a) Discuss the advantages and disadvantages of setting up the business as:

i. A partnership
ii. A private limited company.

i) Partnership Firm
Advantages :-
 Easy to Start. Partnership firms are one of the easiest to start.
 Better Decision Making. Decision making is the crux of any organization.
 Raising of Funds.
 Sense of Ownership.
 Unlimited Liability.
 Number of Members.
 Lack of a Central Figure.
 Trust of the General Public.

Disadvantages :-
 The liability of the partners for the debts of the business is unlimited.
 Each partner is 'jointly and severally' liable for the partnership's debts; that is, each partner is
liable for their share of the partnership debts as well as being liable for all the debts.
 Sometimes, leads to less trust ,being private.
 Since consent of all partners needed, quick decision gets hampered.
 Shared profits.
 Difference in opinion.

ii) A PRIVATE LIMITED COMPANY.

Advantages :-
 Limited Liability.
 Tax efficiency.
 Retained profits.
 Separate Entity.
 Company pension.
 Reduced risk.
 Disadvantages :-
 Paying corporate tax.
 Administration responsibilities.
 Public accounts.
 Expensive.
 Complex & time consuming.
 Complicated withdrawals.
 Human resource management & requirement.
b)
i. Produce a cash budget for the first year of the business. Assume John
ultimately decides to work as a sole trader and borrows £20,000 from
Barclays bank at 7.9% on an interest-only basis, and with the loan capital to
be repaid in full at the end of the four-year period.

01/01/2023 Amount

SALES AMOUNT £2,16,230

LESS :- WORKING CAPITAL £19,000
REQUIREMENT
LESS:- FIXED COST £27,300
APPORTIONED IN THE FIRST
YEAR
LESS :- PREMISES RENT £38,000
LESS:- INTEREST ON LOAN £1560
LESS :- EQUIPMENT COST £36,000
APPORTIONED IN THE FIRST
YEAR
PROFIT ELEMENT £ 94,370
ii. Suggest, in general terms, five methods by which a business can deal with
short-term cash flow problems.

Ans :- (1) Trade credit,

(2) Commercial bank loans,
(3) Commercial paper,
(4) Specific type of promissory note, and
(4) Secured loans.
(5) Borrow from a friend / Relative.
(6) Make a Partner in business.
(7) Outsource some part of business on risk/return sharing basis.
(8) Take equipment on hire/lease basis.
 c) Briefly discuss the functions of budgets in organisations, and the difficulties that
start-up businesses face when attempting to draw up budgets.

The following are the main functions of a Budget

 It Ensures Resource Availability. At its core, budgeting's primary function is to
ensure an organization has enough resources to meet its goals.
 It Can Help Set and Report on Internal Goals.
 It Helps Prioritize Projects.
 It Can Lead to Financing Opportunities.
 It Provides a Pivotable Plan.
 Planning.
 Facilitating communication and coordination across the organisation.
 Allocation of resources.
 Controlling profit and operations.
 Evaluating performance and providing incentives.

Difficulties that start-up businesses face when attempting to draw up

budgets
Management Problems & conflicts.
Less trust of investors & people.
No back up support.
No seed capital.
Difficult to get a venture capitalist.
d) Calculate the following for the first year of the business:

i. Budgeted profit for the year

ii. BEP
iii. Margin of safety

Solution :-

I . Budgeted profit for the year

01/01/2023 Amount

SALES AMOUNT £2,16,230

LESS :- WORKING CAPITAL £19,000
REQUIREMENT
LESS:- FIXED COST £27,300
APPORTIONED IN THE FIRST
YEAR
LESS :- PREMISES RENT £38,000
LESS:- INTEREST ON LOAN £1560
LESS :- EQUIPMENT COST £36,000
APPORTIONED IN THE FIRST
YEAR
PROFIT ELEMENT £ 94,370

ANS :- PROFIT ELEMENT = £ 94,370.

II. BEP –

01/01/2023 Amount

SALES AMOUNT £2,16,230

LESS :- WORKING CAPITAL £19,000
REQUIREMENT
CONTRIBUTION £ 1,97,230
LESS:- FIXED COST £27,300
APPORTIONED IN THE FIRST
YEAR
PROFIT ELEMENT £ 1,69,930

Fixed Cost /Contribution X sales.

= £27,300 / £ 1,97,230 X £2,16,230

Therefore, BEP ( Sales Amt ) = £ 29,929.

III. MOS – Margin of Safety –

01/01/2023 Amount

SALES AMOUNT £2,16,230

LESS :- WORKING CAPITAL £19,000
REQUIREMENT
CONTRIBUTION £ 1,97,230
LESS:- FIXED COST £27,300
APPORTIONED IN THE FIRST
YEAR
PROFIT ELEMENT £ 1,69,930

Profit / Contribution X sales.

= £ 1,69,930 / £ 1,97,230 X £2,16,230

Therefore, MOS = £ 1,86,300.

 e) Assuming this is a four-year project and ignoring all taxation implications,
calculate the following: (Discount rate at 10%)

i. The Net Present Value (NPV)

ii. The Internal Rate of Return (IRR)
iii. The Payback Period

i. ’

Particulars 01/01/2023 01/01/2024 01/01/2025 01/01/2026

SALES AMOUNT (Increase by 12% £2,16,230 £ 2,42,278 £ 2,82,254 £3,04,834

p.a)
LESS :- WORKING CAPITAL
REQUIREMENT (Material cost to £19,000 £19,684 £20,392 £21,127
increase by 3.6% p.a)
LESS:- FIXED COST
APPORTIONED IN THE FIRST £27,300 £28,610 £29,983 £31,423
YEAR (Increases by 4.8% p.a)
LESS :- PREMISES RENT £38,400 £41,088 £43,964 £47,042
LESS:- INTEREST ON LOAN £1560 £1560 £1560 £1560
LESS :- EQUIPMENT COST
APPORTIONED IN THE FIRST £36,000 -------------- -------------- --------------
YEAR
PROFIT ELEMENT £ 94,370 £ 1,51,336 £ 1,86,355 £2,03,682

i. NPV = Net cash flow = £6,35,743 / (1 + 10) power to 4

= 6,35,743 /14,641

= 43.42.
ii.

ii. Accounting Rate of Return =

= (94,370 + 1,51,336+1,86,355+2,03,682) / 4

= £ 1,58935 / £ 42,000
= 3.78.

iii.

iii. Payback period = Initial investment / Cash Flows

= £42,000 / £ 94,370
= 0.45 yr.
 f) Discuss the advantages and limitations of each of the following project appraisal
methods:

i. Payback

AS per the sales probabilities given in the question, its very clear that the Payback
period is going to be very short for the company.
Investing an amount of £42,000 and earning back it in a short span of time after
deducting all the expenses is creditable.

ii. Accounting Rate of Return (ARR)

The Accounting Rate of Return shows a value of 3.78, which indicates a

good return on invested amount.
Year on year the sales revenue seems to be increasing but at the same time
the cost structures are also rising.
Perhaps , the cost structures are rising proportionately less than the revenue
which has contributed to the good figure of ARR.

iii. Net Present Value (NPV)

The NPV of the company stands out to be 43.42,which clearly states that the business of
Mr. John Harrison who is 61,is feasible to do and he should go ahead with it
considering the probable sales amount given & the costing part thereby deriving a
good amount of returns from them after all deductions, excluding the taxation part.

Advantages of the Project :-

Its feasible enough in short run.
Good return on investment.
Early payback period.
Good accounting rate of return.
Disadvantages of the Project :-
Can be risky in long term.
The expense show a good rate of increase.
The business needs more efficiency to rise the revenue & profits.
Entire potential still can be unleased.