96 BPE::ABO Enterprise is reviewing an investment proposal.

The initial cost and

estimates of the book value of the investment at the end of each year, the net cash flows
for each year, and the net income for each year are presented in the schedule below. All
cash flows are assumed to take place at the end of the year. The residual value of the
investment at the end of each year is equal to its book value. There would be no residual
value at the end of the investment's life.

ABO Enterprise uses a 15% target rate of return for new investment proposals. Discount factors
are as follows:

You are required calculate:

i. Cash payback period for this proposal.
ii. The Annual Rate of Return (ARR) for the investment.
iii. The Net Present Value (NPV) of the investment.

Solution:
i) Cash payback period:

Formula = +

So, Pay Back Period =2 + = 2.57 Years

ii) Annual Rate of Return (ARR)
Average Net Income= = Taka 20,000
Average Investment = = 52,500 Taka

Annual Rate of Return= × 100= × 100= 38.10%

iii) Net Present Value (NPV)

Year Cash flows (taka) Discount factor Present value

at 15% (taka)
1 45,000 .86957 39,130
2 40,000 .75614 30,245
3 35,000 .65752 23,013
4 30,000 .57175 17,152
5 25,000 .49718 12,429
Present Value of Cash Flow 121969
Initial Investment 105000
Net Present Value (NPB) 16969

96 BPE:: Suppose, Adit Enterprise took loan from Loyal Bank Ltd. The present loan outstanding
is 50 lacs. There is 10 lacs Taka unrealized interest in the Interest suspense account. Other
collaterals are as follows:
(i) The value of mortgaged land is Taka 30 lacs.
(ii) The value of a Tin shed is Taka 10 lacs.
(iii) The value of pledged goods is Taka 10 lacs.
(iv) Taka 10 lacs of deposit is kept lien against the loan.

What is the total value of eligible collateral and base for provision?

Solution: According to BRPD Circular No: 14 of 23 September 2012.

Note: Temporary houses including tin-shed structure shall not be shown as building.
So, Value of Collateral = Maximum 50% of the market value of land and building mortgaged
with the bank + 50% of the market value of easily marketable commodities kept under control of
the bank + 100% of deposit under lien against the loan.
So, Value of collateral = (50% of 30 lac) + (50 % of 10 lac) + (100% of 10 lac)
= 15 + 5 + 10
= 30 lac
Base for provision = 50 lac – interest suspense – Value of eligible collateral
= (50 – 10- 30) lac
= 10 lac
Or,
= 15% of the total outstanding
= 15% of 50 lac
= 7.5 lac
Whichever is higher.
So, base for provision will be 10 lac. (Ans)
96 BPE::Q-ABC Seating, a manufacture of chairs, had the following information for 2020:
Sales 2,400 units
Sales price Tk. 40 per unit
Variable costs Tk. 15 per unit
Fixed costs Tk. 19,500
Calculate:
(i) What is the contribution margin ratio?
(ii) What is the break-point in sales?
(iii) What is the margin of safety in units and sales?
(iv) If the company wishes to increase its contribution margin by 40% in 2021, by how much
will it need to increase its sales, if all other factors remain constant?

Solution:
i) Contribution margin ratio:
= -
= (40 - 15) = 25
= ÷
= 25 ÷ 40 = 62.5%
ii) Break-point Sales
= ÷
, = 19,500 ÷ 62.5% = 31,200
iii) Margin of safety in units and sales:
= ( ) -
So, = (2,400 × 40) - 31,200 = 64,800

= ( ) -

, = (2,400 - ) = 1,620

So, Margin of Safety ratio = =67.5%

iv)
Now, Total Contribution margin = 2,400 × 25 = 60,000 taka.
Expected contribution margin (with 40% increase) = 60,000 × 1.4 = 84,000 taka
Now in the case when the contribution margin increases by 40%, so ultimately the sales is also
increased by 40%
So, the new sales = (2400×40) ×1.4 = 134,400 taka
So, Increase in sales = (134,400 - 96,000) = 38,400 taka
96 BPE:: 7 (b) XYZ company provides the flowing particulars: 15 Marks
Particulars Amount per unit (taka)
Raw materials 80
Direct labor 30
Overhead 60
Total cost 170
Profit 30
Selling price 200

The following further particulars available:

a) Raw materials in stock, on average, one month;
b) Materials in process (completion stage, 50%), on average, half a month,
c) Finished goods in stock, on average, one month.
d) Credit allowed by suppliers is one month, credit allowed to debtors in two months;
e) Average time-lag in payment of wages is 1.5 weeks and one month in overhead
expenses;
f) One-fourth of the output is sold against cash;
g) Cash in hand and at Bank is desired to be maintained at taka 3,65,000.
You are required to prepare a statement showing the working capital needed to finance a level of
activity of 1,04,000 units of production. Assume that production is carried on evenly throughout
the year, and wages and overheads are accruing similarly. Also assume 4 weeks equivalent to a
month, 52 week a year.
Solution:
Formula, Working Capital= Total Current Assets - Total Liabilities
Given,
1 Year Production = 104000 Units
1 Year = 52 Weeks, 1 Month = 4 Weeks
So, 1 Week Production = = 2000
Total Current Assets:
Stock in Raw Raw materials = 2000×4×80Tk.= 640,000 Tk.
Work in Progress: Half a Month
Materials (100%) = 2000×2×80 Tk.= 32,000 Tk.
Labor (50%) = 2000×2×15 Tk= 60,000 Tk.
Overhead (50%) = 2000×2×30Tk.= 120,000 Tk.
Total Work in Progress = (320000+60000+120000)= 5,00,000 Tk.
1 3
Finished Goods (For One Month) = 2000×4×170 Tk. = 13,60,000 Tk. 1− =
4 4
Credit Allowed to Debtor (Two Months) = 2000× ×8×170= 20,40,000 Tk.
Cash in Hand= 365,000 Tk.
Total Current Assets= (640000+50000+1360000+2040000+365000)= 4905000 Tk.
Total Current Liabilities:
Credit Allowed by Suppliers (For One month)= 2000×4×80 Tk.= 640,000 Tk.
Labor Wages Exp. (1.5 Weeks)= 2000×1.5×30 Tk.= 90,000 Tk.
Overhead Exp (For One Month)= 2000×4×60 Tk. = 4,80,000 Tk.
So, Total Current Liabilities = (640000+90000+480000)= 12,10,000 Tk.

Working Capital Required= (4905000 Tk.- 12,10,000 Tk.) = 3695000 Tk. (Ans.)
97 BPE::Taskin, Muiz and Jahanara formed TMJ Corporation for supplying sports equipment.
TMJ is considering a long-term capital investment and this will require an investment of Taka
2,80,000. The equipment has a useful life of 5 years. Annual net income is expected to be Taka
16,000 a year. Cash flows can be computed by adding back depreciation expense.

Depreciation is computed by the straight-line method with no salvage value. The company's
cost of capital is 10% and discount factor for 5 payments @ 10% is 3.79079.
You are requested to:
a) Compute the cash payback period for the project.
b) Compute the Net Present Value (NPV).
c) Compute the Annual Rate of Return (ARR).
d) Should the project be accepted? Why?

Solution:
Given Data:
Initial Investment: Tk. 280000
Useful Life of Equipment: 5 Years
Annual Net Income: Tk. 16000
Cost of Capital: 10%
Discount Factor for 5 Payments @10% : 3.79079
a) Cash payback period
Depreciation= = = 56000 Tk. per Year
Annual Cash Flow= Annual Net Income+Dep.= 16000+56000= 72000 Tk.
∴Cash Payback Period= = = 3.89 Years

b) Net Present Value (NPV)

(Annual Cash Flow × Discount Factor) – Initial Investment
Calculation: (Taka 72,000×3.79079)- Taka 2,80,000= (-ve) Taka 7063.12
c) Annual Rate of Return (ARR)
Average Investment = = = Taka 1,40,000
ARR = × 100= ×100= 11.43%

d) Should the project be accepted?

The annual rate of return of 11.42% is good. However, the cash payback period is 78% of the
project’s useful life, and net present value is negative. The recommendation is to reject the
project.

97 BPE::Q-The comparative balance sheet of Shakib and Afif Sportswear Ltd. are given below:
Shakib and Afif Sportswear Ltd.
Balance Sheets
December, 31
Shakib and Afif Sportswear Ltd. Prepared Income Statement for the year ended 2022 which
included Net Sales of Taka 1,20,000, Cost of Goods sold Taka 70,000 and Net Income Taka
14,000. Please compute the following ratios for 2022:
/
(i) Current Ratio= = = = =3.42
/

(ii) Quick Ratio= = = =2.56

(iii) Accounts Receivable Turnover= = =5.38

/

(iv) Inventory Turnover= = =8.75

(v) Asset Turnover= = = =0.94

(vi) Profit Margin= = =11.67%

(vii) Return On Equity (ROE)= = = =13.98%

(viii) Return on Asset (ROA)= = = = 10.95%

/ .
(ix) Debt to Asset.= = = =20.22%
Solution:
/
i) Current Ratio= = = = =2.90 (Good)
/

ii) Quick Ratio= = = = 1.7 (Good)

iii) A/R Turnover Ratio= = = = 6 (Good), [Net Sale= Sales- Sales

/

Return]

iv) Inventory Turnover Ratio= = = = 3.6 (Not Good, Range: 5-

10)

v) Assets Turnover Ratio= = = = 1.173 (Good)

/ /
vi) Leverage Ratio= = = = = 0.769 (Good)
/

vii) Interest times Earned= = = = = 4.167

× %

viii) Return on Assets= = = = 7.51%

ix) Return on Equity= = = = = 12.82% (Not Good, Range: 15-

20%)
98 BPE::ABC company's projected information is as follows:
Amount in Taka
Total Per Unit
Sales 2,00,000 20

Variable cost 1,20,000 12

Fixed cost 64,000

You are requested to:

(i) Compute the Break-Even point in units.
(ii) How many units must be sold to earn a profit of Taka 30,000?
(iii) Compute the Contribution Margin and Contribution Margin Ratio.
(iv) Compute the additional profit that ABC would earn if the sales were Taka 25,000 more.

Solution:
i) Break-Even point in units
= -
= (20 - 12) = 8
∴ = = = 8000 units
ii)
- - =
Suppose, the required sales in unit is = Q
20 - 12 - 64,000 = 30,000
∴ 8 = 94,000
∴ = 11,750
iii)
= -
= (20 - 12) = 8
= ÷
= 8 ÷ 20 = 0.40 40%
iv) Additional profit if sales are Tk. 25000 more= 25000×40%=10000 Tk. (Ans.)

98 BPE::A Proforma Cost Sheet of XYZ Company provides the following data:

Cost (Per unit): Taka

Raw materials 52.00
Direct labor 19.50
Overheads 39.00
Total cost (per unit) 110.50
Profit 19.50
Selling price 130.00
The following is the additional information:
Average Raw Material in stock: One Month
Average Material in process: Half a Month
Credit allowed by suppliers: One Month
Credit allowed to debtors: Two Months
Time lag in payment of wages: One and a half weeks
Time lag in payment of overheads: One Month
One-fourth of sales are on cash basis.
Cash balance is expected to be Taka 1,20,000.

You are required to prepare a statement showing the Working Capital needed to finance a level
of activity of 70,000 units of output. You may assume that production is carried on evenly
throughout the year and wages and overheads accrue similarly.
Solution: Working Capital = Total Current Assets- Total Current Liabilities
Given,
1 Year Production= 70000 Units
1 Year = 52 Weeks, 1 Month = 4 Weeks

1 Week Production= Units

A. Total Current Assets:

Stock in Raw materials= ×4×52 Tk.= 280000 Tk.

Work in Progress:

Materials (100%) = ×2×52 Tk.= 1,40,000 Tk.

Labor (50%) = ×2×9.75 Tk.= 26,250 Tk.

Overhead (50%) = ×2×19.5 Tk.= 52,500 Tk.

Total Work in Progress= (140000+26250+52500) Tk.= 218,750Tk.

Finished Goods= ×4×110.50Tk.= 5,95,000 Tk.

Credit Allowed to debtors (Two Months) = ×8×110.50Tk. = 11,90,000 Tk.

Cash In Hand= 120000 Tk.

Total Current Assets= 280000+218750+595000+1190000+120000= 24,02,750 Tk.
B. Total Current Liabilities:

Credit allowed by suppliers (One month) = ×4×52 Tk.= 280000 Tk.

Wages (1.5 Weeks) = ×1.5×19.5 Tk.= 39375 Tk.

Lagged Overhead Exp (One Month)= ×4×39 Tk.= 210000 Tk.

Total Current Liabilities= (280000+39375+210000)= 529375 Tk.

So, Working Capital= (2402750-529375)= 18,73,375 Tk. (Ans.)