Financial Management and Capital Budgeting

The assignment provides an in-depth examination of various aspects of financial management, including budgeting for sole proprietorship and LLC, make or buy decisions, variance analysis, cash budget, and capital investment decisions. The document also references relevant studies and research papers on the topics.

PROJECT AND FINANCIAL
MANAGEMENT
Submitted to:

BUDGETING
 Annual Purchase budget
Windows
(Amt in $)
Productions Required (2400*12) 28800
ADD: Closing (2400*2) 4800
Less: Opening (Given) 1200
Units to be purchased 32400
Purchase price (unit * $90) 29,16,000$
Annual Purchase Budget

Annual operating expenses budget
(Amt in $) (Amt in $)
Selling Expenses
Advertising 46,080$
Wages shop 1,44,000$
Sales commission 4,60,800$
Vehicle running expenses 30,000$
Delivery truck expenses 60,000$
Shop rent 43,200$
7,84,080$
Distribution expenses
Packaging and freight 3,45,600$
Warehouse rental 60,000$
4,05,600$
Administration expenses
Power 9,600$
Office salaries 2,40,000$
Office rental 1,20,000$
3,69,600$
15,59,280$Total Operating expenses
Annual Operating budget
Windows

BUDGET INCOME FOR SOLE
PROPERITOR
2018
Sales revenue 46,08,000
Closing stock 4,32,000
50,40,000
Direct material 29,16,000
Add: Opening stock 1,08,000
Selling Expenses
Advertising 46,080
Wages shop 1,44,000
Sales commission 4,60,800
Vehicle running expenses 30,000
Delivery truck expenses 60,000
Shop rent 43,200
Distribution expenses
Packaging and freight 3,45,600
Warehouse rental 60,000
Administration expenses
Power 9,600
Office salaries 2,40,000
Office rental 1,20,000
45,83,280
Net Income Before Taxes 4,56,720
Income tax expense 1,41,637.6
3,15,082
Total Expenses
Income from Continuing Operations
Income Statement
Revenue
Total Revenues
Expenses

TAX CALCULATIONS
 Using individual tax rate
 14,000 x 10.5% = 1470
 48,000 x 17.5% = 34,000 x 17.5%
= 5950
 70,000 – 48,000 = 22,000
 456,720 – 70,000 = 386,720 x 33%
= 127,617.60
 141,637.60

BUDGET INCOME FOR LLC
2018
Sales revenue 46,08,000
Closing stock 4,32,000
50,40,000
Direct material 31,32,000
Add: Opening stock1,08,000
Selling Expenses
Advertising 46,080
Wages shop 1,44,000
Sales commission 4,60,800
Vehicle running expenses30,000
Delivery truck expenses60,000
Shop rent 43,200
Distribution expenses
Packaging and freight3,45,600
Warehouse rental 60,000
Administration expenses
Power 9,600
Office salaries 2,40,000
Office rental 1,20,000
47,99,280
Net Income Before Taxes2,40,720
Income tax expense 67,402
1,73,318
Revenue
Total Revenues
Expenses
Total Expenses
Income from Continuing Operations

RECOMMENDATION
 Asif Rahman is the sole proprietor. The
company is in growth phase and this
loss would be overcome by the
company if the company form itself
into LLC.

MAKE OR BUY DECISION
 Spare capacity:
 Company should make the component.
 No spare capacity:
 Company should buy the component.

FLEXIBLE BUDGET
 Variance analysis
This
quarter
This
quarter
This
quarter
Year to
date Year to date Year to date
Budget
($)
Actual
($) Variance
Favour
able/
Advers
Budget
($) Actual ($) Varinace
Favour
able/
Advers
Expenses
Cost of sale 28750 31938 -3188 U 54688 58125 -3437 U
Electricity 1875 2000 -125 U 3750 3666 84 F
General expenses 5563 5979 -416 U 10625 11038 -413 U
Consultancy fee 3125 3125 0 F 6250 6250 0 F
Advertising 5563 5131 432 F 10125 9619 506 F
Wages 15938 17400 -1462 U 31250 33419 -2169 U
Total expenses 60814 65573 -4759 U 116688 122117 -5429 U

 Variance analysis (3450 units)
This
quarter
This
quarter
This
quarter
Year to
date Year to date Year to date
Budget
($)
Actual
($) Variance
Favour
able/
Advers
e
Budget
($) Actual ($) Variance
Favour
able/
Advers
e
Expenses
Cost of sale 35424 31938 3486.11 F 67383 58125 9258.42857 F
Electricity 2310 2000 310.268 F 4621 3666 954.535714 F
General expenses 6854 5979 875.411 F 13092 11038 2053.51786 F
Consultancy fee 3850 3125 725.446 F 7701 6250 1450.89286 F
Advertising 6854 5131 1723.41 F 12475 9619 2856.44643 F
Wages 19638 17400 2237.89 F 38504 33419 5085.46429 F
Total expenses 74932 65573 9358.54 F 143776 122117 21659.2857 F

 Explanation and recommendation
 If a variance is favourable then it simply means
that the variance of the company is in the favour
of the organization and explains that the cost of
the company is even lesser than the expected
cost
 It is highly recommended to David Trading limited
to prepare a flexible budget as a flexible budget
enables the administration to evaluate the
deviation of expected output from actual output

CASH BUDGET
 Accounts receivable cash collection
schedule
Jan Feb March April May June
Total sales 96000 102000 108000 1,26,000$ 1,32,000$ 1,32,000$
Cash received 70% 75,600$ 88,200$ 92,400$
Cash received 15% 15,300$ 16,200$ 18,900$
Cash received 10% 9,600$ 10,200$ 10,800$
Total cash received 1,00,500$ 1,14,600$ 1,22,100$
Accounts receivable cash schedule
For the year 2017

 Accounts payable cash payment
schedule
April May June
Total purchase 27,300$ 28,600$ 1,32,000$
Cash paid 90% 21,060$ 24,570$ 25,740$
Total cash received 21,060$ 24,570$ 25,740$
Accounts payable cash schedule
For the year 2017

 Cash budget
April May June
Begining cash balance -10,000$ -47860 -87730
Add: sales 1,00,500$ 1,14,600$ 1,22,100$
Add: Loan 1,50,000$
Total cash available for use2,40,500$ 66,740$ 34,370$
Less: cash disbursements
Purchasse 21,060$ 24,570$ 25,740$
Wages 49,500$ 51,500$ 51,500$
Other expenses 17,800$ 18,400$ 18,100$
Dividend payment 10,000$
Purchase of equipment 1,50,000$
Loan 50,000$ 50,000$ 50,000$
Total disbursements 2,88,360$ 1,54,470$ 1,45,340$
Cash surplus -47,860$ -87,730$ -1,10,970$
budgetd ending cash balance-47,860$ -87,730$ -1,10,970$
Cash budget
For the year 2017

 Recommendation:
It is recommended to the company to
pay the loan into more EMIs rather than
3 EMIs as it has impacted the cash flow
of the company at a huge level.

CAPITAL INVESTMENT DECISION
 Annual net cash flows of project X
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Machinery cost 1,20,000$
Installment cost 15,000$
Varibale cost 5,000$ 6,000$ 7,000$ 8,000$ 9,000$
Fixed cost 5,000$ 5,000$ 5,000$ 5,000$ 5,000$
Total cash outflow1,20,000$ 25,000$ 11,000$ 12,000$ 13,000$ 14,000$
Total cash inflow -$ 50,000$ 60,000$ 70,000$ 80,000$ 90,000$
Profit -1,20,000$ 25,000$ 49,000$ 58,000$ 67,000$ 76,000$
Annual Net cash flow of Project X

 Capital investment technique
Year Cash outflow Cash inflow Net cash flow PV Factor Present value
0 -1,20,000$ -1,20,000$ 1.000 -1,20,000$
1 -25,000$ 50,000$ 25,000$ 0.909 22,727$
2 -11,000$ 60,000$ 49,000$ 0.826 40,496$
3 -12,000$ 70,000$ 58,000$ 0.751 43,576$
4 -13,000$ 80,000$ 67,000$ 0.683 45,762$
5 -14,000$ 90,000$ 76,000$ 0.621 47,190$
79,751$
Calculation of Net present value
Net present value = cash inflow - cash outflow
Year Cash outflow Cash inflow Net cash flow CF
-$ -1,20,000$ -1,20,000$ -1,20,000$
1$ -25,000$ 50,000$ 25,000$ -95,000$
2$ -11,000$ 60,000$ 49,000$ -46,000$
3$ -12,000$ 70,000$ 58,000$ 12,000$
4$ -13,000$ 80,000$ 67,000$ 79,000$
5$ -14,000$ 90,000$ 76,000$ 1,55,000$
2.79
Calcculation of payback period
Payback period
Year Cash outflow Cash inflow Net cash flow PV Factor Present Value CF
0 -1,20,000$ -1,20,000$ 1.000 -1,20,000$ -1,20,000$
1 -25,000$ 50,000$ 25,000$ 0.909 22,727$ -97,273$
2 -11,000$ 60,000$ 49,000$ 0.826 40,496$ -56,777$
3 -12,000$ 70,000$ 58,000$ 0.751 43,576$ -13,201$
4 -13,000$ 80,000$ 67,000$ 0.683 45,762$ 32,561$
5 -14,000$ 90,000$ 76,000$ 0.621 47,190$ 79,751$
3.29
Calcculation of payback period
Payback period

 Annual net cash flows of project Y
Year 1 Year 2 Year 3
Machinery cost 1,20,000$
Installment cost 10,000$
Varibale cost 5,000$ 8,000$ 10,000$
Fixed cost 5,000$ 5,000$ 5,000$
Total cash outflow1,20,000$ 20,000$ 13,000$ 15,000$
Total cash inflow -$ 50,000$ 80,000$ 1,00,000$
Profit -1,20,000$ 30,000$ 67,000$ 85,000$
Annual Net cash flow of Project Y

 Capital investment technique

Year Cash outflow Cash inflow Net cash flow PV Factor Present value
0 -1,20,000$ -1,20,000$ 1.000 -1,20,000$
1 -20,000$ 50,000$ 30,000$ 0.909 27,273$
2 -13,000$ 80,000$ 67,000$ 0.826 55,372$
3 -15,000$ 1,00,000$ 85,000$ 0.751 63,862$
26,506$
Calculation of Net present value
Net present value = cash inflow - cash outflow
Year Cash outflow Cash inflow Net cash flow CF
-$ -1,20,000$ -1,20,000$ -1,20,000$
1$ -20,000$ 50,000$ 30,000$ -90,000$
2$ -13,000$ 80,000$ 67,000$ -23,000$
3$ -15,000$ 1,00,000$ 85,000$ 62,000$
2.27Payback period
Calcculation of payback period
Year Cash outflow Cash inflow Net cash flow PV Factor Present Value CF
0 -1,20,000$ -$ -1,20,000$ 1.000 -1,20,000$ -1,20,000$
1 -20,000$ 50,000$ 30,000$ 0.909 27,273$ -92,727$
2 -13,000$ 80,000$ 67,000$ 0.826 55,372$ -37,355$
3 -15,000$ 1,00,000$ 85,000$ 0.751 63,862$ 26,506$
2.58Payback period
Calcculation of payback period

 Recommendation:
 The Umang trading limited should accept the Project X
 as this project would offer higher return to the company in
comparison with project Y.
 Net present value of project X is way higher than the project Y.
 Though, it has also been found that the discounted payback
period and payback period of project X is lower than project Y
but at the same time, the total life of project X is higher than
project Y.
 Thus, it is concluded and recommended to the Umang
trading limited to invest into project X to manage and
enhance the return.

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