[wallacezai]

Dear tutor,

1) Fling Co has annual credit sales of $4,500,000 and on average customers take 60 days to pay, assuming a 360 days year. As a result, Fling has a trade receivables balance of $750,000. Fling relies on an overdraft to finance this at an annual interest rate of 8%. Fling is considering offering an early settlement discount to its customers of 0.5% for payment in 30 days. It expects that 25% of its customers (representing 35% of the annual credit sales figure) will pay in 30 days in order to obtain the discount. If Fling introduces the proposed discount, what will be the NET saving?

2) R plc has in issue $400,000 8% bonds, redeemable in 5 years time at a premium of 10% investors require a return of 12% p.a. The rate of corporation tax is 35%. What is the total market value of the debt in issue.

3) LJM co is considering investing in a new project which will cost $160,000. It has an expected life of 4 years and an expected scrap value of $20,000. The anticipated net operating cash flows each year are :
Year 1 : $40,000
Year 2: $60,000
Year 3: $80,000
Year 4: $20,000
Cost of capital is 10%
What is the NPV and ARR of the investment?

As for question 3 I know is quite easy, but I can’t figure out where to deduct the scrap value to get the NPV..
Kindly help me on these question. Thanks!!

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