Business Studies HSC HSC Practice Question 2a – Planning and implementing finance

KiteRail Pty Ltd is a fast-growing business that designs and installs lightweight sensor systems on freight trains to predict wheel and bearing failures. It sells to rail operators on 30-day terms and earns ongoing monitoring revenue.

KiteRail plans a 12-month expansion program with three linked financial needs:

• Project A (purpose: long-term capacity): Purchase and fit-out of a specialised testing rig costing \$480,000, payable immediately. The rig is expected to be used for at least 6 years.
• Project B (purpose: working capital): A larger inventory of sensors and spare parts. This will increase inventory by \$120,000 from Month 1 and is expected to remain at that higher level for the full year.
• Project C (purpose: short-term marketing push): A campaign costing \$150,000, paid as \$50,000 in each of Months 2, 3 and 4.

Current position at the start of Month 1:

• Cash at bank: \$140,000
• Minimum cash buffer required by the directors: \$60,000 at all times
• Current monthly fixed operating costs (wages, rent, software): \$95,000, paid in the month incurred
• Variable costs: 35% of sales revenue, paid in the month incurred
• Current monthly sales revenue: \$220,000
• Forecast sales revenue if the expansion proceeds: \$220,000 in Months 1 to 3, then \$320,000 per month from Month 4 onward
• Customer receipts pattern: 70% collected in the month of sale, 30% collected in the following month

Two finance packages are being considered (assume KiteRail can choose only one):

Package 1 (Debt-heavy):
- A 5-year bank term loan of \$480,000 at 9% p.a. interest, with equal monthly repayments of principal and interest starting at the end of Month 1.
- A revolving overdraft facility limit of \$120,000 at 12% p.a. interest, interest-only paid monthly on the closing balance.
- Bank covenant: KiteRail must provide monthly cash budgets and monthly variance reports; if the cash buffer is breached in any month, the bank may reduce the overdraft limit by \$40,000.

Package 2 (Equity-heavy):
- Issue new shares to a venture capital (VC) fund for \$600,000 in exchange for 25% ownership.
- The VC requires: (i) a seat on the board, (ii) approval for any single purchase above \$75,000, and (iii) a requirement that KiteRail implements a formal accounting system with purchase order controls and a three-way match (purchase order, delivery docket, supplier invoice) for all inventory purchases.

KiteRail currently uses a basic cashbook spreadsheet and does not prepare formal budgets. The directors are concerned about financial risk and loss of control, but also want the expansion to proceed quickly.