC) of –73 days for the same fiscal year of 2015.

Required

  • Calculate the CCC of XYZ.
  • What is the interpretation of a negative CCC?
  • What should XYZ Ltd. do to compete better with Amazon?

 

Q2

 

ABC Wines Company is considering the acquisition of a new irrigation system for its extensive vineyards. ABC Wines could either buy the system outright for £10 million or secure a finance lease requiring three annual payments in advance of £3.7 million. The leasing company is not the supplier or manufacturer of the equipment.

The new system is expected to give the following pre-tax net cash savings over the existing system in use:

Year 1 £6 million
  2 £5 million
  3 £3 million

The system would require replacement in 3 years’ time and have no residual value. The outright purchase would be financed by a loan with an interest rate of 8%.

Assume that corporation tax is charged at 25% and is payable 1 year in arrears. Writing down allowances are available on the depreciation of the equipment. The company uses the reducing balance method for depreciation at 25%. Lease payments are allowable for tax in full.

The company has no gearing at present and a cost of capital of 13%.

Required

  • Evaluate whether or not ABC Wines should install the new irrigation system and whether it should use the purchase or the lease option. (Tip: You should use NPV to perform the analysis, and you should take into consideration writing down allowances.)
  • Explain the primary ways in which finance leases differ from operating leases.

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