Bece Model Questions Vol1 2023 Business Studies Question 5

A small retailer intends to purchase inventory worth ₦1,200,000. He can finance the purchase in one of two ways: 1. Obtain a bank loan of ₦1,200,000 at 12% per annum payable monthly over 3 years. A processing fee of 2% of the loan amount is charged at the start of the loan. 2. Use trade credit from his supplier. The supplier offers a 5% discount if the invoice is paid within 30 days; otherwise the full amount is payable after 90 days. The retailer’s projected cash inflows from sales for the first six months are: | Month | Cash inflow (₦) | |-------|-----------------| | 1 | 300,000 | | 2 | 320,000 | | 3 | 340,000 | | 4 | 360,000 | | 5 | 380,000 | | 6 | 400,000 | From month 7 onwards, cash inflows are expected to increase by 5 % each month over the previous month. Monthly operating expenses (excluding any loan repayment) are constant at ₦150,000. Answer the following: a) Calculate the monthly repayment amount (rounded to the nearest naira) using the reducing‑balance method, the total interest payable over the 3‑year period, and the total amount payable including the processing fee. b) Using the cash‑flow forecast, determine after how many months the retailer will have accumulated a cash surplus (after meeting operating expenses and the monthly loan repayment) sufficient to settle the outstanding loan balance early, assuming any surplus can be used as a lump‑sum payment at the end of a month. c) Compare the total cost of financing under the bank loan (as obtained in part a) with the cost of using trade credit for the first purchase of inventory (i.e., the amount payable if the discount is not taken). State which option is more economical and justify with calculations. d) Identify two possible sources of error that could affect the accuracy of the cash‑flow‑based decision in part b and suggest one precaution for each.