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Questions and Answers
True or false: The selling price per headphone is £30?
False
True or false: The variable cost per headphone is £50?
False
True or false: The monthly fixed costs are £5,000?
True
True or false: The marginal value is the same as the contribution margin?
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True or false: The breakeven point is the point at which total revenue equals total cost?
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True or false: The breakeven point can be calculated by dividing the fixed costs by the contribution margin?
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True or false: Increasing the selling price per headphone will increase the profit margin?
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True or false: Decreasing the variable cost per headphone will increase the profit margin?
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True or false: Decreasing the monthly fixed costs will increase the profit margin?
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Fiona invested £15,000 as initial capital in her fashion boutique.
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The total revenue for the month of February is £10,000.
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The cash inflow for the month of March is £9,000.
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A positive cash flow is important for Fiona's boutique because it ensures that she has enough funds to cover her expenses.
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A negative cash flow implies that Fiona's boutique is spending more money than it is earning.
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One common source of finance for startups is bank loans.
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An advantage of bank loans as a source of finance is that they provide a large amount of capital.
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One disadvantage of bank loans as a source of finance is that they often have high interest rates.
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Attraction A has a higher Net Present Value (NPV) than Attraction B.
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The payback period is the time it takes for an investment to generate enough cash flows to recoup the initial cost.
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Which of the following is an advantage of using bank loans as a source of finance for startups?
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What is the total revenue for Fiona's boutique in February?
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What is the payback period for Attraction A?
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What is the Net Present Value (NPV) of Attraction B?
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Why might the tourism board choose an attraction with a longer payback period?
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What is the importance of maintaining a positive cash flow for Fiona's boutique?
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What are the expected monthly cash outflows for Fiona's boutique in March?
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What is the initial cost of Attraction A?
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What are two common sources of finance entrepreneurs might use for startups?
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Which one of the following correctly defines the marginal value (contribution margin)?
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What is the breakeven point in terms of units sold?
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What is the breakeven point in terms of revenue?
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Which one of the following recommendations would help increase Eric's profit margin?
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Which one of the following recommendations would help increase Eric's profit margin?
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Which one of the following recommendations would NOT help increase Eric's profit margin?
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Which one of the following recommendations would NOT help increase Eric's profit margin?
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What is the contribution margin per headphone sold?
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What is the monthly profit margin if Eric sells 300 headphones in a month?
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Which one of the following best defines the breakeven point?
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Which one of the following accurately describes the purpose of maintaining a positive cash flow?
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Which one of the following is an advantage of using bank loans as a source of finance for startups?
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Study Notes
Cash Flow Projection and Financing Options
- Cash flow projection: a forecast of a company's inflows and outflows of cash over a specific period
- Importance of maintaining a positive cash flow:
- Ensures ability to meet financial obligations
- Allows for investment in growth opportunities
- Enhances credibility with suppliers and lenders
- Implications of a negative cash flow:
- Inability to meet financial obligations
- Insolvency and potential bankruptcy
- Reduced credibility with suppliers and lenders
- Two common sources of finance for startups:
- Personal savings (advantages: low-cost, no debt repayment; disadvantages: limited funds, personal financial risk)
- Bank loans (advantages: larger funds, professional guidance; disadvantages: debt repayment, interest rates)
Net Present Value (NPV) and Payback Period
- Net Present Value (NPV): the difference between the present value of expected cash inflows and outflows
- Importance of NPV:
- Evaluates investment profitability
- Compares investment opportunities
- Considers time value of money
- Payback period: the time it takes to recover an investment
- Calculating payback period: divide initial investment by annual cash inflows
- Factors affecting NPV and payback period decisions:
- Interest rate
- Investment horizon
- Non-financial factors (e.g. cultural and historical significance)
Marginal Value, Breakeven Point, and Cost Analysis
- Marginal value (contribution margin): the difference between selling price and variable cost
- Importance of marginal value:
- Evaluates profitability of individual products
- Guides production and pricing decisions
- Breakeven point: the point at which total revenue equals total fixed and variable costs
- Calculating breakeven point:
- In terms of units sold: divide total fixed costs by (selling price - variable cost)
- In terms of revenue: multiply breakeven point in units by selling price
- Recommendations to increase profit margin:
- Increase selling price (if demand is inelastic)
- Reduce variable costs (e.g. through efficient production or renegotiated supply contracts)
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Description
Test your knowledge of cash flow projection and financing options with this quiz! Explore Fiona's fashion boutique and her expected monthly cash inflows and outflows. See if you can accurately analyze the financial situation and make informed decisions for the business.
