SECTION I 1.

Zero Based Budgeting (ZBB) is an approach to budgeting that starts from the premise that no costs or activities should be factored into the plans for the coming budget period, just because they figured in the costs or activities for the current or previous periods as it happens with incremental budgeting. Rather, everything that is to be included in the budget must be considered and justified as expense, even savings. In other words, with ZBB every each item of income it must be addressed as expense so the balance sheet to be equal to zero in the end of the period. This method could be very handy for nonprofit organizations where they are forced to justify donations etc. ZBB is also something very useful for top level strategic planning within an organization , because the budget can be delivered to the managers and they will have to decide where these funds should be distributed (i.e. marketing & promotion practices). That is one of the main reasons that the individuals that will manage those funds should be well trained and very familiar with the specific method as they will have to set measurable decision packages according to cost and benefits, how to measure the performance of an activity and which will be the collateral impact of not performing the activity. In the next stage they should perform the ranking or the prioritization of the decision packages which should be evaluated in order of importance. One of the most important is that you may have to need to group some activities based on the nature of them so as to make them even more measurable. In a marketing group of activities i.e. it would be much more efficient what should be the intended outcome for each one activity and then set the priority level for the entire group. Another advantage of ZBB is due to the fact that managers get more involved to the decision process of an organization they become more responsible and motivated and from another hand in a restricted budget they become more creative by finding cost effective solutions. This is something that also helps in the co operation within an organization by improving communication between departments. Because managers have to set properly and in a realistic manner their needs they are succeeding to efficiently allocate the needed resources for the total of the activities within the period. Another benefit of ZBB is that, its clearer to determine whether a budget is inflated and either reduce it or take the opportunity for outsourcing. Nevertheless ZBB has some drawbacks. One of them is that it is time consuming as the accounting department must be very cautious in addressing every single income to expenditure in order to achieve a zero balance sheet. Also there is the chance that the form or the balance sheet could be very long and makes it difficult to read. Additionally the department which will manage the budget may also confront conflicts with other departments and experience stalls during the decision making process. As aforementioned, managers who get involved must have a clear understanding not only of the method itself but also the general strategy of their organization and be well trained and familiar with the organizational procedures in order to successfully handle the budget. Exaggeration of a single manager could easily produce unwanted results if the activities wouldnt have the appropriate return to the organization.

ZBB Example Credit Income 1 Income 2 Paycheck 1 Paycheck 2 Total

500 200 1000 1500 3200 0

Debt 800 900 500 500 500 3200

Expense 1 Expense 2 Expense 3 Expense 4 Expense 5

2. Company A and company Z are mainly importers and distributors of medical devices, facing the situation of the current economical crisis they decided to proceed in a merge. Company A has long background which has given to the company the opportunity to build a very strong and reliable back office. During the years warehouse managers have create bonds with the logistics department of the MNE distributed and a good level of communication has been established, resulting in an efficiently management of the stock. Additionally the distribution department has gain the appropriate know how on how to deal emergencies and proper channeling of products. Lastly the sale force of the company is working with these products several years and have prove its creditability and reliability not only to the company but most important to the local market. Company Z it is considerably new entity to the market but the human resource employed have significant presence in the market. Therefore it is comparable small to the company A in terms of employment but in terms of finance is equally measurable. Company Z though is lacking a distribution department, which is something that can result improper channeling of the products and goods. Nonetheless company Z is distributing high technology medical devices compared to company A, therefore both of the companies can be benefited from this merging for different reasons. Company A should take the opportunity to gain some extra share of the market with the new products and company Z must exploit the most of the back office of companys A. Conflicts may arise as merging can involve a series of unwanted changes to the departments and most important is to merge the business culture of the two companies. A rich picture diagram has created to demonstrate more clearly the scheme that the two companies must integrate in order for them to achieve a homogenic result. It seems clearly that one of the most important is that both the administration departments must transfer the same strategy to the sales department have the same promotion and marketing policies, procedures must be identical and finally to develop the same business language.

COMPANY a COMPANY Z MERGING RICH PICTURE

SALES a ORDERS MARKETING/STRATEGY ADMIN a

SOURCES FUNDS

REPORT

WAREHOUSE a

INVENTORY

ACCOUNTING a

Channeling

DISTRIBUTION a

OUTPOUT

SERVICE / CLIENTS

WAREHOUSE Z

Channeling

INVENTORY

ACCOUNTING Z

SOURCES FUNDS

ORDERS

REPORT

SALES Z

MARKETING/STRATEGY

ADMIN Z

SECTION II 1. a) With base year as 1979=111 which is the 100% If in 1979=111 which was the 100% In1974=93 which will be the x%?

Applying the golden rule of three: FY1974: (93/111)100=83.78 FY1975: (85/111)100=76.57 FY1976: (93/111)100=83.78 FY1977: (100/111)100=90.09 FY1978: (107/111)100=96.39 FY1979=100% FY1980: (109/111)100=98.19 FY1981: 100% FY1982: (103/111)100=92.79 FY1983: (109/111)100=98.19 FY1984: (122/111)100=109.9 FY1985: (125/111)100=112.6

b) For base year 1974-1976, we need to find first the average production of the three years period : (93+85+93)/3=90.33100% If 1974-1976=90.33 which is the 100% FY 1974=93 which will be the x%? Applying the golden rule of three: Fy1974: (93/90.33)100=102.95 FY1975: (85/90.33)100=94.09 FY1976: (93/90.33)100=102.95 FY1977: (100/90.33)100=110.7 FY1978: (107/90.33)100=118.45 FY1979: (111/90.33)100=122.88 FY1980: (109/90.33)100=120.66 FY1981: 100% FY1982: (103/90.33)100=114.02 FY1983: (109/90.33)100=120.66 FY1984: (122/90.33)100=135.06 FY1985: (125/90.33)100=138.38

2. a) If our year of reference is 1982=100% then for year 1977 will be: If in 1982=2765 which was the 100% In 1977=2046 which will be the X? By applying the golden rule of three will have: (2046/2765)*100=73.99 FY1978: (1776/2765)*100=64.23 FY1979: (2134/2765)*100=77.17 FY1980: (2380/2765)*100=86.07 FY1981: (2785/2765)*100=100.7 FY1982=100% FY1983: (2420/2765)*100=87.52 FY1984: (2595/2765)*100=93.85 FY1985: (2425/2765)*100=87.7

b) For the period of reference as 1977-1980 we must first calculate the average value of the production for those four years. So the average of 1974-1981 will be as follow: (2046+1776+2134+2380)/4=2084 If 1977-1980=2084 which is the 100% FY1977=2046 which will be the x%? Applying again the golden rule of three: FY1977: (2046/2084)*100=98.2 FY1978: (1776/2084)*100=85.2 FY1979: (2134/2084)*100=102.39 FY1980: (2380/2084)*100=114.2 FY1981: (2785/2084)*100=133.63 FY1982: (2765/2084)*100=132.67 FY1983: (2420/2084)*100=116.12 FY1984: (2595/2084)*100=124.52 FY1985: (2425/2084)*100=116.36

SECTION III i) First we need to calculate the Present value for each time period with interest rate at 10% so

FY0: PV=-50000/(1+0.10)^0=-50000 FY1: PV=7000/(1+0.10)^1=6363.36 FY2: PV=25000/(1+0.10)^2=20661.57 FY3: PV=30000/(1+0.10)^3=22539.44 FY4: PV=5000/(1+0.10)^4=3415.06 Then we need to calculate the present values for interest rate at 15% so FY0: PV=-50000/(1+0.15)^1=-50000 FY1: PV=7000/(1+0.15)^1=6087 FY2: PV=25000/(1+0.15)^2=18903.6 FY3: PV=30000/(1+0.15)^3=19725.5 FY4: PV=5000/(1+0.15)^4=2858.8

ii)

Now we can calculate the Net Present value of the investment by simply summing the present values of the cash flows, first for the interest rate of 10%:

For 10%: NPV=-50000+6363.36+20661.57+22539.44+3415.06=2979.43 The investment is considered profitable Then for the interest rate at 15%: For 15%: NPV=-50000+6087+18903.6+19725.5+2858.8=-2426.3 The investment is considered as non profitable

iii)

The Internal Rate of Return of the investment based on the formula will be:

IRR=0.10+[(2979.43/(2979.43-(-2426.3)))*(0.15-0.10)]=12.76% The interest rate should not be exceeded more than 13%