QUESTION 1 [28 MARKS]
CS Fashions(CS), is a Windhoek based company that specializes in textile printing. The company has
recently identified a new business niche in which it can supply schools with specially printed T shirts.
CS expects the T shirts business to continue uninterrupted for three years after which a review will
be under taken to see if it can be continued.
CS will have a sales person that will be travelling to the schools to get orders. The company expects
that a normal school order will be comprised of 200 T shirts. The selling price per shirt is NS90. A
commission of NS15 per each shirt sold will be given to each school.
CS has already invested NS65 000 to undertake a research that has established that Namibia has 1
723 primary and secondary schools. The company plans to visit six hundred schools per year in each
of the next three years. Sales orders in year 1 are expected to be 40% of the schools visited. As the T
shirts become popular 50% of the schools will place orders in year 2 and 70% of schools will place
orders in year 3.
The sales person is expected to travel on average 1 000 kilometers per week. The agreement
between CS and the company is that she will use her private car charging CS NS5.50 per kilometer.
This will be increased by NSO.50 (50 cents) per kilometer in year 2 and by that same amount again in
year 3. The sales person will be contracted for three years on a fixed annual salary of NS300 000 plus
a sales commission of N$1 000 per order received.
Note: The company’s operating year has 50 weeks.
Other relevant information is as follows:
- CS will require a screen printer that will cost NS1 800 000 and will require a major service in
year 3 that will cost CS costing N$500 000. The printer will have no economic value and it
will have no other use at the end of three years.
- The printing screens for the T shirts will last for a run of 1 000 T shirts. They will be
purchased from a South African firm at a cost of NS5 000 each, fixed for three years.
- The basic cost of each shirt to CS materials will be N$30, fixed for three years. This will be
reduced by 5% in any year in which the number of T shirts bought exceeds 50 000.
- Two print employees will be employed at a cost of NS5 000 per week for 50 weeks per year.
- Their wages will increase by 10% per annum starting year 2.
- A graphic design artist will will be employed at a cost of NS300 000 in year 1, increased by 5%
per annum thereafter.
- Ignore Taxation.
- All cash flows may be considered to arise at year-end of the relevant year.
The financial manager of CS Fashions has heard that you are studying management accounting at NUST and you are very well conversant with capital budgeting techniques. Prepare a report that he
will use at a recent meeting that:
a) Advises whether or not to invest in the project, if CS’s investment criteria require:
i) a minimum payback period of 2 years, and
ii) an Internal Rate of Return (IRR) of 15% (21)
b) Identifies the annual reduction in school commission per T shirt that would be required to make the project viable at the stated required rate of return (assume that the project has a
negative NPV of N$325 648 and that the only cut in expenses can be done on the school commissions and that the schools will accept this cut). (6)
Presentation in report format (1)
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