Anonymous

Urgent Finance Question: setup a Hot dog Van

I have the idea of setting up a hog dog van on a vacant piece of waste ground opposite the club at night. The van would also be handy for offices nearby so sales could also be made during the day. However these sales would be on contract to local firms and would be paid by invoice three months in arrears. Sales would be as follows;

T/ Night Sales (£)/ Day Sales (£)

2010/ 15000/ 19500

2011/ 16025/ 20832.5

2012/ 17050/ 22165

2013/ 18075/ 23497.5

van cost £20,000, my accountant has advised me that this should be depreciated at 25% and will have a net worth of zero at the end. I paid £10,000 to a market researcher. He estimates I will need a cash float of £30,000. He estimates annual staff costs and stock costs:

Variable Costs

T/ Staff Costs (£)/ StockCosts (£)

2010/ 17550/ 13500

2011/ 18083/ 15120

2012/ 18616/ 16934

2013/ 19149/ 18967

Stock purchases from wholesalers given six months credit.

I will undertake the initial expenditure in 2009. Should I go ahead given that I currently earns 6.5% on my savings in a high interest account?

1. Set these figures out as a profit and loss account

2. Calculate the accounting rate of return

3. Work out the Net Present Value

4. Roughly work out the internal rate of return(to within a half percent either way)

5.Explain which of the above criteria would be relevant in making a decision on whether to go ahead with the project. (25)

6.Would you recommend this project? (5)

Rating
• ?
Lv 7

Invested capital turnover:

A company's annual sales divided by its average stockholders' equity. Capital turnover is used to calculate the rate of return on common equity, and is a measure of how well a company uses its stockholders' equity to generate revenue. The higher the ratio is, the more efficiently a company is using its capital. also called equity turnover.

Times interest earned:

EBIT / I

EBIT = earnings before interest and taxes

I = dollar amount of interest payable on debt

The Times Interest Earned Ratio shows how many times earnings will cover fixed-interest payments on long-term debt.

Cash flow / debt:

Cash flow* / Total debt

Since debt does not materialize as a liquidity problem until its due date, the closer to maturity, the greater liquidity should be. Other ratios useful in predicting insolvency include Total Debt to Total Assets (see "Leverage Ratios" below) and Current Ratio (see "Liquidity Ratios").

*Cash flow = Net Income + Depreciation

Note: Because there are various accounting techniques of determining depreciation, use this ratio for evaluating your own company and not to compare it to other companies.

Dividend yield:

Annual dividends per common share / market price of common stock per share

Dividend payout:

Cash dividends / net income

Capital intensity: I don’t know what the accounting ratio of capital intensity is, and just list out some usual ratios for capital / equity

Debt to equity ratio: Debt / Owners' Equity—indicates the relative mix of the company's investor-supplied capital. A company is generally considered safer if it has a low debt to equity ratio—that is, a higher proportion of owner-supplied capital—though a very low ratio can indicate excessive caution. In general, debt should be between 50 and 80 percent of equity.