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  • 4 Marks

FM – L2 – Q82 – Discounted Cash Flow

Calculate NPV of a project with given cash flows and 10% cost of capital, and state if it should be undertaken.

 

A company has a cost of capital of 10%. Calculate the NPV of an investment project with the following estimated cash flows:

Years Cash flow each year
GH₵
0 (70,000)
1 15,000
2–4 12,000
5–10 8,000

State whether the project should be undertaken.

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  • 10 Marks

PSAF – L2 – Q10.3 – International public sector accounting standards

Account for the treatment of a property reclassified as investment property in 2024 financial statements of the National Retirement Oversight Agency.

The National Retirement Oversight Agency acquired a property on 1 January 2021 at a cost of GHc40,000,000 and immediately occupied it as office premise. On acquisition, it was estimated to have a useful life of 50 years. Subsequent to its acquisition, the asset was measured at depreciated cost until 1 October 2024 when management decided to use the building mainly for rentals. Following this decision, the property was fair valued at GHc38,000,000. The National Retirement Oversight Agency adopted the fair value model for subsequent measurement. At 31 December 2024, it was fair valued at GHc39,000,000.

Required:

Account for the treatment of this property in the 2024 financial statements of The National Retirement Oversight Agency.

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  • 17 Marks

FM – L2 – Q81 – Sources of finance: debt

Calculate loan repayment schedule for a GH₵300,000 loan and list advantages of term loan over overdraft.

(a) Dinco Supermarket is considering acquiring a loan of GH₵300,000 from Abrempong Bank Ltd. The loan is payable in five equal annual instalments at an interest rate of 25%. Dinco Ltd has consulted you to determine their annual repayment amount and the interest thereon.

Required:

(i) Prepare a repayment schedule for Dinco indicating clearly the interest payment and the principal repayment

(ii) State THREE (3) advantages of a term loan over an overdraft facility

(b) On 1st January 20X4, Exchequers Insurance issued a 15% convertible bond quoted at GH₵123. The nominal value for each bond is GH₵100 and the conversion date for the bond is 31st December 20X9 after interest has been paid. The bond is convertible at 20 ordinary shares per GH₵100 bond. The current price per share is GH₵6.

Required:

(i) Determine the conversion rate.

(ii) Determine the conversion premium.

(iii) Comment on the possibility of bond holders converting for shares.

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  • 10 Marks

PSAF – L2 – Q10.2 – International public sector accounting standards

Prepare financial statement extracts for a new technology acquisition by the Office of Business Registry for 2023 and 2024, considering delayed deployment.

The Office of Business Registry has successfully acquired a new technology that will transform the landscape of business registration in the Republic of Zamara and make the Republic of Zamara a preferred destination for business.

The cost of the technology is GHc375 million. Professional advisers charged GHc5 million for providing advice in the acquisition of the technology which was estimated to have a useful life of 20 years effective from 1 January 2023.

Delay for the construction of the supporting infrastructure meant that the new technology could not be deployed until 1 January 2024.

Required:

Show extracts of the financial statements of the Office of Business Registry for the years ending 31st December 2023 and 2024.

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  • 40 Marks

FM – L2 – Q80 – Simple interest and compound interest

Solve various time value of money problems involving simple and compound interest, annuities, and sinking funds.

(a) Kofi borrowed GH¢120,000 for eight months at 15% simple interest per annum. How much interest would he pay?
Compute the annual rate of interest that, if compounded continuously monthly, would result in the payment of the same amount of interest.

(b) Ama paid GH¢500,000 into a fund which yielded 8% per annum compounded annually.
How much amount will she have in the fund after 10 years?

(c) At the start of each 6 month period for 7 years Kwame paid GH¢25,000 into a fund earning annual interest at 6% compounded semi-annually.
What amount would be in the fund at the end of 7 years?

(d) Yaw deposited an amount into a bank which will be doubled in eight years. Find the rate of interest on the basis that the amount is compounded annually.

(e) How much should Adwoa deposit now to yield GH¢600,000 at the end of five years at 10% per annum simple interest?

(f) How much should Esi deposit now to yield GH¢600,000 at the end of five years at 10% per annum compound interest?

(g) How much should Kwesi deposit now to yield GH¢600,000 at the end of five years at an annual interest of 10% compounded half yearly?

(h) Nii wants to purchase an annuity that will provide GH¢6,000 per annum at the end of each year for 10 years.
How much will he need to invest in a fund with a return of 6% per annum?
How much interest would he earn over the period of 10 years?

(i) Two years ago, Apex Limited borrowed an amount at an annual interest rate of 10%. The amount of the loan today is GH¢100,000 and the final amount will be paid back in four years.
Apex Limited is to set up a sinking fund which yields a return of 8% per annum compounded quarterly (by parts).
How much will Apex Limited need to deposit at the end of each quarter, in the sinking fund, to settle the loan at the end of four years?

(j) Star Limited wants to invest equal annual amounts in a bank for five years starting from January 1, 20X1 in order to have the following amounts available:

  • GH¢1.0 million for the purchase of land on January 01, 20X6.
  • Enough cash to buy an annuity of GH¢240,000 per annum for 4 years commencing from January 1, 20X7 at an interest rate of 8%.
    How much will Star Limited need to deposit at the end of each year in a fund that generates a return of 10% per annum compounded annually?

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  • 20 Marks

FM – L2 – Q79 – Discounted Cash Flow

Calculate NPV for three investment projects with varying cash flows and discount rates for Zenith Solutions Ltd.

The Board of Zenith Solutions Ltd is considering the company’s capital investment options for the coming year, and also evaluating the following potential investments:

Investment A
This investment is similar to its current investments and requires an investment of GH₵60,000 now, GH₵40,000 for new capital equipment and GH₵20,000 for increases in working capital. This will be financed from Shareholders Funds. Sales next year would be 10,000 units, variable costs would be GH₵6 and the product would be sold for GH₵10. But due to entry of new competitors and technological improvements, the sales price would decline by 20% per annum thereafter, sales volume would fall by 10% and variable costs would fall by 20% per annum. Overheads attributed to the project would be GH₵15,000 per annum.
In year three the project would be wound up, working capital investment would be recovered and capital equipment sold off for 25% of its purchase costs the following year. Fixed costs include an annual charge of GH₵4,000 for depreciation.

Investment B
This is a long-term project in a totally new area, involving an immediate outlay of GH₵90,000, which they intend to borrow from their lenders at 6%. They expect net profits of GH₵12,000 next year, rising thereafter by 3% per annum in perpetuity.

Investment C
This is another long-term investment in a totally new area, involving an immediate outlay of GH₵25,000 which they intend financing by retained earnings. Expected annual net cash profits are as follows:
Years 1 to 4: GH₵3,000
Years 5 to 7: GH₵5,000
Year 8 onwards forever: GH₵7,000
The company discounts all projects lasting ten years duration or less at a cost of capital of 10% and all other projects at a cost of 13%. You may ignore taxation.

Required:
(a) Calculate the NPV of each project.

(b) Calculate the IRR of investments A and B (you may use 25% as the upper limit if you wish) and comment accordingly.

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  • 10 Marks

PSAF – L2 – Q10.1 – Revaluation of Assets

Show financial statement extracts for Kumawu District Assembly's building revaluation at 31 December 2024 under IPSAS.

Kumawu District Assembly revalues its buildings and decides to incorporate the revaluation into the financial statements. The following information has been made available:
a) Extract from the statement of financial position at 31 December 2023

Buildings at cost GHc’000
Buildings at cost 300,000
Accumulated Depreciation (93,000)
Carrying amount 207,000

b) Depreciation has been provided at 2% per annum on a straight-line method.
c) The building is revalued at 30 June 2024 at GHc276 million. There has been no change in the remaining estimated future life of the buildings.
Required:
Show the relevant extracts from the financial statements at 31 December 2024.

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  • 12 Marks

FM – L2 – Q78 – Discounted cash flow

Calculate NPV for Woodland Enterprises' new product investment with inflation and advise on project viability.

Woodland Enterprises plans to invest GH₵7 million in a new product. Net contribution over the next five years is expected to be GH₵4.2 million per annum in real terms. Marketing expenditure of GH₵1.4m per annum will also be needed. Expenditure of GH₵1.3m per annum will be required to replace existing assets which will now be used on the project but are getting to the end of their useful lives. This expenditure will be incurred at the beginning of each year. Additional investment in working capital equivalent to 10% of contribution will need to be in place at the start of each year. Working capital will be released at the end of the project. The following forecasts are made of the rates of inflation each year for the next five years:

Contribution Marketing Assets General prices
8% 3% 4% 4.70%

The real cost of capital of the company is 6%. All cash flows are in real terms. Ignore tax.

Required:
Calculate the net present value of the project and appraise whether it is a worthwhile project.

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  • 20 Marks

PSAF – L2 – Q9.4 – Provisions and Contingent Liabilities

Account for contract cancellation, court ruling, and revised contract costs under IPSAS 19, including provisions and disclosures.

Under IPSAS 19: Provisions, Contingent Liabilities and Contingent Assets, the authority needs to account for the cancellation of contracts, the legal case, the court’s decision, and the potential revision of the contract amount.

Required:

Determine whether provisions should be made for the court award and contract revision, calculate the expected value of the revised contract amount, and outline the disclosures required under IPSAS 19.

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  • 20 Marks

FM – L2 – Q76 – Investment Appraisal

Describe four differences in investment appraisal approaches between a municipal assembly and a mining company.

(A) Describe FOUR (4) ways in which the investment appraisal approach of a City Council will differ from a GoldPeak Ltd, a mining company.

(B) StarPrint Ltd has been printing all its magazines from a facility in Abu Dhabi due to cost advantages. The company is considering establishing its own printing department, and the R&D team has identified a printing machine that meets the quality and cost specifications of StarPrint Ltd. The machine also has the capacity to print to meet the market needs of the company. The machine, which has a useful life of 5 years, will cost GH₵800,000, and immediate installation cost will be GH₵50,000. Fixed cost for maintaining the machine will be GH₵170,000 per annum over the machine’s useful life, and additional working capital of GH₵30,000 will be introduced in year 2. The use of this machine will generate a contribution of GH₵500,000 per annum for five (5) years. Corporate income tax rate, payable in arrears, is 25%, and the company’s after-tax cost of capital is 20%. No capital allowance is permitted.

Required:
Calculate the NPV for the project and advise management on whether to accept or reject the project.

(C) Explain the following types of contracts:

(i) Mudaraba contract

(ii) Musharaka contract

(iii) Murabaha contract

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