Perry Rose Case Study Essay Example | Topics and Well Written Essays - 2000 words

Perry Rose Case Study - Essay Example Additionally, a Memo will be prepared to the board advising them on whether to accept or reject the project. The study will put forth factors that a bank should consider prior advancing loans. Additionally, calculations will be utilized in order to determine whether the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. In above connection, the Year0 Year1 Year2 Year3 Year4 year5 Year6 ?000 ?000 ?000 ?000 ?000 ?000 ?000 Equipments (500) - - - - - (100) Sales Revenue 0 450 470 470 470 470 470 (-)Less Cost Materials 0 0 126 132 132 132 132 Labour 0 0 90 94 94 94 94 Overheads 0 0 300 300 300 300 300 Add back Depreciation 0 0 120 120 120 120 120 Working Capital (180) - - - - - - Incremental cash flows 320 450 74 64 64 64 (36) (b) Calculate: (i) The project’s payback period. ... ii) The project’s net present value as at 31 December Year 0. Years Incremental cash flow Discount factor (12%) Present Value 0 (?500) 1 (?500) 1 ?450 0.893 ?401.85 2 ?74 0.797 ?58.98 3 ?64 0.712 ? 45.57 4 ?64 0.636 ? 40.70 5 ?64 0.567 ?36.29 6 (?36) 0.507 (?18.25) Net Present Value=?101.64 (c) Write a memo to the board advising on the acceptance or rejection of the project. (7 marks) Perry Rose Plc Finance Public Limited Company Bromsgrove 6th April 2013. To: The Board of Perry Rose Plc. From: Assistant Accountant of Perry Rose Plc Subject: Acceptance or Rejection of the Project The computation above indicates that the amount invested would be recovered within a very short time. This is based on the pay back period which shows that the amount invested will be recovered within a period of 1year and 4 months. Additionally, the above computations indicate that the Board of Perry Rose Plc should undertake the project because it has a positive net present value of ?101.64. Whereby , a positive net present value indicates that better returns will be derived by investing in this project (Hansen, Mowen and Guan, 2009). Therefore, I would recommend the company to undertake the project because the benefits outweigh the cost. Yours Sincerely Finance and Accounting Department 2. (a) Identify and discuss the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business. An overdraft involves amount of money given by bank account to the business and it should be repaid upon bank request. An overdraft provides current account holders with an opportunity to withdraw more funds than what it is already available in