问答题
BQK Co, a house-building company, plans to build 100 houses on a development site over the next four years. The purchase cost of the development site is $4,000,000, payable at the start of the first year of construction. Two types of house will be built, with annual sales of each house expected to be as follows:<br>Houses are built in the year of sale. Each customer finances the purchase of a home by taking out a long-term personal loan from their bank. Financial information relating to each type of house is as follows:<br>Selling prices and variable cost of construction are in current price terms, before allowing for selling price inflation of 3% per year and variable cost of construction inflation of 4·5% per year.<br>Fixed infrastructure costs of $1,500,000 per year in current price terms would be incurred. These would not relate to any specific house, but would be for the provision of new roads, gardens, drainage and utilities. Infrastructure cost inflation is expected to be 2% per year.<br>BQK Co pays profit tax one year in arrears at an annual rate of 30%. The company can claim capital allowances on the purchase cost of the development site on a straight-line basis over the four years of construction.<br>BQK Co has a real after-tax cost of capital of 9% per year and a nominal after-tax cost of capital of 12% per year. New investments are required by the company to have a before-tax return on capital employed (accounting rate of return) on an average investment basis of 20% per year.<br>Required:<br>(a) Calculate the net present value of the proposed investment and comment on its financial acceptability. Work to the nearest $1,000. (13 marks)<br>(b) Calculate the before-tax return on capital employed (accounting rate of return) of the proposed investment on an average investment basis and discuss briefly its financial acceptability. (5 marks)<br>(c) Discuss the effect of a substantial rise in interest rates on the financing cost of BQK Co and its customers, and on the capital investment appraisal decision-making process of BQK Co. (7 marks)
问答题
Warden Co plans to buy a new machine. The cost of the machine, payable immediately, is $800,000 and the machine has an expected life of five years. Additional investment in working capital of $90,000 will be required at the start of the first year of operation. At the end of five years, the machine will be sold for scrap, with the scrap value expected to be 5% of the initial purchase cost of the machine. The machine will not be replaced.<br>Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year.<br>Warden Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored.<br>Required:<br>(a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (7 marks)<br>(b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (4 marks)<br>(c) (i) Explain briefly the meaning of the term ‘sensitivity analysis’ in the context of investment appraisal; (1 mark) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (6 marks)<br>(d) Discuss the nature and causes of the problem of capital rationing in the context of investment appraisal, and explain how this problem can be overcome in reaching the optimal investment decision for a company. (7 marks)
问答题
(a) ZPS Co, whose home currency is the dollar, took out a fixed-interest peso bank loan several years ago when peso interest rates were relatively cheap compared to dollar interest rates. Economic difficulties have now increased peso interest rates while dollar interest rates have remained relatively stable. ZPS Co must pay interest of 5,000,000 pesos in six months’ time. The following information is available.<br>Required:<br>(i) Explain briefly the relationships between;<br>(1) exchange rates and interest rates;<br>(2) exchange rates and inflation rates. (5 marks)<br>(ii) Calculate whether a forward market hedge or a money market hedge should be used to hedge the interest payment of 5 million pesos in six months’ time. Assume that ZPS Co would need to borrow any cash it uses in hedging exchange rate risk. (6 marks)<br>(b) ZPS Co places monthly orders with a supplier for 10,000 components that are used in its manufacturing processes. Annual demand is 120,000 components. The current terms are payment in full within 90 days, which ZPS Co meets, and the cost per component is $7·50. The cost of ordering is $200 per order, while the cost of holding components in inventory is $1·00 per component per year.<br>The supplier has offered either a discount of 0·5% for payment in full within 30 days, or a discount of 3·6% on orders of 30,000 or more components. If the bulk purchase discount is taken, the cost of holding components in inventory would increase to $2·20 per component per year due to the need for a larger storage facility.<br>Assume that there are 365 days in the year and that ZPS Co can borrow short-term at 4·5% per year.<br>Required:<br>(i) Discuss the factors that influence the formulation of working capital policy; (7 marks)<br>(ii) Calculate if ZPS Co will benefit financially by accepting the offer of:<br>(1) the early settlement discount;<br>(2) the bulk purchase discount. (7 marks)
问答题
The production equipment for the new confectionery line would cost $2 million and an additional initial investment of $750,000 would be needed for working capital. Capital allowances (tax-allowable depreciation) on a 25% reducing balance basis could be claimed on the cost of equipment. Profit tax of 30% per year will be payable one year in arrears. A balancing allowance would be claimed in the fourth year of operation.<br>The average general level of inflation is expected to be 3% per year and selling price, variable costs, fixed costs and working capital would all experience inflation of this level. BRT Co uses a nominal after-tax cost of capital of 12% to appraise new investment projects.<br>Required:<br>(a) Assuming that production only lasts for four years, calculate the net present value of investing in the new product using a nominal terms approach and advise on its financial acceptability (work to the nearest $1,000). (13 marks)<br>(b) Comment briefly on the proposal to use a four-year time horizon, and calculate and discuss a value that could be placed on after-tax cash flows arising after the fourth year of operation, using a perpetuity approach. Assume, for this part of the question only, that before-tax cash flows and profit tax are constant from year five onwards, and that capital allowances and working capital can be ignored. (5 marks)<br>(c) Discuss THREE ways of incorporating risk into the investment appraisal process. (7 marks)
问答题
The following draft appraisal of a proposed investment project has been prepared for the fi nance director of OKM Co by a trainee accountant. The project is consistent with the current business operations of OKM Co.<br>Net present value = 1,645,000 – 2,000,000 = ($355,000) so reject the project.<br>The following information was included with the draft investment appraisal:<br>1. The initial investment is $2 million<br>2. Selling price: $12/unit (current price terms), selling price infl ation is 5% per year<br>3. Variable cost: $7/unit (current price terms), variable cost infl ation is 4% per year<br>4. Fixed overhead costs: $500,000/year (current price terms), fi xed cost infl ation is 6% per year<br>5. $200,000/year of the fi xed costs are development costs that have already been incurred and are being recovered by an annual charge to the project<br>6. Investment fi nancing is by a $2 million loan at a fi xed interest rate of 10% per year<br>7. OKM Co can claim 25% reducing balance capital allowances on this investment and pays taxation one year in arrears at a rate of 30% per year<br>8. The scrap value of machinery at the end of the four-year project is $250,000<br>9. The real weighted average cost of capital of OKM Co is 7% per year<br>10. The general rate of infl ation is expected to be 4？7% per year<br>Required:<br>(a) Identify and comment on any errors in the investment appraisal prepared by the trainee accountant. (5 marks)<br>(b) Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability. (12 marks)<br>(c) Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:<br>(i) assets with replacement cycles of different lengths;<br>(ii) an investment project has several internal rates of return;<br>(iii) the business risk of an investment project is signifi cantly different from the business risk of current operations. (8 marks)
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