Teaching Period - 1, 2025

Assessment - 3

Case-Study

Disclaimer:The information contained in this case is provided on an "as is" basis and does not purport to reflect actual commercial operations.

Part A

(15 marks in total)

Cardwell Florist Cafe

It is November 2024.

Introduction

Mr. Jack Oldham grew up in a suburb of Cardwell, a major provincial city in Australia. During his final years of secondary school, he worked part-time at a large convenience store that also sold cut flowers. Although Jack sometimes found the job monotonous, he thoroughly enjoyed working with the flowers and developed a talent for arranging beautiful bouquets. His enthusiasm stemmed from the joy he saw flowers bring to people. The store manager recognized Jacks passion and skill, appreciating how his approach contributed to the stores success.

Eventually, Jack left his part-time job and moved to Melbourne to pursue a Bachelor of Business at university. After graduating, he secured a graduate position at a large government agency headquartered in Cardwell. As he gained experience, he took on increasingly responsible roles and became regarded as a highly competent and successful team member. However, when reflecting on his career, Jack often found his thoughts returning to his time at the convenience store, where he had found immense satisfaction in bringing joy to people with beautifully arranged flowers.

In December 2022, Jack visited his aunt in Melbourne. She had recently moved into a high-rise apartment building with shops on the ground floor. The surrounding area was filled with buildings over ten stories tall, including apartment complexes and office towers. On weekdays during lunchtime, the streets bustled with office workers stepping out to visit cafs, enjoy the sunshine, or shop.

What truly impressed Jack was a unique florist caf on the ground floor of his aunts apartment building. This small shop not only served drinks and snacks but also sold flowers. During his stay, he visited the caf several times and noticed that it continued to thrive despite the challenges posed by the Covid lockdowns. Inspired by its success, he considered starting a similar venture in his city.

Since late 2022, Jack has made significant progress toward opening a florist caf near his home. He has completed a short floristry course, become a certified barista, and attended a small business training program. This last course focused heavily on financial management, highlighting the importance of maintaining adequate cash flow. One key lesson Jack has embraced is that many new businesses fail not due to a lack of profitability but because they struggle to meet payroll and pay their bills on time.

So far, Jack has independently financed the preparations for his new business. Recently, he took a significant step by legally establishing a company,Cardwell Florist Caf Pty Ltd, in which he is the sole shareholder. He also registered the businesss trading name,Cardwell Florist Caf,and opened a dedicated bank account for the company.

Background

Holidays in Australia

In Australia, every state and territory have a lengthy school holiday in January, with the new school year starting in early February. Most Australian workers receive annual leave as part of their employment contracts, and many opt to take time off in January. In fact, some businesses close for two weeks or more between late December and early January.

Taxation in Australia

In Australia, both personal income tax and corporate income tax apply. Individuals must pay income tax on their wages, while companies must pay corporate income tax on their profits. TheAustralian Tax Office (ATO)administersand enforces taxation across the country.

Information about the proposed operation of Cardwell Florist Caf

Location of Cardwell Florist Caf

As previously mentioned, the ideal location for Jacks envisioned business is a combination of residential and commercial spaces. He has identified a spot inValley Downs,a suburb just two kilometres from Cardwells central business district. The suburb has strong transport links to the broader suburban area.

Up until about six years ago, part of Valley Downs was zoned for industrial use, accommodating small businesses like car servicing and minor electrical work. However, the area has since been rezoned for mixed-use development, which includes both office buildings and medium-rise apartments. This change has proven to be extremely successful, leading to the construction of numerous office blocks and several completed apartment buildings, making it an appealing location for Jacks florist caf.

The newly developed area in Valley Downs features several coffee shops catering to local workers and residents and essential services such as a pharmacy, post office, clothing alteration service, and medical clinic. However, there is no florist in the precinctand certainly no florist caf. Recognising this gap in the market, Jack has directed his search for business premises within this rezoned area of Valley Downs.

Jack has now secured an appropriate location forCardwell Florist Caf, featuring a back area for flower preparation and a front space for the caf. The rent for these premises is$2,000 per month, payable three months in advance. The first payment is due inDecember 2024, and future payments will follow the same schedulefor example, the$2,000 rent for April to June 2025 must be paid by March 31, 2025.

Activities of Cardwell Florist Caf

The business will focus on two main activities.

The first activity involves creating and delivering large flower arrangements for office reception areas and the lobbies of apartment buildings. Flowers will be purchased wholesale, arranged into large displays, and delivered to their respective locations. Customers will be invoiced when the arrangement is delivered at the end of the month, with payment due via bank transfer by the end of the following month. For instance, if an apartment building receives an arrangement inMarch 2025, payment must be made bythe end of April 2025. After discussions with office and building managers, Jack has already secured contracts with several office and apartment buildings for 2025. While new customers will be accepted, Jack does not intend to actively seek new ones, as his primary focus will be on developing the second activityoperating the florist caf.

The second main activity ofCardwell Florist Cafwill involve sellingbeverages and snacksto office workers in the surrounding office blocks and residents of the apartment buildings. In addition to the typical caf offerings, the business will also sell small posies of flowers, which are made in the same way as large flower arrangements but on a smaller scale.

All sales made at the florist cafbeverages, snacks, and small flower posieswill be paid for in cash. Payments will be made via credit card for the larger corporate clients purchasing flower arrangements. To facilitate these transactions,Cardwell Florist Cafwill pay a monthly fee of$300toQuickPay, the credit card service provider, starting inJanuary 2025. The agreement ensures that QuickPay will transfer the full amount of credit card sales, minus the merchants fee, into the cafs bank account at 11 PM each night.

Setting up the caf area

TheCardwell Florist Cafwill be designed to offer a particularly inviting atmosphere, with small tables inside and two tables on the pavement for customers to enjoy their drinks and snacks. The caf will also feature displays of flower posies, enhancing its charm.

Tea, coffee, and soft drinks will be available for take-away or to be enjoyed at a table inside or outside. To set up tables on the pavement, the caf must purchase a permit fromCardwell City Council. The permit costs$150 monthly, payable every six months in advance. For 2025, the caf will need to pay$900for the license inDecember 2024(coveringJanuary to June 2025) and another$900inJune 2025for the year's second half.

Days and Hours of Operation:

The caf will operateMonday through Fridayand remain closed on public holidays. Its opening hours will be7:30 AM to 3:30 PM, though additional time will be needed for preparation before opening and cleaning after closing.

Based on the2025 calendar, the public holidays observed inCardwelland the two weeks break that the owner takes in Dec-Jan, the following table outlines the number of days the caf will be open each month in 2025.

Table A1 number of trading days for each month in 2025

Caf customer purchasing behaviour

Based on Jack's research,Cardwell Florist Cafexpects an average of220 customers per day, with a steady flow both weekly and annually. Here's how customer purchasing patterns are expected to break down:

• 25% of customerswill buy a snack.
• 5% of customerswill buy a posy of flowers.

For beverages:

• 60%will order a cup of coffee.
• 25%will opt for tea.
• 15%will choose a soft drink.

Each customer is anticipated to purchase only one beverage during their visit.

Jack has secured contracts for large flower arrangements, with30 arrangementsexpected to be assembled and delivered inJanuary 2025. For the remaining months of 2025,40 arrangementswill be assembled and delivered each month.

Staffing of Cardwell Florist Caf

Jack plans to personally work in theCardwell Florist Caffrom7 AM to 5 PM every day. Additionally, he will hire three part-time staff membersdaily, each workingfive hours. The pay rate for these staff members will be$30 perhour.Their responsibilities will include setting up for the day, making coffee and tea, serving customers, preparing flower posies and corporate arrangements, and cleaning up after the caf closes.

Payment of staff

In Australia, all individuals receiving labour income are required to pay income tax on their earnings. Employers are responsible for withholding a portion of their employees' wages. Instead of paying this amount to the employee, they must remit it directly to theAustralian Tax Office (ATO)by a specified date. This system is known asPay as You Go (PAYG)withholding.

TheCardwell Florist Cafis required by theAustralian Tax Office (ATO)to withhold20%of each staff members wages for tax purposes. This withheld amount must be forwarded to the ATO by the end of the following calendar month. Staff members will receive the remainingamount astheir wages in cash on the final working day of the month.

For example, if a staff member works five-hour shifts every day the caf is open inFebruary 2025, they would earn$3,000(20 x 5 x $30). The staff member will receive$2,400in cash onFriday, 28 February. The caf will then send$600to the ATO on behalf of the staff member before31 March 2025.

For theCardwell Florist Caf,Jackwill not initially take a salary or drawings. His goal is to build the business and have enough funds to handle emergencies. However, his accounting advisor has pointed out that Jack's labour must still be included in preparing the projected income statement and calculating the projected profit.

To determine the profit for2025, the labour expense for Jack will be$100,000,assuming he works50 hours per weekfor50 weeksof the year at a rate of$40 per hour.

Jack is optimistic that by the end ofJune 2025, theCardwell Florist Cafwill be thriving enough to allow him to take$8,000 per monthin drawings fromJuly 2025 to December 2025. Until then, he plans to rely on his savings and will need a steady income afterward. While this amount is still lower than his desired annual salary, he hopes to see better financial performance in2025and fully enjoy his lifestyle.

Costing of products

Considerable effort has been put into analysing the variable cost of each item sold. The selling price and variable cost for each of the six items offered by theCardwell Florist Cafare detailed in Table A2 below.

Table A2 Pricing and costing of beverages, snacks, posies and flower arrangements

The variable costs encompass the expenses related to caf consumables (such as coffee beans, loose leaf tea, soft drinks, milk, sugar, take-away cups, stirrers, and paper napkins) and florist consumables (including flowers for posies and arrangements, florist supplies like ribbons and paper, and delivery costs for large flower arrangements). Its important to note that these variable costs exclude any labour expenses, as they are treated as fixed costs for theCardwell Florist Caf.

It can be assumed that all variable costs are paid in the same month the item is sold. For example, if100 flower posiesare sold in April,$1,400will be spent on the variable costs associated with making these posies (i.e.,100 x $14 the variable cost per posy).

Additionally, it's worth noting that the business maintains virtually no inventory. All flowers purchased in a week are used within the same week. The snacks purchased for sale each day are sold on that same day, and soft drink turnover is high enough that inventory is effectively negligible.

The espresso coffee machine

A caf that serves coffee needs a dependable espresso machine that can handle the volume of customers. Jack has identified two options for acquiring the coffee machine forCardwell Florist Caf.

The first option is to purchase a coffee machine. A suitable machine would cost$7,500, with depreciation applied straight-line over 5 years. In addition to the purchase price, regular servicing would be required for$250 per service, to be done quarterly. If Jack opts for this route, the$7,500for the machine would need to be paid inJanuary 2025, with$250for servicing to be paid inMarch,June,September,andDecember.

The second option is to lease a machine. The cost would be$2,500for the entire year of2025, with the payment made in full at the beginning of the lease. The leasing arrangement covers all servicing and includes a replacement policy: if the machine malfunctions, it will be replaced by the end of the day, ensuring no disruption to the cafs operations.

Jack has decided to go with the leasing option forCardwell Florist Caffor2025.

Other capital items.

In addition to the coffee machine,Cardwell Florist Cafrequires six essential capital items to be in place before the shop opens in mid-January 2025. These items include two refrigerators. The first, afloral refrigerator, will be placed in the back area and used to store fresh flowers and completed arrangements or posies. The second refrigerator will be located in the caf area and will store soft drinks and other perishable items needed in the caf.

The table below outlines all the capital items cost, price, and depreciation periods. All these items will be purchased at the start ofJanuary 2025, with payment made that month.

Table A3: Capital items costs and depreciation schedule

Other expenses

There are several additional expenses forCardwell Florist Caf.

In the first week of January, a basic fit-out of the premises will occur. This includes painting the walls and performing some electrical and carpentry work. The total cost of this work will be$4,000, with a$1,000 depositpaid inDecember 2024,$1,000paid inJanuary 2025, and the remaining balance due inFebruary 2025. From an accounting perspective, this$4,000will be classified as an operating expense.

The estimatedelectricity cost for 2025isestimated to be $400 per month. The bills will be received at the beginning of each month after electricity usage and must be paid within14 days. For example, the bill forFebruary 2025will be received in earlyMarch 2025, with payment due by the end ofMarch 2025. SinceCardwell Florist Cafwill not be able to occupy the premises untilJanuary 1, 2025, the first bill will be receivedfor electricity used inFebruary.

Jack has also planned a promotional strategy. Based on his research,targeted online advertisingwill be a cost-effective way to promote the business. This will cost$60 monthly($720 for the year),payable in the month the promotion runs. Additionally, to increase visibility early in 2025, Jack plans to spend$500onpaper flyersinJanuary. These flyers will be distributed personally to nearby businesses and apartment buildings, with initial distribution in January and follow-up in early February when schools and offices resume.

Recognizing the importance of insurance, Jack has secured a quote forcomprehensive businessinsuranceat$6,000for 2025. The insurance will be paid in12 monthly instalments, with the first payment of$500due inDecember 2024.

Finally, Jack has budgeted$500 per monthfor other miscellaneous expenses. These will be paid on the day the expense is incurred.

Financing the business

Jacks parents are lending him$6,000to help start his business. The loan will be available in thelast week of December 2024. They are not charging interest, but Jack has agreed to repay them$3,000inJune 2025and the remaining balance inDecember 2025.

In addition, Jack has arranged a short-term loan with a small business lender. This lender will transfer$5,000toCardwell Florist CafonDecember 1, 2024, and a final transfer of$10,000onDecember 31, 2024.

As part of the loan agreement,Cardwell Florist Cafwill incur an interest expense of$1,800in2025. The caf must pay$150 intereston the last day of each month fromJanuary to December 2025. Additionally, the business must repay $5,000 of the capital borrowed onJune 30,September 30,andDecember 31, 2025.

Corporate Income Tax

IfCardwell Florist Cafgenerates a profit in 2025, it will incur a corporate income tax expense. However, no cash will need to be forwarded to theATOfor corporate income tax untilJune 2026. The applicable tax rate forCardwell Florist Cafwill be25%.

Rising costs

Assuming Cardwell Florist Caf will continue operations into 2026, some regular expenditure for the 2026 year will need to be paid in 2025. It can be assumed that an inflation rate of 2.5% will apply for any such expenditure.

Projected income statement

Please see Appendix 1 for the projected income statement for Cardwell Florist Cafe for the year 1 January 2025 to 31 December 2025.

Also please see Appendix 2 for a grid you can use as a starting point for the cash budget. You must complete the entries and provide necessary structure to the grid.

Part A

Two questions (with subparts) to be answered:

REQUIRED:

(While the questions are to be solved using MS-Excel, they must also be presented properly in a Word/Pdf document)

• Prepare the monthly cash budget for Cardwell Florist Cafe for the period 01/01/2025 to 31/12/2025. Clearly specify the Opening Cash Balance on 1/1/2025. Please present your answers in two decimal places.

You may use the layout presented in Appendix 2 to prepare the cash budget.Please note that you must add more entries and other necessary details to complete the cash budget.

(7marks)

• You might like to use Appendix 1: Projected Income Statement for this question.

Assumingthe relationship between the number of customers, the number of each type of beverage sold, the number of snacks sold, and the number of small flower posies sold remains as set out in the sectionCaf customer purchasing behaviour (page 5), together with assuming that the number of large flower arrangements sold for the year stays fixed at 470 arrangements:

1. What is the break-even average number ofcustomers per dayfor Cardwell Florist Cafe for the year January 2025 - December 2025?

(3 marks)

1. How manycustomers per daywould Cardwell Florist Cafneed to make aprofit aftertaxation of $120,000 for the 2025 calendar year.

(2 marks)

1. Jack decided in planning for the 2025 calendar year to have an operating lease agreement for the espresso coffee machine rather than buy one.

An alternative is to buy an espresso machine. Refer to the sectionThe espresso coffee machine (page 7)for more specific details about this option.

If the alternative arrangement for the espresso machine were to be put in place, that is, Jack decides to buy it, recalculate thebreak-even number of customers per dayfor the caf with this option.

(3 marks)

(7 + 3 + 2 + 3 = 15 marks)

Note: for calculations, please show the workings in your answers.

Appendix 1:

Appendix 2:

Partially filled cash budget. You may use this proforma to complete the cash budget for Cardwell Florist Caf for the 12-month period 1 January 2025 to 31 December 2025.

Part B

(13 marks in total)

TransOz Freight Ltd

It is 30 November 2024

TransOzFreight Ltd, operating as TFL, is a publicly listed company offering a range of freight services across Australia. Among its specialized services isBlossom Express, which delivers flower arrangements in capital cities and major regional centres.

TFL is setting up a fleet offivevans to facilitate flower transportation in Cardwell. Drawing from prior experience, the process of preparing the fleet for the Blossom Express service involves two key steps. The first step is selecting the most suitable van model, followed by outfitting each vehicle with a high-quality air-conditioning system and essential modifications to preserve the freshness of the flower arrangements during transit. To date, TFL has invested $10,000 in an initial assessment of available van options and an additional $4,000 in evaluating the necessary components to convert the vans into specialised flower transport vehicles. Regardless of the final selection, all four vans will be of the same model.

Based on their research, TFL has shortlisted two van models:OrionandNova. Each option comes with its own pros and cons. Orion is the more cost-effective choice upfront but incurs higher maintenance expenses and consumes more fuel. It also has higher operational life cycle of 6 years. In contrast, Nova is more fuel-efficient and has lower maintenance costs but has a shorter operational lifespan of 5 years. Additionally, both van models require specialised modifications, and the costs of equipping each vehicle differ depending on the model selected.

Once each van is fully prepared for service, it must be registered with the Vehicle Registration Authority before being permitted on the road. This registration process is an annual requirement. TFL also follows a strict policy of insuring all its vehicles, with insurance payments required before the vans can be put into operation. Additionally, TFL will establish an annual maintenance contract with the chosen supplier, with the maintenance costs payable at the beginning of each year.

Relevant Data about Orion and its fleet of 5 vans:

Each Orion van is priced at $42,800. Outfitting each van with the necessary air-conditioning system costs an additional $3,300, while custom fittings add another $1,650 per vehicle. The initial annual registration fee per van is estimated at $2,475. Additionally, maintaining a fleet of five vans requires an initial working capital investment of $3,100.

For the first year, the total estimated costs for the fleet of five vans include $51,150 for fuel, $22,000 for insurance, and $13,200 for maintenance. At the end of their service life, the estimated salvage value for the entire fleet is projected to be $9,350.

Relevant Data about Nova and its fleet of 5vans:

Each Nova van is priced at $44,000. Each air-conditioning system costs an additional $3,500, while custom fittings add another $1,760 per vehicle. The initial annual registration fee per van is estimated at $2,500. Additionally, Nova fleet would require an injection of working capital of $2,750.

For the first year, the total estimated costs for the fleet of five vans include $47,575 for fuel, $19,800 for insurance, and $11,000 for maintenance. At the end of their service life, the estimated salvage value for the entire fleet is projected to be $9,845.

Additional Information:

• Regardless of the van model selected, all vehicles will be purchased, equipped, and operational by January 1, 2025.
• After acquiring the new fleet, TFL plans to sell the three currently used vans for $9,000 in January 2025.
• The revenue generated from Blossom Express operations will remain the same regardless of the van model chosen. Additionally, labour requirements for the service will not vary between the two van types.
• The capital costs for both fleets will be depreciated to zero using the straight-line method.
• The working capital invested in either fleet is expected to be fully recoverable in the final year of service upon fleet retirement.
• For Orion vans, maintenance costs are expected to increase annually in line with the inflation rate. However, for Nova vans, maintenance costs will remain fixed throughout their expected service life.
• All other annual operational expenses, excluding maintenance costs, are projected to increase at a 2.5% inflation rate per year for both models.
• The applicable tax rate for financial calculations is set at 25%.

Capital Structure Data:TransOzFreight Ltd

Financial advisors have indicated that the risk of this capital investment does not alter the current risk linked to TFLs existing capital structure.

Debt:

• Each bond has a face value of $1,000 and is set to mature on May 31, 2030. The bonds carry a 6% coupon rate, with semi-annual interest payments made on May 31 and November 30 each year. The most recent coupon payment was issued this morning, November 30, 2024. Currently, 80,000 bonds are in circulation, and as of today, they are trading at $1,010 per bond.
• The loan stands at $15 million, with an interest rate of 7% per annum, compounded daily.

Equity:

• TFL has 12 million shares outstanding. As of November 30, 2024, TFLs shares are trading at $10 per share. The expected market return is 9% and the relevant risk-free rate is 5%. TFLs Beta is estimated to be 0.99.

Part B

Two questions to be answered:

(While these questions are solved using MS-Excel, they must also be presented properly in a word/Pdf document)

REQUIREMENTS:

1. With the given information about TransOzFreight Ltd estimate the suitable Weighted Average Cost of Capital (WACC) to evaluate the investment options.

(5 marks)

2. Using the WACC you have established, (round it to the nearest whole number), undertake an NPV analysis of the two alternatives for TFL regarding the vans to be procured.

(8 marks)

(5 + 8 = 13 marks)

Note: for calculations, please show workings in your answers.

Part C

(22 marks in total)

Video Presentations

Part C is designed to allow youto showcase the depth of understanding of the accounting and finance concepts or tools that you have developed or employedwhile resolving the questions asked in the Case Study.

A good video presentation will typically underpin the basic theory or the associated concepts in the analyses, describe the process of the key steps/workings that you have adopted in developing those tools/outcomes, outline any assumptions that have been made, articulate well, discuss numerical outcomes and finally spell out clearly the recommendations in line with the findings and provide justifications.

It is important to use appropriate software (Studio, PowerPoint, or other tools), provide clear tables/diagrams and other content if any, use correct terminology and express the ideas and information coherently. Correct RMIT Harvard referencing style must be used.

Youmust read the rubrics carefullyand frame your responses around their requirements.

As a recommendation, you must carefully deliberate on the contents and if possible, prepare a script before recording your videos. The presentation quality is as important as the analyses, recommendations, and other content to achieve the best grades.

Upload your video presentations or provide shareable links to them along with your presentation slides/other communication aids.It is strongly recommended that you use the Canvas Studio tool to record and upload your presentations. You may use other applications too provided you comply with the requirements. You mustpresent yourself in the videos. Canvas-basedStudioallows you to do both i.e., run a presentation and record yourself at the same time.

The preference is that you producetwo short videos, one relating to the work undertaken for Part A and another for Part B. This approach will keep the file size manageable and minimize logistic issues around uploading / downloading or other unknowns.

Together, the two videos must be of atotal of between 10 and 12 minutes. Ideally, you should divide your time proportionately between the two videos. Both the parts have comparable weights.

Part C

Two categories of questions (with subparts) to be answered:

1. Questions for analysing Part A (Cardwell Cafe)

Consider the analysis you have done in Part A questions, and use your video to:

1. Discuss both the concept behind and the process of developing the Cash Budget and the CVP analysis using your work on the Case Study on Cardwell Cafe as example to illustrate these ideas. Ensure that you summarise the key aspects/ findings in your analyses.

(5 marks)

1. Based on your findings, discuss/make recommendations to Jack. These recommendations need to include:

1. any improvements to the business plan based on the proposed Cash Budgets.

(2 marks)

1. any improvements towards the viability of the business through the CVP analysis that you have conducted.

(1 mark)

2. Questions for analysing Part B (TFL)

Consider the analysis you have done in Part B, questions 1 and 2, and use your video to:

1. Discuss both the concept behind and the process of NPV analysis using your work in the Case Study on TFL as an example to illustrate these ideas. Ensure that you summarise the key assumptions/aspects/findings/limitations in your presentation.

(3 marks)

1. Provide a recommendation to TFL as to which of the two purchase options should be chosen. Briefly explain your reasons for this recommendation.

(2 marks)

1. For WACC, financial advisors have indicated that the investment in vans does not change TFLs current risk level. Why is it important to assess whether new projects carry the same level of risk? How would this impact your analysis? Please explain.

(2 marks)

Further, 7 marks are allocated to the overall quality of the presentation. Please read the rubrics for details about all the criteria.

(5 + 2 + 1 + 3 + 2 + 2 + 7 = 22 Marks)