Academic year: 2022/23

Examination period: SPRING MAIN

Examination paper number: BST189

Examination Paper Title: ENTREPRENEURIAL FINANCE

Duration: 2 HOURS

1. Fountain ltd has set up in business manufacturing water pumps. A summary of the transactions for the year ended 31 December 2022, the first year of trading, are as follows:

i. Shareholders invested £50,000 into the business. 

ii. On 1 January 2022 Fountain ltd borrowed £30,000 from the bank and the first loan repayment of £3,000 was paid on 31 December 2022. Annual interest payments on the loan are £2,100, payable half yearly in arrears, the first interest payment of £1,050 was paid on 1 July 2022 and the second interest payment of £1,050 was paid on 1 January 2023.

iii. In January 2022 the business purchased and paid for equipment costing £50,000. The equipment is expected to last for five years and have a scrap value of £10,000 at the end of five years.  

iv. In January 2022 the business purchased and paid for a fork lift truck at a cost of £20,000, to be depreciated at 15% per annum reducing balance.

v. Total sales for the year were £500,000 of which £45,000 was still owed from customers at the year end. It is considered prudent to provide a bad debt provision of 2% of annual sales.

vi. Total purchases during the year for direct costs of manufacturing the fountains were £185,000 of which £20,000 was still owing to suppliers at the year end.

vii. At 31 December 2022 there was closing inventory costing £15,000.

viii. During the year wages and salaries of £110,000 were paid.

ix. During the year marketing, energy and administration costs of £60,000 were paid and energy costs of £10,000 were estimated to be outstanding at 31 December 2022.

x. Insurance costing £20,000 covering the year to 31 March 2023 was paid during the year.

i. Corporation tax is estimated at 20% of the net profit for the year and is payable on 30 September 2023.

REQUIRED:

(a) Prepare an Income Statement (Profit and Loss Account) and Cashflow

Statement for the first year of trading.           (34 marks)

(b) Explain the purpose of the Statement of Financial Position (Balance Sheet) and discuss three limitations of the Statement of Financial Position.           (16 marks) (Total: 50 marks) 

2. Kayak ltd is a canoe manufacturer and is considering introducing a new canoe, the XL100. The following information regarding the XL100 has been provided:

i. New equipment costing £260,000 will have to be purchased and paid for immediately. At the end of the three years the equipment will have a scrap value of £50,000.  

ii. Sales have been forecast at £325,000, £375,000 and £175,000 in years 1, 2 and 3 respectively. Operating costs are estimated to be £100,000, £140,000 and £60,000 in years 1, 2 and 3 respectively. Annual fixed costs are estimated to be £120,000, this cost of £120,000 includes straight line depreciation on the new equipment.

iii. Working capital requirements are expected to amount to 10% of the expected annual sales value of which 95% will be recovered as the sales decrease. Working capital cash outflows are payable at the start of each relevant year and cash inflows at the end of each relevant year.

iv. Corporation taxation is payable annually at a rate of 20% on operating cashflow, where operating cashflow includes relevant sales, operating and fixed cost cashflows.

v. Kayak ltd’s required return is 25%.

vi. Assume all cash flows, including corporation tax, are payable at the end of the year in which the relevant cashflows arise, unless otherwise indicated.

REQUIRED:

(a) Calculate the Net Present Value and Accounting Rate of Return for the XL100.           (32 marks) 

(b) Compare the Net Present Value and Accounting Rate of Return for the XL100 calculated in part “a” above and advise Kayak ltd, with explanations and reasons, whether or not to launch the XL100.                               (6 marks)

(c) When comparing different projects, explain one advantage the Net Present Value appraisal technique has over the Internal Rate of Return appraisal technique.                              (4 marks)

(d) Explain one advantage and one disadvantage of the Payback Period appraisal technique.                   (8 marks) 

(Total: 50 marks)

3. Track ltd and Field ltd are two companies, operating in the same industry, that have recently setup in business. The annual results for their first year of trading to 31 March 2023 are set out below: