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Module 6 Answer
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  • Course
  • Financial management
  • Institution
  • University Of Cape Town (UCT)

JJ Industries is in the business of manufacturing large yachts. They have an agreement with one of their biggest customers that they will pay off their account of R18.5 million over the next three years, with JJ Industries receiving the payments according to the following schedule:

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Document information

  • March 19, 2021
  • 4
  • 2020/2021
  • Other
  • Unknown

Subjects

  • finance
  • accounting
  • module 6 answers

Written for

  • University of Cape Town (UCT)
  • Financial management
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Question 1
JJ Industries is in the business of manufacturing large yachts. They have an agreement with
one of their biggest customers that they will pay off their account of R18.5 million over the
next three years, with JJ Industries receiving the payments according to the following
schedule:

End of year 1: R4,000,000

End of year 2: R6,500,000

End of year 3: R8,000,000

The business has access to a market-linked investment account, which earns them 11% a
year.

1.1 Using the tables, what PVIFs would one use to calculate the present values of each of the
three cash inflows?

Present Value Interest Factor. Year 1 = 0.901 Year 2 = 0.812 Year 3 0.731.



1.2 What is the present value of this income stream?

Start writing here: Year 1 = 4 000 000 X 0.901 = R3 604 000. Year 2 = 6 500 000 x 0.812 =
R5 278 000. Year 3 = 8 000 000 x 0.731 = R5 848 000.

PV = R14 730 000



1.3 What is the total opportunity cost of allowing their customer to pay over three years,
instead of right now?

18 500 000 – 3 604 000 – 5 278 000 – 5 848 000 = R3 770 000



1.4 If their customer offered them R15 million to settle their account today, would you
recommend that JJ Industries accept it? Why, or why not? (Max. 3 lines)

Yes I would recommend accepting it. As the account can then be closed and focus can
move to a different client as well as they would be paid R270 000 extra.



1.5 In a brief point, mention one other factor that the business should take into account
when allowing a customer to pay off an account over an extended period. (Max. 2 lines)

The need to consider the credit worthiness of the customer.

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