Assignment, Finance and Accounting
Construction Economics and finance
The management committee of the Flint Construction Ltd. Is considering investing 1.0 million in
noncurrent assets for expansion purposes, and an additional 200,000 pounds for working Capital (e.g.,
inventories and trade receivables). Currently the profit generated by the company is 500,000 which
represents a 5.0% Return on Revenue of 10.0 million. The investment proposal was presented to
the board of directors for consideration and approval.
To Finance the $1.2 million investment, John Flints Chief Financial Officer (CFO) explained that a
certain potion of the expansion would be financed by internally generated cash (operating
activities). He indicated that;
1. The revenue for the budget year would show a 10% increase over the current year and ;
2. The Return on Review (ROR) as a result of costcutting, particular in materials transport
would be increased to 7%.
The CFO explained that the profit was to be allocated as follow;
a. 60% for internal use; half of the funds would be allocated toward working capital (
current assets) and the rest in noncurrent assets; and
b. 40% would be used for external purposes, of which 60% would be used to pay dividends
and the rest to reduce the principal on the debt.
Based on the feasibility study prepared by the controllers department, he explained that the
capital expansion program would generate lucrative profits. However, in order to finance
the purchase of these assets, he would have to raise capital funds from lending institution at
a cost estimated 10% (before tax). The shareholders were prepared to invest 200, 000
toward the capital project, and an amount of 100,000 would be obtained from the bank for
financing the working capital requirements. The shareholders are looking for at least a 12%
return on their investment. The board of directors indicated that if the project generated
15% they would consider approving it. However, before approval, they wanted to answers
for the following questions;
Q1: How much cash would be generated internally (operating activities)?
Q2. How much cash would have to be raised from external sources (Financial
Q3. How does the ROA of the project (investing activates) compare to the weighted
average cost of capital (financing activities)?
Q4. Should the board of directors approve the capital project?
Q5. On the basis of the above information what is the breakdown of the financing