Level 2 – Page 25

FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

Question

A company is considering whether or not to invest in a project where the investment would be GH¢5,250,000. The project would have a five-year life, and estimated annual cash flows are as follows:

Year	Cash inflows	Cash outflows
	GH¢	GH¢
1	3,000,000	1,500,000
2	4,000,000	1,800,000
3	5,000,000	2,400,000
4	4,000,000	1,700,000
5	3,000,000	1,000,000

The cost of capital is 10%.
The estimates of cash outflows are considered fairly reliable. However, the estimates of cash inflows are much more uncertain. Several factors could make the annual cash flows higher or lower than expected.
Factor 1: There is a 20% probability that government measures to control the industry will reduce annual cash inflows by 20%.
Factor 2: There is a 30% probability that another competitor will also enter the market: this would reduce the estimated cash inflows by 10%.
Factor 3: There is a 40% probability that demand will be stronger than expected. The company would not be able to supply more products to the market, but it would be able to sell at higher prices and cash inflows would be 5% higher than estimated.
Required
Calculate the expected net present value of the project.

Answer

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Tags: Cash Flows, Discounted cash flow, Expected value, investment appraisal, Net Present Value, Probability Analysis, Risk Assessment
Level: Level 2

Topic: DCF: Risk and uncertainty

PSAF – L2 – Q8.2 – International Public Sector Accounting Standards

Show the accounting treatment of bilateral grant revenue for the Federal Government of Nigeria as at 31st December 2023.

Question

Bilateral grants were received from a number of friendly governments in 2023 amounting to NGN125 million. The Federal Government of Nigeria is unlikely to comply with some of the conditions for the bilateral grants from one country amounting to NGN15 million included in bilateral grants received. The Federal Government of Nigeria has already complied with grant conditions in respect of a grant from a Global Development Agency amounting to NGN22 million which is yet to be received. The probability of receipt of this grant in a month’s time from December 2023 is very probable.

Required:

Show the accounting treatment for the grant revenue in the books of the government as at 31st December 2023.

Answer

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Tags: Bilateral Grants, Deferred Grant, Financial Position, Grant Revenue, IPSAS 23, Non-Exchange Transactions, Revenue Receivable
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q69 – Discounted cash flow

Calculate NPV of replacing Product X with Product Y using DCF analysis, with given sales, costs, and 8% cost of capital.

Question

A well-established company in the region of the Volta River manufactures engines. One of its current products is Product X, for which sales will be 150,000 units in the year just ending (Year 1). However, after four more years, at the end of Year 5, Product X will no longer be permitted, when new government environmental regulations come into force. On or before that time, the company needs to introduce a new product to replace Product X.
A replacement product has already been developed. This is Product Y. A market research report has estimated that, if Product Y is introduced to the market now to replace Product X, annual sales of Product Y at a unit price of GH₵350 would be:

Annual sales (units)	Probability
100,000	0.2
80,000	0.5
50,000	0.3

The current selling price of Product X is GH₵250 per unit, and its variable cost of sales is GH₵180. There is no possibility of increasing the selling price.
The annual sales demand for Product X is expected to fall each year if it is kept on the market. The best estimate is that annual sales in Year 2 will be 10,000 units less than in Year 1, with a further fall in sales by 10,000 units each year until Year 5.
To prepare a production facility for manufacturing Product Y instead of Product X, an initial capital outlay of GH₵2,000,000 would be required. Annual fixed costs would increase by GH₵160,000. The variable cost of making and selling Product Y would be GH₵230 per unit.
The company’s cost of capital is 8%. Ignore inflation and taxation.

Required:
(a) Using DCF analysis, calculate the NPV of a proposal to replace Product X with Product Y from Year 2 onwards.

(b) Estimate the minimum annual sales for Product Y that would be required to justify the immediate replacement of Product X with Product Y. Assume that the estimates of annual sales of Product X are correct.

(c) Calculate the minimum reduction in the annual sales of Product X, in Year 2 and in each subsequent year that would be necessary before you recommended the immediate replacement of Product X with Product Y. Assume that the estimates of annual sales of Product Y are correct.

(d) List briefly the weaknesses or limitations in the financial analysis in part (a) to (c) above.

Answer

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Tags: DCF, Financial analysis, Limitations, NPV, product replacement
Level: Level 2

Topic: Discounted cash flow

PSAF – L2 – Q8.1 – International Public Sector Accounting Standards

Detail the accounting treatment of outstanding tax revenue for the Federal Government of Nigeria as at 31st December 2024.

Question

As at 31st December 2024, corporate tax assessments amounting to NGN170 million were still outstanding to be paid by corporate entities to the Federal Government of Nigeria, whilst the total amount owed to the Federal Government of Nigeria as at 31st December 2024 in respect of taxes on goods and services stood at NGN140 million. It is estimated that, only 85% and 90% of the outstanding corporate taxes and taxes on goods and services respectively may be recovered.

Required:

Detail out the accounting treatment of tax revenue for the year ended 31st December 2024.

Answer

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Tags: Financial Performance, IPSAS 23, Non-Exchange Transactions, Provisions, Receivables, Tax Revenue, Uncollectible Revenue
Level: Level 2

Topic: International Public Sector Accounting Standards

FM – L2 – Q68 – Discounted Cash Flow

Calculate the expected NPV of a new product launch for Accra Nova Cosmetics Limited with given cash flows and a 12% cost of capital.

Question

Accra Nova Cosmetics Limited has designed a new product that it would like to introduce to the market. It has spent GH¢250,000 on the design work so far. A market research report has indicated that the product will have a life of four years, and at a selling price of GH¢35 per unit, annual sales would be as follows:

Year	Sales (units)
1	40,000
2	60,000
3	60,000
4	20,000

It has been estimated that to produce the new product, annual fixed production costs (all cash flows) will increase by GH¢200,000, and the variable cost per unit will be GH¢10.
Other cash flows for the project will be:

Capital expenditure of GH¢1,400,000 at the beginning of the project. There will be a residual value of GH¢600,000 from this investment at the end of Year 4.
An investment of GH¢400,000 will be required in working capital. This will be recovered at the end of Year 4.
Expenditure on advertising will be required, as follows:

Year	Advertising costs
0	800,000
1	600,000
2	400,000
3	200,000

Required
(a) Calculate the expected NPV of the project to launch the new product, if the company’s cost of capital is 12%.

(b) Calculate the target cost for the product that is needed to achieve a return of 12% on investment and calculate the size of the current cost gap.

Answer

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Tags: Cost Gap, investment appraisal, NPV, Target Cost, variable costs
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q67 – Capital rationing

Determine optimal investment for Yebson Plc with GH₵800,000, assuming divisible/indivisible projects, and calculate NPV

Question

Yebson Plc is reviewing investment proposals that have been submitted by divisional managers. The investment funds of the company are limited to GH₵800,000 in the current year. Details of three possible investments, none of which can be delayed, are given below.

Project 1
An investment of GH₵300,000 in work station assessments. Each assessment would be on an individual employee basis and would lead to savings in labour costs from increased efficiency and from reduced absenteeism due to work-related illness. Savings in labour costs from these assessments in money terms are expected to be as follows:

Year	1	2	3	4	5
Cash flows (GH₵000)	85	90	95	100	95

Project 2
An investment of GH₵450,000 in individual workstations for staff that is expected to reduce administration costs by GH₵140,800 per annum in money terms for the next five years.

Project 3
An investment of GH₵400,000 in new ticket machines. Net cash savings of GH₵120,000 per annum are expected in current price terms and these are expected to increase by 3.6% per annum due to inflation during the five-year life of the machines.

Yebson Plc has a money cost of capital of 12% and taxation should be ignored.

Required:
(a) Determine the best way for Yebson Plc to invest the available funds and calculate the resultant NPV:
(i) on the assumption that each of the three projects is divisible
(ii) on the assumption that none of the projects are divisible.

(b) Explain how the NPV investment appraisal method is applied in situations where capital is rationed.

Answer

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Tags: Capital rationing, Financial constraints, Financial management, investment appraisal, Project Selection
Level: Level 2

Topic: Capital rationing

FM – L2 – Q66 – Capital rationing

Recommend investments to maximize NPV assuming divisible projects with a GH¢150,000 capital limit.

Question

A company, Kumasi Ventures Ltd, has identified five investment projects that it would like to undertake. None of the investments can be delayed. If they are not undertaken now, the opportunity to invest will be lost. Details of the five investments are as follows:

Investment	Capital investment required in Year 0	NPV of the investment
	GH¢	GH¢
A	60,000	12,000
B	80,000	21,600
C	50,000	8,500
D	45,000	10,800
E	55,000	9,900

Capital is in short supply, and only GH¢150,000 is available for investment. The company cannot therefore undertake all five investments.
Required:
In order to maximise the total NPV of its investments, recommend which investments to undertake:
(a) assuming that all five investment projects are divisible.

(b) assuming that none of the five investments is divisible, and the choice is either 0% or 100% of each investment.

Answer

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Tags: Capital rationing, Financial decision-making, Indivisible projects, investment appraisal, NPV
Level: Level 2

Topic: Capital rationing

FM – L2 – Q6.4 – Public Financial Management Systems

Discuss five public financial management functions integrated on the ZIFMIS platform.

Question

The most important element of the Zamara Integrated Financial Management Information System (ZIFMIS) is its integration capability, which enables the linking of various functions of public financial management onto a single platform.

Required:

Discuss five public financial management functions integrated on the ZIFMIS.

Explain the risk associated with implementing the ZIFMIS.

Answer

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Tags: Accounting, Budget Preparation, GIFMIS, Integration, Procurement, Public Financial Management, Revenue Management, Treasury Operations
Level: Level 2

Topic: Public Financial Management Systems

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

Question

A business entity, Volta Ventures, is considering its policy for the replacement of machines. One type of machine in regular use is Machine Y. This machine has a maximum useful life of four years, but maintenance costs and other running costs rise with use. An estimate of costs and disposal values is as follows:

Machine Y: Purchase cost GH₵40,000

Year	Maintenance costs and other running costs in the year	Disposal value at the end of the year
	GH₵	GH₵
1	8,000	25,000
2	12,000	20,000
3	20,000	10,000
4	25,000	0

The cost of capital is 10%.

Required
Calculate the equivalent annual cost of a replacement policy for the machine of replacement:
(a) every one year
(b) every two years
(c) every three years
(d) every four years.
Recommend a replacement policy for the machine.

Answer

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Tags: Asset Replacement, Cash Flows, Cost of Capital, Depreciation, Discounted cash flow, Equivalent Annual Cost, Financial decision-making, investment appraisal, Machine Replacement, Net Present Value
Level: Level 2

Topic: DCF: Specific Applications

PSAF – L2 – Q6.3 – Public Financial Management Systems

Explain steps to implement NIFMIS and discuss five benefits for a covered entity's financial management system migration.

Question

The principal spending officer of the covered entity where you work as a financial officer wishes to migrate the entity’s financial management system onto the Nigeria Integrated Financial Management Information System (NIFMIS) platform, in accordance with the provisions of the Public Financial Management Act 2019. However, he has a limited understanding of the steps involved in the implementation.

Required:

(a) Explain to the principal spending officer, the steps involved in implementing the NIFMIS in the entity.

(b) Discuss five benefits of implementing NIFMIS in the entity.

Answer

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Tags: Benefits, Budget Management, Financial Systems, Implementation, NIFMIS, Public Financial Management, System Setup, Transparency
Level: Level 2

Topic: Public expenditure and financial accountability framework, Public Financial Management Systems

Level (SQ): Level 2

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FM – L2 – Q70 – DCF: Risk and uncertainty

Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

PSAF – L2 – Q8.2 – International Public Sector Accounting Standards

Show the accounting treatment of bilateral grant revenue for the Federal Government of Nigeria as at 31st December 2023.

FM – L2 – Q69 – Discounted cash flow

Calculate NPV of replacing Product X with Product Y using DCF analysis, with given sales, costs, and 8% cost of capital.

PSAF – L2 – Q8.1 – International Public Sector Accounting Standards

Detail the accounting treatment of outstanding tax revenue for the Federal Government of Nigeria as at 31st December 2024.

FM – L2 – Q68 – Discounted Cash Flow

Calculate the expected NPV of a new product launch for Accra Nova Cosmetics Limited with given cash flows and a 12% cost of capital.

FM – L2 – Q67 – Capital rationing

Determine optimal investment for Yebson Plc with GH₵800,000, assuming divisible/indivisible projects, and calculate NPV

FM – L2 – Q66 – Capital rationing

Recommend investments to maximize NPV assuming divisible projects with a GH¢150,000 capital limit.

FM – L2 – Q6.4 – Public Financial Management Systems

Discuss five public financial management functions integrated on the ZIFMIS platform.

FM – L2 – Q65 – DCF: Specific applications

Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

PSAF – L2 – Q6.3 – Public Financial Management Systems

Explain steps to implement NIFMIS and discuss five benefits for a covered entity's financial management system migration.

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Calculate the expected NPV of a project with uncertain cash inflows affected by multiple probabilistic factors, using a 10% cost of capital.

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Show the accounting treatment of bilateral grant revenue for the Federal Government of Nigeria as at 31st December 2023.

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Calculate NPV of replacing Product X with Product Y using DCF analysis, with given sales, costs, and 8% cost of capital.

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Detail the accounting treatment of outstanding tax revenue for the Federal Government of Nigeria as at 31st December 2024.

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Calculate the expected NPV of a new product launch for Accra Nova Cosmetics Limited with given cash flows and a 12% cost of capital.

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Determine optimal investment for Yebson Plc with GH₵800,000, assuming divisible/indivisible projects, and calculate NPV

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Recommend investments to maximize NPV assuming divisible projects with a GH¢150,000 capital limit.

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Discuss five public financial management functions integrated on the ZIFMIS platform.

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Calculate the equivalent annual cost for replacing a machine every 1, 2, 3, and 4 years and recommend the optimal replacement policy.

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