10 - 63 Financial budgets; Cash Outflows
Country Club Road Nurseries grows and sells garden plants. The nursery is active between January and October each year. During January, the potting tables and equipment are prepared. The potting seeding are done in February. In March and April, the plants are cultivated, watered, and fertilized. May and June are the peak selling months. July, August, and September are the peak months for visiting customers in their homes to provide them with advice and help solve their problems. During October, the equipment and buildings are secured for the winter months, and in November and December, full-time employees take their paid holidays and the business is closed.
The nursery employs 15 full-time staff and, depending on the season, up to 20 part-time staff. The full-time staff members are paid an average salary of $2,700 per month and work 160 hours per month.
The part-time staff members are paid $10 per hour. Because the nursery relies on local students for part-time work, there is no shortage of trained people willing to work the hours that are available. The ratio of full-time employee hours worked to part-time employee hours worked is as follows:
January 5:1 February 5:1 March 3:1 April 3:1 May 1:1 June 1:1
July 1:1 August 1:1 September 2:1 October 4:1
Because part-time students are used mainly for moving and selling activities, their work creates very little incremental support costs.
Fixed costs, other than wages, associated with this operation are about $55,000 per month. The cost drivers in this operation are the activities that the full-time employees undertake. These cost drivers are the proportional to the hours worked by the full-time employees. The variable costs depend on the season and reflect the common employee activities during that season. Average variable costs per employee hour worked are as follows: January, $ 15; February, $ 15; March, $ 15; April, $ 15;
May, $ 5; June, $ 5; July, $ 20; August, $ 20; September, $ 20; and October, $ 10. These variable costs include both support items such as power and water and direct items such as soil and pots. Assume that all expenses are paid in the month they are incurred.
On the basis of information provided, determine the cash outflows for the upcoming year.
The solution explains how to determine the cash outflows for the upcoming year
Replacing a Piece of Equipment for a New Computerized Version
As a manager, part of your role is to develop strategy, and share this strategy with various stakeholders within the organization. This assignment will allow you to take your findings as a manager and communicate these findings to those who are affected.
Your company has been presented with a decision on replacing a piece of equipment for a new computerized version that promotes efficiency for the upcoming year. As manager you will need to decide whether or not the purchase of the new equipment is a worthwhile investment and to communicate your recommendations to Executive Management for a final decision. To be convincing, sufficient support for your recommendations must be provided in order to be considered valid and accepted.
Original Cost 60,000
Present Book Value 30,000
Annual Cash Operating Costs 145,000
Current Market Value 15,000
Market Value in Ten Years 0
Remaining useful Life 10 years
Annual Cash Operating Costs 50,000
Market Value in Ten Years 0
Useful Life 10 years
Cost of Capital 10%
Payback requirement 6 years
In this assignment, use the information above to develop a comprehensive analysis using NPV, Payback Method, and IRR to develop a recommendation on replacing the existing equipment with a new computerized version. Develop an executive summary of your findings in a Microsoft PowerPoint presentation format to present to Executive Management.
• Include a statement of the problem or topic, a concise analysis of the findings, and a recapitulation of any main conclusions or recommendations.
• Be sure to incorporate specific details to highlight or support the summary including calculations.
• Using your knowledge of capital budgeting techniques, explain how principles of capital budgeting, such as the payback method, IRR, and NPV, can be used to assess the potential projects and assist in the decision-making process.