ACCAF9assignment2

ACCAF9assignment2
ACCA F9 Financial management
Investment appraisal Assignment two (10%)
Day of submission 25/11/2010
Department of Accountancy.
Nanfang college ,Sun Yat-Sen University.
Question 1:
oracle plc invests in a new machine at the beginning of year 1 which costs $15,000. it is hoped that the net cash flows over the next five years will correspond to those given in the table below.
Year 1 2 3 4 5 Net cash flow $1,500 $2,750 $4,000 $ 5,700 $7,500 You are required to calculate:
(1)the net present value assuming a 15% cost of capital.
(2)The net present value assuming a 10% cost of capital.
Question 2
Calculate the payback period in years and months for the following project.
Year Cash flow
$000
0(3,100)
11000
2900
3800
4500
5500
Question 3
(A)Explain the differences between NPV and IRR as methods of discounted cash
flow anlysis.
(B)Explain how inflation affects the rate of return required on an investment
project, and the distinction between a real and a nominal( or “money terms”)
Approach to the evaluation of an investment project under inflation
Basics limited is considering whether to invest $90,000 in the purchase of a new item of equipment. The equipment would be paid for with a down-payment of $60,000 and the payment of the remaining $30,000 six weeks later. The company has already spent $8,000 on design and feasibility work, and the operational management team are keen to purchase the equipment quickly.
The equipment is expected to have a life of three years, after which time it should have a resale value of $5,000. the equipment will be depreciated by the straightline method over three years. It has been estimated that an investment of $20,000 in working capital will be needed.
As a result of acquiring the equipment, it is expected that there will be an increase in annual cash profits, as follows: Year $
1$37,000
2$48,000
3$26,000
Required:
(A). Calculate the expected NPV of the investment, if the cost of capital is 8%.
(B). Calculate the expected IRR of the investment, using the interpolation method and taking 12% as the cost of capital for calculating another NPV.
Question 5 (ACCA exam-type Question)
KL Ltd is considering manufacturing a new product. This requires machinery costing $20,000, with a life of four years and a terminal value of $5000. Profits before depreciation from the project will be $8000 per year. However, there will be cash flows which will differ from profits by the build-up working capital during the first year of operation and its run-down during the fourth year, amounting to $2,000.
Tax allowance on the machine are 25% per year reducing balance. At the end of project’s life a balancing charge or allowance will arise equal to the difference between the scrap proceeds and tax written down value.
Tax is payable one year after the end of the accounting year on which it is based, at a rate of 30%. The start of the project is also the start of the accounting year.
The cost of capital is 15%.
Should the project be accepted ?
Question 6
(A)Identify the limitations of Net Present Value techniques when applied
generally to investment appraisal.
(B)Briefly discuss how inflation may complicate the analysis of business
financial decision.
A company is considering an investment in an item of equipment costing $80,000. the equipment would attract a 25% annual writing down allowance. The operating cash flows are forecast as :
$
Year 1 30,000
240,000
320,000
These estimates do not allow for an investment of $25,000 in working capital that would be required, the project is expected to have a three-year life , at the end of which the equipment would have a sell-off value of $50,000.
The rate of tax on profits is 30%. The company’s cost of capital is 8%.
Required calculate the NPV of the project and suggest whether it should be undertaken.
Question 8 (ACCA exam-type Question)
Bacher Ltd is considering investing $500,000 in equipment to produce a new type of ball. Sales of the product are expected to continue for three years, at the end of which the equipment will have a scrap value of $80,000. Sales revenue of $600,000 per annum will be generated at a variable cost of $350,000. annual fixed costs will be increase by $40,000.
You are required:
(A)to determine whether , on the basis of the estimates given, the project should be
undertaken, assuming that all cash flows occur at annual intervals and that Bacher Ltd has a cost of capital of 15%.
(B)To find the percentage changes required in the following estimates for the
investment decision to change.
(2)initial investment
(3)Scrape value
(4)Selling price
(5)Sales volume
(6)Cost of capital。