ACCACAT Paper T4 Accounting For Costs INT Topicwise Past Papers
ACCACAT Paper T4 Accounting For Costs INT Topicwise Past Papers
ACCACAT Paper T4 Accounting For Costs INT Topicwise Past Papers
CAT T4
Material Costing
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Week 2:
Week 3:
2
Many manufacturing organisations hold raw material stocks.
Required: (a) List three examples of holding costs. (b) List two examples of stockout costs. (3 marks) (2 marks)
A manufacturing organisation uses 20,000 kilograms (kg) of a raw material evenly over a period. The material is purchased for 250 per kg, the cost of placing an order with the supplier is 60 and the cost of holding one kg of the material in stock for the period is 15% of the purchase price. Required:
(c) Calculate the economic order quantity (EOQ) of the raw material (to the nearest kg). (5 marks) (d) Calculate the total holding costs of the raw material in the period if the order quantity is 3,000 kg and buffer stock is 1,000 kg. (5 marks) [Sec: B, Q: 3 T4 June 2005]
3(a)
Material X is used by a company in the manufacture of one of its products, Product Z. Demand for Product Z for the next year is forecast to be 26,000 units. Each finished unit of Product Z contains 072 kilograms of Material X. There is a preparation loss of 10% of material used. It is not planned to change the stock-holding of Product Z in the year ahead but a reduction of 1,000 kilograms in the stock of Material X is planned.
Required: Calculate the quantity of Material X that needs to be purchased in the year ahead. (4 marks) ------------------------------------------------------------------------------------------------------------------------------------------------------------
Required:
Calculate for Material Y the: (i) Economic order quantity, using the formula (ii) Reorder level (assume 1 year = 50 weeks); (iii) Total annual cost of ordering stock; (iv) Total annual cost of holding stock. (4 marks) (4 marks) (3 marks) (3 marks) [Sec: B, Q: 2 T4 June 2007]
4
At the beginning of Month 2, the balance in the stores ledger for Material M27 was 2,400 kg at $360 per kg. The movements of the material in Month 2, and the prices per kg, were as follows: Day Receipts Issues Quantity Price Quantity Price kg $/kg kg $/kg 4 5,000 365 6 4,000 365 17 6,000 370
Required: (a) State the pricing method used to value the material issues on Day 6. (b) Calculate the closing inventory value at the end of Month 2. (2 marks) (3 marks)
In Month 3, no further purchases of Material M27 were made. Issues in the month were: Day 2 3,200 kg Day 10 4,300 kg
Required: (c) Prepare the inventory record for Material M27 for Month 3, showing both the quantity AND the value of: (i) Each of the issues; and (4 marks) (ii) The balance remaining after each issue. (4 marks) [Sec: B, Q: 1 T4 June 2008]
CAT T4
Labour Costing
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A company manufactures a single product at the rate of 25 units per direct labour hour. 660 direct labour hours were budgeted to be worked in a period during which 640 hours were actually worked and 16,390 units were manufactured.
Required: Calculate the following ratios for the period: (i) Efficiency; (ii) Capacity; (iii) Production volume.
2
A company manufactures three products. Sales demand for the products in the next period is estimated to be: Product A 6,200 units Product B 8,000 units Product C 11,500 units Selling prices and unit costs are: Product A per unit 970 280 240 090 270 Product B per unit 1110 390 240 090 270 Product C per unit 1380 492 320 120 360
Selling price Costs: Direct materials Direct labour (800 per hour) Variable overhead Fixed overheads
The company is experiencing a shortage of direct labour and estimates that a maximum of 8,500 hours will be available in the next period. Required:
(a) Demonstrate that the availability of direct labour will be a limiting factor in the next period. (4 marks) (b) Determine the production schedule for the next period that will maximise profit. (10 marks) [Sec: B, Q: 4 T4 December 2004]
3
A company manufactures a single product. Currently, the company employs a team of six direct operatives who produce a total of 2,500 units of the product in a 40-hour week. The hourly rate of pay for all operatives is 800. In an effort to improve productivity, and thus to increase output in the normal 40-hour week, an incentive scheme has been suggested. The scheme, which the six operatives have agreed to trial over a 4-week period, provides for differential piecework payments in addition to a reduced basic rate per hour.
In the first week of the trial, total output was 3,080 units in the 40 hours worked. Required:
(a) For the existing time rate payment system, calculate: (i) The labour cost per unit, based on the current weekly output of 2,500 units; (2 marks) (ii) The % change in the labour cost per unit if weekly output in the 40 hours worked could be increased to 2,750 units. (2 marks) (b) For the incentive scheme, calculate: (i) The labour cost per unit, based on the results of the first week of the trial; (6 marks) (ii) The level of output in a 40 hour week at which total labour cost would be the same as under the existing time rate payment system. (5 marks) [Sec: B, Q: 1 T4 December 2006]
4
(a) Describe briefly how the following are used in the accounting for labour: (i) time sheets; (3 marks) (ii) job cards. (3 marks) (b) The following details relate to the labour in a production cost centre for a period: Direct personnel Hourly rates of pay: Basic Overtime Payroll hours: Productive Idle Total $1000 $1300 Indirect personnel $700 $910
310 18 328
118 4 122
Additional information: 1. The basic rates of pay apply to a normal working week of 38 hours 2. There are eight direct personnel and three indirect personnel in the cost centre 3. Overtime is worked from time to time to meet the general requirements of production 4. Idle time is regarded as normal.
Required: Calculate the total amounts: (i) Paid to the direct personnel and the indirect personnel respectively; (6 marks) (ii) Charged as direct wages to work-in-progress and indirect wages to overheads respectively (show clearly the make-up of the indirect charge). (6 marks) [Sec: B, Q: 4 T4 December 2008]
CAT T4
Overheads Costing
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A
Allocated overheads Apportioned overheads Additional data: Number of employees Direct labour hours 17,628 29,938
B
38,490 45,841
C
14,671 28,360
X
3,795 4,640
Y
6,130 5,750
14 5,200
21 7,460
14 4,780
Overheads allocated and apportioned to Service Cost Centre X are re-apportioned on the following basis: Production Cost Centre A 20%, Production Cost Centre B 45%, Production Cost Centre C 35%. Overheads allocated and apportioned to Service Cost Centre Y are re-apportioned on the basis of the number of employees in the other cost centres. Production overheads are absorbed on the basis of direct labour hours. Required:
(a) Re-apportion the service cost centre overheads. (b) Calculate an overhead absorption rate for each production cost centre. (7 marks) (3 marks)
(c) Calculate the total production cost of Job 57. Direct production costs of the job are: Direct materials Direct labour: Cost Centre A Cost Centre B Cost Centre C 1,678 288 (36 hours) 425 (50 hours) 304 (32 hours).
2(a)
State an appropriate basis of apportionment for each of the following production overhead costs: (i) Factory rent; (ii) Staff canteen.
(4 marks) ----------------------------------------------------------------------------------------------------------------------------------------------------------
2(b)
Overheads allocated, apportioned and re-apportioned to the two production cost centres in a factory for a period were: Production Cost Centre X Y Budget 161,820 97,110 Actual 163,190 96,330 Overheads are absorbed using predetermined rates. A machine hour rate is used in Production Cost Centre X and a direct labour hour rate in Production Cost Centre Y. Machine and direct labour activity in each production cost centre is:
Required: Calculate for each production cost centre for the period: (i) The predetermined production overhead absorption rate; (ii) The production overheads absorbed; (iii) The over/under absorption of production overhead.
3
There are two production cost centres (P1 and P2) and two service cost centres (Materials Store and Employee Facilities) in a factory. Estimated overhead costs for the factory for a period, requiring apportionment to cost centres, are: Buildings depreciation and insurance 42,000 Management salaries 27,000 Power to operate machinery 12,600 Other utilities 19,400 In addition, the following overheads have been allocated to cost centres:
Cost Centre
P1 107,000 Further information: P2 89,000 Materials Store 68,000 Employee Facilities 84,000
Cost Centre
Total P1 Floor area (m2) Number of employees Share of other utilities overhead Machine hours Share of Materials Store overheads Required:
(i) Prepare a schedule showing the allocated and apportioned factory overhead costs for each cost centre; (7 marks) (ii) Re-apportion the service cost centre overheads. (4 marks) [Sec: B, Q: 3 T4 June 2006]
Department
Overhead costs Direct labour hours Machine hours X 51,240 4,200 Y 87,120 5,280 Z 66,816 11,520
A predetermined overhead absorption rate is established for each production department each year.
Department
Overhead costs Direct labour hours Machine hours Required:
(a) Calculate, from the data provided, an appropriate predetermined overhead absorption rate for each production department for Year 6. (4 marks) (b) Calculate the amount of the over/under absorption of overhead in Month 1 in each production department and in total for the factory. (9 marks) (c) Suggest two general causes of overhead under absorption. (3 marks) [Sec: B, Q: 2 T4 December 2006]
X 4,410 340
Y 7,190 426
Z 5,610 985
5(a)
A company has three production cost centres (P1, P2 and P3) and two service cost centres (S1 and S2) in its factory. The actual production overhead costs for a period, totalling 487,430, have been allocated and apportioned to cost centres as follows:
The overheads of service cost centre S1 are reapportioned on the basis of the number of materials requisition notes (MRN) raised in the period. The overheads of service cost centre S2 are reapportioned on the basis of the number of employees in the other cost centres. The following additional actual information is available for the period: Cost centre P1 P2 P3 S S Required:
(a) Reapportion the service cost centre overheads. (7 marks)
Number of employees 20 25 50 1 2
Machine hours Budget Actual 8,100 8,250 1,960 1,880 3,610 3,720
Direct labour hours Budget Actual 3,650 3,680 8,650 8,440 15,600 15,990
6
The following information is available for two production cost centres in a factory for a period: Cost centre X Cost centre Y Budgeted costs $28,556 $54,264 Budgeted hours 1,210 machine hours 6,460 labour hours Predetermined absorption rate $2360 per machine hour $840 per labour hour Actual costs $29,609 $52,567 Actual hours 1,235 machine hours 6,395 labour hours
Required: (a) Calculate the over or under absorption of overhead for the period in each cost centre. (6 marks) (b) Explain two advantages of using predetermined, as opposed to actual, overhead absorption rates. (4marks) [Sec: B, Q: 3 T4 December 2007]
7
Three of the cost items that are included in the production overhead budget for a factory for a period are: Machine maintenance labour Power Rent and rates $33,600 $26,000 $39,800
Production overheads are currently absorbed using a single factory-wide rate. It has been suggested that a separate overhead absorption rate should be calculated for each of the three groups of machines in the factory. The following additional budgeted data has been collected for the period: Machine Group Total MG1 MG2 MG3 Floor area (m2) 1,600 1,400 1,000 4,000 Machine values ($000) 320 250 230 800 Kilowatt hours (000) 220 110 110 440 Machine maintenance (labour hours) 600 400 600 1,600 Number of indirect workers 4 4 2 10 Machine hours 8,200 5,600 4,900 18,700
The totals of ALL budgeted production overhead cost items, allocated and apportioned to the three machine groups, are as follows: MG1 $129,560 MG2 $107,520 MG3 $119,070
Required: (c) Calculate an appropriate absorption rate for each machine group. (3 marks) (d) Calculate the production overhead that would be charged to Job J21 which requires five hours on MG1 machines, two hours on MG2 machines and three hours on MG3 machines. (3 marks) [Sec: B, Q: 3 T4 June 2008]
CAT T4
Job Costing
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2
Give an example of a business where job costing may be applied and describe the features of this type of business which make the costing method appropriate; (4 marks)
[Sec: B, Q: 3(a)(i) T4 June 2004]
CAT T4
Service Costing
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2
A transport business operates a fleet of 10 vehicles. Operating data are as follows: Purchase of vehicles (depreciated on a straight-line basis over 4 years) 460,000 (for 10 vehicles) Vehicle disposal value (after 4 years) 4,000 (per vehicle) Road fund licence and insurance 2,290 (per vehicle per year) Tyres (8 per vehicle renewed every 40,000 kilometres) 210 (per tyre) Servicing (every 16,000 kilometres) 650 (per vehicle service) Fuel (consumption of 1 litre per 32 kilometres) 080 (per litre) Vehicle usage 80,000 kilometres (per vehicle per year) Drivers (1 driver per vehicle) 18,000 (per driver per year) Required:
Calculate the total vehicle operating costs per kilometre (to four decimal places of ). (10 marks) [Sec: B, Q: 3(ii) T4 December 2004]
3
A passenger transport company operates four coaches, each with a capacity for 25 passengers. The company operates on two routes with two coaches on each route. Each coach on Route A completes 12 journeys per day and on Route B 10 journeys per day. The coaches operate for six days per week and for 52 weeks per year. The company is analysing performance on each route and has gathered the following route data for the last 52 weeks: Route A Route B Average number of passengers per journey 13 11 Average fare paid per passenger, per journey $226 $280 Route length per journey (kilometres) 14 19 Operating cost data for the last 52 week period is as follows: Drivers wages: $110 per coach per working day Fuel and maintenance: $08932 per kilometre Vehicle tax and insurance: $3,870 per coach for the period Apportioned fixed costs: $21,760 per route for the period
Required: Calculate, for the 52 week period, the: (a) Total cost per coach on each route; (b) Cost per kilometre on each route (to four decimal places of $); (c) Profit per kilometre on each route.
CAT T4
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2
A company has the following costs for its single product, based on planned production and sales of 46,000 litres in a period: per litre Prime costs 520 Production overhead all fixed 280 Non-production overhead variable 065 fixed 170 1035 Actual production and sales in the period were: Production 46,000 litres
A book publisher makes an initial payment of 25,000 to authors for each accepted manuscript, followed by a royalty payment of 15% of the net sales price of each book sold. The net sales price of a book, which is the revenue received by the publisher, is the listed selling price in bookstores less the bookstore margin of 20% of the listed selling price. A particular book has a listed selling price of 1500. Costs incurred on the book by the publisher (excluding initial and royalty payments to the author) are: Variable costs per copy 320 Total fixed costs 80,000 Required:
(a) Calculate the number of copies of the particular book that need to be sold for the publisher: (i) to break even; (ii) to make a profit of 35,000. (9 marks) (3 marks)
(b) Prepare a profit/volume (P/V) chart for the publisher, relating to the particular book publication, covering sales up to 25,000 copies. (5 marks) [Sec: B, Q: 4 T4 June 2005]
4
The following is a list of unit costs for a single product, incurred in a period, using either marginal costing or absorption costing: Marginal costing Absorption costing $ $ $ $ Production costs: Prime cost 420 420 Variable overhead 060 060 Fixed overhead 380 480 860 Selling & administration costs: Variable overhead 100 100 Fixed overhead 290 100 390 Total 580 1250 The selling price of the product, throughout the period, was $1450 per unit. 11,400 units of the product were manufactured in the period during which 11,200 units were sold. There were no finished goods at the beginning of the period. The fixed production overhead costs per unit listed above are based on the production units for the period and the fixed selling and administration overhead costs per unit are based on the sales units.
CAT T4
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Selling price Costs: Direct materials Direct labour (800 per hour) Variable overhead Fixed overheads
The company is experiencing a shortage of direct labour and estimates that a maximum of 8,500 hours will be available in the next period. Required:
(a) Demonstrate that the availability of direct labour will be a limiting factor in the next period. (4 marks) (b) Determine the production schedule for the next period that will maximise profit. (10 marks) [Sec: B, Q: 4 T4 December 2004]
2(a)
Company A manufactures and sells a single product. The following information is available: Selling price per unit Variable costs per unit Fixed costs per period 6000 3600 216,000
Required: (i) Draw a profit/volume (P/V) chart based on sales up to 14,000 units per period. (8 marks) (ii) Clearly identify the break-even point, and areas of profit and loss, on the chart. (2 marks) ----------------------------------------------------------------------------------------------------------------------------------------------------------
2(b)
Company B manufactures and sells three products. The following information is available: Product A Product B Product C Selling price per unit 1000 1250 1870 Variable costs per unit 520 750 935 Machine hours per unit 06 05 10 Direct labour hours per unit 10 12 25 The company wishes to maximise profit each period. Required:
(i) Calculate the contribution/sales (C/S) ratio of each of the products; (2 marks) (ii) List the products in the order of their production priority (i.e. most profitable product first) in EACH of the following situations: (1) if machine hours are the limiting factor; (3 marks) (2) if direct labour hours are the limiting factor. (3 marks) [Sec: B, Q: 4 T4 December 2005]
Required:
(a) By reference to the above chart: (i) Estimate the break-even sales revenue of Company A; (ii) Estimate the total fixed costs of Company A; (iii) State which company has the higher contribution/sales ratio (justify your conclusion); (iv) Estimate the level of sales at which the profit of the two companies is the same. (2 marks) (2 marks) (3 marks) (2 marks)
(b) Calculate the contribution/sales ratio of Company A and use this to confirm, by calculation, the breakeven point identified in (a) (i) above. (4 marks) [Sec: B, Q: 2 T4 June 2006]
(3 marks) (3 marks)
(b) In the following period it is expected that fixed costs will total 39,000. Required:
Calculate the required contribution per unit in the following period for the break-even point to be 500 units. (4 marks) [Sec: B, Q: 3 T4 June 2007]
5
A garage operates a vehicle repair service. Space is limited and, although the garage is usually busy, the owner is concerned about the amount of profit that can be generated. Summarised data concerning vehicle repairs follows: Average number of repairs per period Average variable cost of each repair Average sales value of each repair 85 $126 $210
The owner is considering extending the garage opening hours. This would result in an increase in fixed costs from $6,972 to $7,728 per period. The average variable cost and the average sales value of each repair would be expected to remain the same.
Required: (a) For the current situation, calculate per period the: (i) Profit; (3 marks) (ii) Break-even sales revenue. (4 marks) (b) For the proposed extended opening hours, calculate the average number of repairs required per period to achieve the current level of profit. (4 marks) [Sec: B, Q: 2 T4 December 2008]
CAT T4
Process Costing
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Selling prices:
2
Give an example of a business where process costing may be applied and describe the features of this type of business which make the costing method appropriate. (4 marks)
[Sec: B, Q: 3(a)(ii) T4 June 2004]
A company manufactures a product by means of two successive processes, Process 1 and Process 2. The following relates to the period just ended: Process 2 Units Opening work-in-progress Transfer from Process 1 Material added Conversion costs Transfer to finished goods warehouse Closing work-in-progress Nil 2,160 Cost () Nil 22,032 5,295 8,136
1,950 210
The work-in-progress at the end of the period was 80% complete with respect to material added and 40% complete with respect to conversion costs in Process 2. Required: Calculate for the period the:
(i) Production cost per equivalent unit of the product; (ii) Value of the transfer to the finished goods warehouse; (iii) Value of the closing work-in-progress in Process 2. (6 marks) (2 marks) (3 marks) [Sec: B, Q: 3(b) T4 June 2004]
4
In another process operation joint products A and B are produced. Joint costs, apportioned on the basis of weight of output, are 980 per kg. Product A can be sold at the split-off point for 900 per kg. Alternatively the product can be processed further, at an incremental cost of 210 per kg, and sold as Product AA at a price of 1150 per kg. Required:
Comment on EACH of the following statements concerning Product A: (i) The product should be processed further because if sold as Product A the selling price is below cost; (3 marks) (ii) The product should be processed further because profit would increase (show calculations clearly to support your comment). (4 marks) [Sec: B, Q: 4(b) T4 June 2006]
5
A company manufactures two products, Product A manufactured in Process Y and Product B manufactured in Process Z. The following information is available for a period: Process Y Nil $162,180 (18,000 kg) $94,050 1,000 kg (Note 1) $160 per kg 17,000 kg Nil Process Z Nil $210,090 $287,760 Nil Nil 12,600 units 1,500 units (Note 2)
Opening work-in-progress Raw materials input Conversion costs Waste material Sales value of waste material Output of finished product Closing work-in-progress
Note 1 In Process Y the normal amount of waste material is 5% of the weight of raw materials input. Note 2 In Process Z the closing work-in-progress is 100% complete as to raw materials and 60% complete as to conversion costs.
Required: (a) For Process Y, calculate the: (i) Cost per kg of the expected production of Product A; and (8 marks) (ii) Total cost of the finished output of Product A. (2 marks) (b) For Process Z, calculate the equivalent units of production of Product B in respect of conversion costs. (3 marks) [Sec: B, Q: 2 T4 June 2008]
There is a preparation loss at the start of the process operation. Actual losses in the period were at the normal level of 10% of the materials input.
Required: For the period: (a) Calculate the cost per kg (kilogram) of production. (b) Prepare the process account (showing kg as well as value).
CAT T4
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Product A is sold for 860 per kg. Product B can be sold for 780 per kg or alternatively can be further processed to produce the same weight of Product BB. Further processing costs are 140 per kg. Product BB can be sold for 900 per kg. Required:
(a) Calculate the profit/loss in the period for each product and in total, assuming: i. All output was sold as Products A and B; and ii. Joint costs were apportioned on the basis of weight of output. (8 marks) (b) Determine whether further processing of Product B is worthwhile. (6 marks) [Sec: B, Q: 2 T4 December 2004]
2
Two products (Y and Z) are jointly produced in a single process. Joint costs for a period totalled 52,000. Output of the two products in the period was: Product Y 2,000 units Product Z 3,500 units There was no opening or closing work-in-progress or finished goods stock. Both products are currently sold without further processing for: Product Y 1200 per unit Product Z 1600 per unit Sales values are used as the basis for apportioning joint costs.
Required: Prepare a statement showing the gross profit (in total and per unit) for each product in the period. (9 marks) [Sec: B, Q: 4(a) T4 June 2006]
3
The following summary shows the selling prices, costs and output of joint products JP1 and JP2 from a manufacturing process: Product JP1 $2000 per kg $1200 per kg $800 per kg 100 kg Product JP2 $1000 per kg $1200 per kg ($200) per kg 120 kg
Both products can be sold at the split-off point but Product JP1 can also be further processed to form Product FP1. Relevant selling price, cost and output information for Product FP1 is: Product FP1 $2500 per kg $350 per kg 100 kg
CAT T4
Decision Making
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120 units 610 per unit 460 per unit 650 per unit
Overheads would be absorbed on the contract on the following basis: Production overheads Non-production overheads 120% of direct labour cost (only 20% of the overheads absorbed would be an incremental cost) 40% of total production cost (none of the overheads absorbed would be an incremental cost)
2. Sub-contract work: The sub-contract work would be carried out in Department Z, utilising existing machinery. The machinery is now surplus to requirements and would otherwise be sold. The net book value of the machinery is 140,000 but the current disposal value is only 120,000. If used for three years on the sub-contract work the disposal value would be expected to reduce to 10,000. The remaining net book value of the machinery would be depreciated on a straight-line basis over the three years. Net cash inflows from the sub-contract work, occurring at the end of each year, are forecast to be: Year 1 40,000 Year 2 55,000 Year 3 60,000 Required:
(a) Calculate the minimum price that could be quoted for Contract W in order to recover incremental costs only. (Show workings clearly.) (10 marks) (b) Calculate the net present value (NPV) for the sub-contract work at a cost of capital of 10% per annum. Discount factors at 10%: Year 1 0909 Year 2 0826 Year 3 0751 (9 marks) [Sec: B, Q: 4 T4 December 2006]
Selling prices Variable costs: Production* Non-production Fixed costs: Production Non-production
*includes the cost of direct operatives 2420 1650 1760 The fixed costs per unit are based on achieving the sales targets. There would not be any savings in fixed costs if production and sales are at a lower level.
Required: (i) Determine the production plan that would maximise profit in the following period, if the available direct operatives hours total 26,400. (11 marks) (ii) Calculate the total net profit in the following period based on the production plan in (b) above. (5 marks) [Sec: B, Q: 4 T4 June 2008]
CAT T4
Investment Appraisal
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2
A company is considering investment in several projects. The following information relates to three of the projects: Project 1: Project 2: Investment of 119,000 at the start of the project. Net cash inflow of 13,500 per annum in perpetuity. Investment of 241,000 at the start of the project. Net present value (NPV) at 20% of (23,000) i.e. negative, based on net cash inflows of: 1st year 60,000 2nd year 65,000 3rd year 70,000 4th year 100,000 5th year 85,000 Investment of 186,000 at the start of the project. Constant annual net cash inflows for five years. Internal rate of return (IRR) of 14%.
Project 3:
Assume that net cash inflows occur at the end of each year. Discount factors at 10% per annum (the companys cost of capital) and at 14% per annum are: Year 1 2 3 4 5 1 to 5 110% 0909 0826 0751 0683 0621 3790 114% 0877 0769 0675 0592 0519 3432
(d) If the cost of capital increased to 15%, state, with reasons, whether investment in Projects 2 and 3 would be justified. (NB Base your answer on the discounted cash flow analysis already carried out. No further discounted calculations are required.) (3 marks)
[Sec: B, Q: 4 T4 June 2004]
3(a)
The future value (S) of a sum invested now can be calculated using the formula:
S = P (1 + r) Required:
(i) Define each of the other constituents in the formula above (i.e. P, r and n); (3 marks) (ii) Calculate the value (to the nearest ) after four years of 5,000 invested now at a compound rate of interest of 8% per annum. (3 marks)
--------------------------------------------------------------------------------------------------------------------------------------------
3(b)
A company is considering an investment in new machinery. The incremental annual profits (losses) relating to the investment are estimated to be: 000 Year 1 (11) Year 2 3Year 3 34Year 4 47Year 5 8Investment at the start of the project would be 175,000. The investment sum, assuming nil disposal value after five years, would be written off using the straight-line method. The depreciation has been included in the profit estimates above, which should be assumed to arise at each year end. Required: (i) Calculate the net present value (NPV) of the investment at a discount rate of 10% per annum (the companys required rate of return); Discount factors at 10% are: Year 1 Year 2 Year 3 Year 4 Year 5
statement.
(8 marks)
(ii) State, on the basis of your calculations, whether the investment is worthwhile. Justify your
(2 marks) [Sec: B, Q: 1 T4 December 2005]
5
A company is considering whether to add a new product to its range. Machinery costing $280,000 would have to be bought at the start of the project (Year 0). The project life would be five years with no disposal value at the end of the project. Sales of the new product are forecast at 12,000 units in each of Years 1 and 2, rising to 15,000 units in each of Years 3, 4 and 5. The selling price per unit will be $15 in Year 1 and $16 thereafter. Variable costs are estimated at $9 per unit. Straight-line depreciation of the machine would be $56,000 in each year. No other future incremental fixed costs would be incurred. However, the company has already incurred expenditure of $6,000 for a market research survey and has decided to write this off against profits made in the first year if the investment takes place. Assume that all cash flows, apart from the investment in machinery, occur at the end of each year. The cost of capital is 14% per annum. Discount factors at 14% are: Year 1 0877 Year 2 0769 Year 3 0675 Year 4 0592 Year 5 0519
Required: (a) Calculate the net cash flows for each year of the project (Year 0 to 5). (8 marks) (b) Calculate the net present value of the project (working in $000). (6 marks) (c) State whether the internal rate of return is above or below 14% and justify your conclusion. (2 marks) [Sec: B, Q: 1 T4 December 2008]