Level (SQ): Level 2

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  • 12 Marks

FM – L2 – Q64 – DCF: Specific applications

Evaluate whether to acquire a machine and recommend purchase or lease, considering NPV with tax and capital allowances.

NexGen Enterprises is considering whether to acquire a new machine. The machine has a purchase cost of GH₵30,000, an expected useful life of five years, and a disposal value of GH₵6,000 at the end of year 5. The machine would generate additional cash flows of GH₵10,000 in each of its five years.
Two methods of financing are under consideration:
(i) To buy the machine with money obtained from a bank loan, at an interest rate of 8% after tax.
(ii) To lease the machine. The lease payments to the lessor would be GH₵7,000 at the end of each of the next five years.
The company’s cost of capital is 10% after tax.
Corporation tax is 30%. If the machine is purchased, the company will be able to claim capital allowances (tax depreciation allowances) of 25% each year on a reducing balance basis. Tax is payable at the end of the year following the year against profits earned during Year 1.

Required:
(a) Recommend whether the machine should be acquired.
(b) If your recommendation is to acquire the machine, recommend whether it should be purchased or leased.

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  • 20 Marks

PSAF- L2 – Q6.2 – Public Financial Management Systems

Discuss the transformed roles of various users (Budget Officers, Accountants, Procurement Officers, Internal Auditors, Principal Spending Officers, Vote Controllers) in public financial management due to NIFMIS implementation.

The Nigeria Integrated Financial Management Information System (NIFMIS) has significantly transformed the role of public servants in public financial management.

Required:

Discuss the role of the following users of the NIFMIS platform:

(a) Budget Officers;

(b) Accountants;

(c) Procurement Officers;

(d) Internal Auditors.

(e) Principal Spending Officers; and

(f) Vote Controllers.

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  • 20 Marks

FM – L2 – Q63 – DCF: Risk and uncertainty

Calculate NPV for two machines under different sales demand levels for Kofi Enterprises Ltd.

Kofi Enterprises Ltd must purchase a new machine for making a new product. There is a choice between two machines, Machine A and Machine B. Each machine has an estimated life of three years with no expected scrap value.
Machine A costs N₦15,000 and Machine B costs N₦20,000.
The variable costs of manufacture would be N₦1 per unit if Machine A is used and N₦0.50 per unit if Machine B is used. The product will sell for N₦4 per unit.
The demand for the product is uncertain. Following some market research, the following estimates of annual sales demand have been made:

Annual demand (Units) Probability
2,000 0.2
3,000 0.6
5,000 0.2

The sales demand in each year will be the same. For example, if the demand is 2,000 units in Year 1, it will be 2,000 units for every year of the project.
Taxation and fixed costs will be unaffected by any decision made.
Kofi Enterprises Ltd’s cost of capital is 6%.

Required:
(a) Calculate the NPV for each of investment options, Machine A and Machine B, for each of the possible levels of sales demand.

(b) Calculate the expected NPV for each of the investment options.

(c) Assume now that the decision is taken to buy Machine A.

(i) Calculate the probability that the NPV of the project will be negative.

(ii) Calculate the minimum annual sales required for the NPV of the project to be positive.

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  • 10 Marks

PSAF – L2 – Q6.1 – The context of public financial management

Discuss five challenges of public financial management before the implementation of the Integrated Financial Management Information System.

Before the implementation of the Integrated Financial Management Information System (IFMIS), public financial management faced numerous challenges.

Required:

Discuss five challenges of public financial management prior to the implementation of the IFMIS platform.

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  • 20 Marks

PSAF – L2 – Q5.4 – Public expenditure and financial accountability framework

Discuss roles of EOCO, OSP, PAC, and FIC in promoting ethics and accountability in public sector management.

Ethics management is the responsibility of every organisation; however, certain institutions are specifically established to champion ethical practices and accountability in public sector management.

Required:

Discuss five roles of each of the following institutions in relation to ethics and accountability:

(a) Economic & Organised Crime Office;

(b) Office of the Special Prosecutor;

(c) Public Accounts Committee; and

(d) Financial Intelligence Centre

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  • 21 Marks

FM – L2 – Q62 – Discounted cash flow

Calculate contribution PV for two strategies and evaluate machine investment using IRR for Volta Fabrication Ltd.

DOME FABRICATION LIMITED
(a) Contribution
Strategy 1

Year 1 2 3 4 5
Demand (units) 10,000 12,000 15,000 18,000 20,000
Selling price (unit) GH¢25 GH¢25 GH¢25 GH¢25 GH¢25
Variable cost (unit) GH¢15 GH¢15 GH¢15 GH¢15 GH¢15
Contribution (unit)
Inflated contribution
Total contribution (GH¢)

10% discount factors
PV of contribution (GH¢)

Total PV of Strategy 1 contributions =

Strategy 2

Year 1 2 3 4 5
Demand (units) 12,000 14,000daf 16,000 18,000 20,000
Selling price (unit) GH¢22 GH¢22 GH¢22 GH¢22 GH¢22
Variable cost (unit) GH¢12 GH¢12 GH¢12 GH¢12 GH¢12
Contribution (unit)
Inflated contribution
Total contribution
Total contribution
PV of contribution (GH¢)

Total PV of strategy 2 contributions =

Strategy 2 is preferred as it has the higher present value of contributions.

(b) Evaluating the investment in the new machine using internal rate of return

Year 1 2 3 4 5
Total contribution
Fixed costs
Profit
10% discount factors
Present value
20% discount factors
Present value of profits

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  • 20 Marks

PSAF – L2 – Q5.3 – Public Expenditure and Financial Accountability

Discuss how professional skepticism and judgement assist in evaluating a hospital's operations for resource misuse and poor procurement.

You have been appointed as an independent assessor to evaluate the operations of a major regional hospital, which has recently been in the news for significant misuse of resources and poor procurement practices.

Required:
Discuss how professional skepticism and judgement assist in the assignment in the hospital.

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  • 20 Marks

PSAF – L2 – Q5.2- Ethical Principles in Public Sector Accounting

Discuss breach of confidentiality by an audit officer sharing audit evidence on a messaging group.

(A) You are a Junior Internal Audit Officer of a regulated entity, and you have conducted an internal audit of some sensitive operations of the entity. The audit covers allowances and bonuses paid or due for payment to the Council Chairperson and other members of the board of governors, including the Managing Director. The transactions and events indicate profligacy and corruption, given the current financial difficulties the entity faces. You took a snapshot of the audit evidence with your phone camera and posted it on your private messaging group to support a claim of corruption you made. This has attracted a lot of traffic to your post, and one of the group members, who is a journalist, decided to spark a bigger debate on the matter in the mainstream media. Your post went viral within 24 hours.

Required:
Discuss the specific ethical principle(s) of professional accountants that has been breached and suggest a safeguard for this scenario.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            (B)

In early December 2022, your District Council received an unplanned visit from top political figures who claimed to be on a political campaign and decided to pay a “courtesy call” on the District Administrator and the Council. The District Administrator quickly asked that a financial package (brown envelope) be prepared for them. The amount was significant but unbudgeted. The visitors left the Council with high commendation from the District Administrator. Thereafter, he asked the Finance Manager to process the necessary documentation to support the brown envelope transactions. The Finance Manager expressed some misgivings about the transactions but advised the accountant to record the brown envelope transaction as “goods and services” under “travel and transport,” which he did without objection.

Required:
Discuss the specific ethical principle(s) of professional accountants that has been breached and suggest a safeguard for this scenario.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             (C)

 A Finance Manager of a regulated entity has been at his post for the last two years, and it has become an open secret in the entity that he does not know his job. Since his assumption, the entity has not been able to submit the required quarterly and annual public accounts to the Controller and National Auditor. Auditors have raised many audit observations indicting the entity for poor accounting practices. The financial records are in shambles, the financial statements are in disarray, and the cash management is unfortunate. He secured the job based on his political activism rather than accounting professionalism.

Required:
Discuss the specific ethical principle(s) of professional accountants that has been breached and suggest a safeguard for this scenario.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            (D)

The Finance Manager was touted as the smartest accounting person in Zamara by the Managing Director of the entity. He claims that he always covers for him and delivers him from the corrupt league of public officers. He brags: “This Finance Manager, I have yet to meet his kind of accountant. He understands the language; just discuss it with him, and it is done. Whatever you want. The guy is the smartest of the smart. Even the National Auditor himself can audit him and the report will be clean. I just love this guy because he knows how to cook the books well.”

Required:
Discuss the specific ethical principle(s) of professional accountants that has been breached and suggest a safeguard for this scenario.

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  • 15 Marks

FM – L2 – Q61 – Discounted Cash Flow

Calculate NPV for Coastline Plc's project with equipment purchase, considering inflation and taxation.

Coastline Plc is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.

Year Average unit sales price Average unit variable cost Incremental fixed costs Sales volume (units)
1 GH¢73.55 GH¢50 GH¢1,200,000 65,000
2 GH¢76.03 GH¢45 GH¢1,200,000 110,000
3 GH¢76.68 GH¢45 GH¢1,200,000 125,000
4 GH¢81.86 GH¢45 GH¢1,200,000 80,000

The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs and do not allow for expected increases in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure.
Tax on profits is at the rate of 30%, and tax is payable in the same year.
The cost of capital is 10%.

Required:
Calculate the NPV of the project.

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  • 12 Marks

FM – L2 – Q60 – Discounted Cash Flow

Calculate NPV of ZQR Ltd's project ignoring inflation, with given cash flows and 10% cost of capital

ZQR Ltd, a manufacturing company, is considering a proposal to invest in machinery that it will use to increase its output and sales by 10,000 units in each of the next five years. The full purchase cost of the machinery would be GH¢225,000. This price includes a payment of GH¢20,000 made 12 months ago to the machinery supplier for a non-refundable down-payment for purchase of the machinery.

The company currently makes and sells a single product. This has a selling price of GH¢15 per unit and at present-day prices the direct costs per unit are GH¢3.75 for material and GH¢2.50 for labour. Incremental production overheads (all cash expenses) would be GH¢37,500 in each year, at current price levels.

Assume that all cash flows occur at the end of the year to which they relate.

ZQR’s cost of capital is 10%.

Required

(a) Calculate the NPV of the project, ignoring inflation.

(b) Calculate the NPV of the project, at a cost of capital of 10%, taking the following inflationary increases in revenues and costs into consideration:

Because of inflation, selling prices will rise by 7% in each year.

Material costs will rise by 5% each year, labour costs by 6% each year and overheads by 2% each year.

Comment on the differences in your results, compared with the NPV you calculated in part (a)

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