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What is margin of safety?
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Answer / harsha
THIS TERM IS BASICALLY USED IN MANAGMENT ACCOUNTING MARGIN
OF SAFTY IS NOTHING BUT THE DIFFERENCE BETWEEN ACTAUL SALES
AND THE SALES AT BREAK EVEN POINT.GRADUALY HIGHER THE
MARGIN OF SAFTY THE BETTER IS FOR ORGANISTAION.
MAGIN OF SAFTY=ACTUAL SALES-BREAK EVEN SALES OR
PROFIT/PVRATIO
MARGIN OF SAFTY RATIO=EXPECTED SALES-BREAK EVEN SALES/BREAK
EVEN SALES
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Answer / naveengokarapu@gmail.com
The Margin of Safety is the margin, by which the return on
assets exceeds the average interest rate on fixed term
securities.
| Is This Answer Correct ? | 2 Yes | 2 No |
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2 Answers State Bank Of India SBI,
DHPL is a small sized firm manufacturing hand tools. It manufacturing plan is situated in Haryana. The company’s sales in the year ending on 31st March 2007 were Rs.1000 million (Rs.100 crore) on an asset base of Rs.650 million. The net profit of the company was Rs.76 million. The management of the company wants to improve profitability further. The required rate of return of the company is 14 percent. The company is currently considering an investment proposal. One is to expand its manufacturing capacity. The estimated cost of the new equipment is Rs.250 million. It is expected to have an economic life of 10 years. The accountant forecasts that net cash inflows would be Rs.45 million per annum for the first three years, Rs.68 million per annum from year four to year eight and for the remaining two years Rs.30million per annum. The plant can be sold for Rs.55 million at the end of its economic life. The company would need to raise debt to the extent of Rs.200 million. The company has the following options of borrowing Rs.200 million: a. The company can borrow funds from a nationalized bank at the interest rate of 14 percent for 10 years. It will be required to pay equal annual installment of interest and repayment of principal. b. A financial institution has offered to lend money to DHPL at 13.5 per annum but it needs to pay equated quarterly installment of interest and repayment of principal. Questions: 1. Should the company expand its capacity? Show the computation of NPV 2. What is the annual installment of bank loan? 3. Calculate the quarterly installments of the Financial Institution loan 4. Should the company borrow from the bank or from the financial institution?
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