Group U - Case 3: Capital Budgeting Decisions & Master Budget

School: Campbellsville University - Course: BA 611 - Subject: Accounting

Term Group Project Case 3 Group U by Teja Engilela (553863) Varun Chillamcharla (555563) Santhosh Reddy Puchkayala (554167) Santhosh Kumar Doulager (552752) 1

Group U - case 3 Part A Capital Budgeting Decisions Chee Company has gathered the following data on a proposed investment project: Investment required in equipment.............$240,000 Annual cash inflows..................................$50,000 Salvage value............................................$0 Life of the investment...............................8 years Required rate of return..............................10% Assets will be depreciated using straight line depreciation method Required: Using the net present value and the internal rate of return methods, is this a good investment? Solution: From the given data, the company uses straight-line depreciation. Assuming cash flows occurring uniformly for a whole year except for initial investment: Net Present Value (NPV)= [Cash Flow/(1+i)t]- initial investment t= number of time periods i= required return or discount rate NPV= 26, 650 Payback period= Investment Required in equipment/Annual cash inflows = 240,000/50,000= 4.8 years From the above analysis, the payback period is shorter than the life of the investment. So, this is shorter than life of the project which means that the investment is worthy. If the payback period is longer than the life of investment, then we are not looking at a good investment.

Group U - case 3 Part B: Master Budget You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): January (actual) 20,000June (budget) 50,000 February (actual) 26,000July (budget) 30,000 March (actual) 40,000August (budget) 28,000 April (budget) 65,000September (budget) 25,000 May (budget) 100,000