ACCOUNTING ASSIGNMENT Harvard Case Solution & Analysis

ACCOUNTING ASSIGNMENT Case Study Solution

Cash Requirement

For the year ended 2018 Munich Exports needs approximately $85000 cash. As Munich Export already have $50000 cash in hand. Therefore, it has to arrange the shortfall of $35000. Munich Exports needs this cash for the whole year to complete its operation.

Cash Conversion Cycle

Usually companies purchase and sale on credit. Which means that Munich Exports has to pay or collect money on later days. Cash conversion cycle calculates the time it takes to convert an inventory into cash and the anticipated time to receive and pay cash for sales and purchases. It is calculated by calculating inventory, payable and receivable turnover days. By adding inventory and receivable turnover days and then subtracting payable turnover days from it.

The cash conversion cycle of Munich Export is approximately 217 days. Which indicates that the cash injected on inventory takes approximately 217 days to repay. This is a long time but before giving any recommendation we need industrial data to conclude Munich Export position.

Question#2

As Nash Co. requires $100000 throughout the next year. It intends to withdraw the money from the investment of $125000 in market securities. While on liquidation of marketable securities it involves fixed cost of 100 per transaction. So the optimal level of withdrawal is 14142. Means Nash Co should withdraw 100000 in approximately 7 transactions. From which each transaction should be of amount 14142.

Question#3

The payback period of new investment project is approximately 3.08 years. Which is lower than the company’s prescribed one. The project has also a positive Npv of $3111.32 in five years. Meanwhile the IRR of the project is 19%. Which is greater than the company’s cost of capital. Therefore, the company can invest in this new machine project as it is worthwhile. But especial consideration should be given because the IRR of the project is not significantly higher than the company’s cost of capital. And hence make the project too sensitive asa minor change can make the project worthless. Like if the cost of capital increases by just 5% or even by 4% than the NPV will be negative or zero of this project. If company have any other investment opportunity, then should analyze that as well.

Question#4

Liquidity Ratios:

The current and quick ratio of the company has improved from the last year. These ratios are also above the industry average which indicates that the Martin Manufacturing Company has a good liquidity position and currently it has enough assets to meet with its liabilities.

Gearing Ratios:

The gearing of the company is on its peak. It gradually increases from the last year by 32.42%. And it is also significantly above from the industry average. If martin manufacturing company does not control it then it will face problems in acquiring new finance required for the new proposed construction project. In the result the company will be unable to work on it. And if the previously acquired loan has any covenants relating to gearing, then on its breach company has to repay outstanding loans immediately which may jeopardize the going concern of Martin Manufacturing Company. Meanwhile the interest coverage ratio of the company deteriorated from the last year and it is also below the industry average. So the debt provider may become concise about their payment and hence may increase the interest rate. Which will further create finance problem for the company...................

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