Tim, a friend of yours, has asked for your assistance, as he knows you are doing a business course. A new industrial estate has been set up in the area and he is wondering whether to buy a workshop there. He wants to set up as a sole trader for the manufacture and maintenance of agricultural machinery. You help him identify the following assumptions and estimates. 1. The workshop will cost $100,000, and the equipment is expected to cost $20,000. 2. You estimate that an initial inventory of materials amounting to $8,000 will be needed, and will probably need to be maintained indefinitely. Tim will pay for any inventory in the month after purchase. 3. Material costs are expected to be approximately 25% of the revenue earned. 4. Tim can put $20,000 into the business. He is thinking of asking the bank if he can borrow a further $120,000. Interest is expected to be around 10%. Tim would like to pay off $12,000 of the principal of the loan at the end of each year until it is paid off. 5. Tim will bring his current vehicle into the business, valued at $8,000. 6. Tim expects to pay himself a wage based on an hourly rate of $20.

He plans to take on an assistant, Terry, who will be paid $15 per hour. He anticipates taking out additional drawings of $20,000 over each year. 7. Other expenses are estimated to be: • Vehicle expenses • Insurance • Heating and lighting • Telephone • Rates • Other materials $5,000 $2,500 $2,500 $3,000 $5,000 $2,000 8. Cash from work carried out is expected to be received one month after it has been done. Tim is confident that work will be easily obtained to keep him and Terry fully occupied for the whole year. They will both get four weeks paid annual leave. Work done will be charged out to customers at the rate of $40 per hour. 9. Depreciation will be charged at 20% straight line on the equipment and 25% reducing balance on the vehicle. Required: (a) Prepare a set of forecast financial statements, preferably using a spreadsheet. Make all of your assumptions clear. (b) Advise Tim on the plans, particularly on the adequacy of the loan sought from the bank. Identify any areas of concern that might require further information. Specifically comment on: (i) the level of profit (ii) the level of drawings (iii) levels of liquidity (iv) what happens to the forecasts if customers become slow payers (v) how the plans might be modified to help develop a sustainable business over time.