Scenario 1The manager of the FG division of the British GlassCompany has the opportunity of investing in new plant and equipment. The cost of the investment will be £60million, and the anticipated profit before taxarising from the investment is £9.6millionper yearfor the lifetime of the new plant and equipment. Using the concepts covered on BA1540, explain to the FG division manager how he should evaluate the potential investment. In your discussion, you should outline the merits and demerits of each method and identify any additional information that will be required for making a decision about this potential investment. 8 marksScenario 2 Jenny Kitty Ltd. (JKL) is a private company which manufactures and sells bottled green juices. The company prides itself on its ability to contribute to the health of communities and its corporate customers. At the beginning of the accounting period, as usual, JKL paid rent, insurance and rates in advance. However, as a result of the ongoing pandemic, JKL has experienced problems with collecting monies from its customers to whom it sold on credit. In fact, it is expecting to write off an additional 10% of its receivables. JKL is worried that its cash position will make it difficult for it to pay itssuppliers on time. Briefly explain the implications of JKL’s current position on its financial statements. In your discussion, suggest one way that JKL can address its anticipated inability to meet its obligations to its suppliers. 6 marks
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Scenario 3
BCT Ltd hasbeen offered the sum of £25millionfor one of its manufacturing equipment. The equipment was bought at the beginning of the accounting period on Jan 1, 20X4 and was estimated to have a salvage value of zero at the end of its 5-year useful life. The annual depreciation charge on the equipment was £24million. The sale is expected to take place on July1, 20X7if BCT Ltd accepts the offer. Advise BCT on whetherto accept the offer. You should use appropriate calculations to support your answer. You should also identify any other financial and non-financial considerations that BCT must make in arriving at its decision.
