Working capital management
Part A
BLC Ltd. is a medium-sized UK manufacturing company based in Liverpool. The company is seeking to expand its operations with the establishment of an office block to house the marketing and human resources staff in Manchester.
The company has narrowed the choice to two alternatives with the following net cash flow information being available:
|
Year
|
Property 1
|
Property 2
|
|
|
£000s
|
£000s
|
|
0
|
(2,500)
|
(2,750)
|
|
1
|
1,000
|
900
|
|
2
|
500
|
700
|
|
3
|
600
|
800
|
|
4
|
1,000
|
600
|
|
5
|
900
|
700
|
Items to keep in mind:
- The company's current cost of capital is 10%.
- For this assignment, ignore taxation.
Required
As the company accountant is currently on holiday you are required, by calculating net present value, internal rate of return and payback, to advise the company which option they should take.
You should also critically evaluate the other qualitative factors that might be taken into account in this decision.
Part B
BLC Ltd. has revenue of £500 million and sells all of its goods on credit to a variety of different wholesale customers. At the moment the company offers a standard credit period of 30 days. However, 70% of its customers (by revenue) take an average of 70 days to pay, while the other 30% of customers (by revenue) pay within 30 days. The company is considering offering a 2% discount for payment within 30 days and estimates that 80% of customers (by revenue) will take up this offer (including those that already pay within 30 days).
The Managing Director has asked the credit controller if the cost of this new policy would be worth offering. The company has a £80 million overdraft facility that it regularly uses to the full limit due to the lateness of payment and the cost of this overdraft facility is 15% per annum.
The credit controller also estimates that bad debt level of 2% of revenue would be halved to 1% of revenue as a result of this new policy.
Required
1.Calculate the approximate equivalent annual percentage cost of a discount of 2%, which reduces the time taken by credit customers to pay from 70 days to 30 days.
2.Calculate the value of trade receivables under the existing scheme and the proposed scheme at the year-end.
3.Evaluate the benefits and costs of the scheme and explain with reasons whether the company should go ahead and offer the discount. You should also consider other factors in this decision. (Hint: You need to work out the cost of the discount compared to the interest on the overdraft saved and bad debt reduction.)
This assignment should be around 1,000 words and should be submitted in the form of a Business Report (approximately 500 words for each part).