Answer to Question #241196 in Finance for neaj

Question

A newly formed beverage company, moderately capitalized, has purchased 40 units of delivery trucks from a motor vehicle dealer.  The total value of the trucks amounted to P1,350,000.    The local bodies built at the expense of the buyer was valued at P500,000.   The buyer made an initial down payment of P250,000 and mortised the balance, with finance charged for 36 monthly instalments.

Answer 1

A newly formed beverage company, moderately capitalized has purchase 40 units of delivery trucks from a motor vehicle dealer. The total value of the trucks amounted to P1,350,00. The local bodies built at the expense of the buyer was valued at P 500,000. The buyer made an initial down payment P 250,000 and amortized the balance with finance charged for 36 monthly installments.

The company promptly paid the first two installments of the amortization schedule. Then, it met a series of difficulties. First, one of its two principal machineries broke down. Then, it suffered from acute water shortage such that it had to contend with the rising cost of sugar which made production doubly expensive. As if these problems were not enough, it met difficulties in the procurement of empty bottles which is reportedly controlled by a giant soft drinks company.

The present status of the account P 450,000 overdue equivalent to six monthly installments. The total unpaid total balance is P 1 million. Present value of the vehicles -P 1,250,000. The credit manager of the vehicle dealer made a thorough evaluation of the account as if presently stands. In point of character, the major stockholder of the company is a successful businessman in his own right. He has varied interest here and abroad and moreover, except for this particular business, he has been proven financially responsible and capable. From the viewpoint of capital, the company fails for indeed it is suffering from dire lack of capital. Capacity is impaired for the money although there are high hopes that come summer time, assuming the operational difficulties are solved, business should pick up and prove profitable. Collateral-wise the transaction is still visible. Note that out of the present balance of P 1 million, the total value of the trucks including the cost of locally built bodies is still P1,250,000.

The question that confronts the credit manager is whether at this particular point the company should lower the boom and repossess the vehicle. Judging from the amount overdue and the number of installments outstanding and unpaid the initial answer seems to be YES. Yet, there are factors that initiate against taking repossession action to wit:

1. If this action is taken, surely the selling company would have lost a potential fleet customer?

2. If the units are repossessed, the seller faces the problem of having in its inventory P 1 million worth of assets which it cannot hope to readily convert into cash since the trucks are constructed for soft drinks delivery purposes and there is a limited market for thus type of truck.

3. The cost of storing the vehicles will be approximately 2 1/2 per month.

POINTS TO PONDER:

1. For repossession- full recovery of account plus good prospects of reselling units even at a profit after reconditions, considering the upward trend or prices of used vehicles.

2. Not repossessing- What are the chances that this small bottling company will survive?

Answer:

Not repossessing

Not repossessing will be the better decision because the trucks are now made for a specific purpose. This means that it is made for softdrink delivery purposes, so the market value of such truck is comparatively low. So converting them into cash is not an easy process and also the storage cost of truck may be an additional burden. Thus, not repossessing the vehicles and give some more time to the beverage company to pay installments. If they repossess the trucks, they will lose their customers because they cannot deliver beverages to their customers. It will lead to the overall breaking of the business.

One of the major issue is lack of adequate capital if the stakeholder introduce more capital to the business they can overcome the problems such as water shortage, high price of sugar, bottle shortage etc. If the production is improved they can overcome all the financial burdens in summer season and give some more time to the beverage company to pay the installments.