Program (SQ): PROFESSIONAL PROGRAM

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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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  • 20 Marks

PSAF – L2 – Q9.3 – Employee Benefits

Show financial statement extracts for Ministry of Transport and Infrastructure's defined benefit plan for 2024 per IPSAS 39.

As at 31st December 2023, the following balances were outstanding in respect of employee pensions which are determined based on a formula that considers number of years of service and the best last six months remuneration of the employee:

GHC million
Pension plan assets 65
Pension liabilities 85

During the year ending 31st December 2024, the following transactions occurred:

GHC million
Transfers into the investments of the scheme 15
Pension payments made 29
Investments liquidated to support pension payments 11
Current service cost 10
Cost resulting from improvement to the plan formula 6

At 31st December 2024, the present value of pension liabilities was computed at GHc127 million (using a discount rate of 15%) and the fair value of plan assets estimated at GHc98 million.

Required:
You are required to show extracts of the financial statements in respect of employee benefits for the year ended 31st December 2024.

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  • 10 Marks

FM – L2 – Q75 – Discounted cash flow

Calculate NPV to decide between maintaining old equipment or buying new equipment for Wisdom Ltd, using a 20% cost of capital.

The maintenance manager of Wisdom Ltd insists that management should maintain an old piece of equipment that had been used for 5 years and is fully depreciated rather than buy a new one. The old equipment has a current operating cost of GH₵53,000.00 per annum. The operating cost of the equipment is expected to increase at 5% every year over the next four years, with a sale value of GH₵6,500.00 in the fifth year.

The maintenance manager has proposed that a new system with enhanced technology to reduce operating cost to GH₵32,000.00 for the next three years and GH₵33,600.00 for the fourth and fifth years be introduced. The new equipment will cost GH₵60,000.00 and when introduced, a redundancy cost of GH₵25,000.00 will be paid, with the old equipment sold for GH₵12,000.00. The sale value of the new equipment will be GH₵10,200.00 after its five years’ useful life.

Required:

Using net present value (NPV) method of capital appraisal with 20% cost of capital, advise management on which option Wisdom Ltd should go for.

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  • 20 Marks

PSAF – L2 – Q9.2 – Leases

Classify a lease for Keta District Hospital as finance or operating per IPSAS 13/43 criteria.

Based on the information provided, this lease arrangement falls under the category of a finance lease according to IPSAS 13/43: Leases.
To classify a lease as a finance lease, the following criteria are typically considered:

  • Transfer of ownership: If the lease transfers ownership of the asset to the lessee by the end of the lease term.
  • Bargain purchase option: If the lessee has the option to purchase the asset at a price lower than the asset’s fair value.
  • Lease term: If the lease term is for a major part of the economic life of the asset.
  • Present value of lease payments: If the present value of lease payments amounts to substantially all of the asset’s fair value.
  • Specialized nature: If the asset is so specialized that only the lessee can use it without major modifications.

            In this case, Keta District Hospital:

  • The lease term (4 years of primary lease period with an indefinite secondary lease period at peppercorn rent) covers a substantial portion of the asset’s useful life (10 years).
  • The present value of the lease payments is likely to cover a substantial part of the fair value of the asset.
  • The Assembly retains almost all risks and rewards of ownership (e.g., paying repair, maintenance, and insurance costs).

    Therefore, the lease qualifies as a finance lease, meaning the equipment will be recorded as an asset with a corresponding     liability for future lease payments.                                                                                                                                                                                                                                                                                                                                                                                                                             (B)

Prepare the extracts of the final accounts with regards to the lease of the equipment in accordance with IPSAS 43: Leases for the year ended 31st December 2024.
There are four steps in answering this question and these are:

  • Calculate the lease liability and right-of-use asset
  • Calculate depreciation on the right-of-use asset
  • Determine the lease liability and interest expense for 2024
  • Extract the financial statements

Calculation of lease liability and right-of-use asset
Since the lease is a finance lease, Keta District Hospital will recognize both a right-of-use asset and a lease liability at the inception of the lease. The lease liability is initially measured as the present value of the lease payments over the primary period, discounted using the interest rate implicit in the lease (15%). The present value of the lease payment is as follows:

Year Lease payment (GHc)
2022 2,000,000
2023 2,000,000
2024 2,000,000

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  • 10 Marks

FM – L2 – Q74 – Discounted Cash Flow

Calculate NPV for TechNova Ltd's new game Zestora, considering sales, costs, and tax over four years.

TechNova Ltd

(a) TechNova Ltd, a software company, has developed a new game “Zestora” which it plans to launch in the near future. Sales volumes, production volumes, and selling prices for “Zestora” over its four-year life are expected to be as follows:

Year Sales and production (units) Selling price (GH₵ per game)
1 15,000 45
2 25,000 40
3 20,000 38
4 10,000 35

Financial information relating to the production of Zestora:

Item GH₵ per game
Direct materials 6
Direct labour 8
Variable production overheads 4

Additional information:

  • Annual fixed production overheads will be GH₵150,000.
  • Initial investment in equipment will be GH₵800,000.
  • Additional working capital of GH₵50,000 will be needed at the beginning of the project and will be released at the end of year four.
  • Tax at the rate of 25% is payable on profits one year in arrears.
  • Capital allowance is available at 25% per year on a reducing balance basis.
  • TechNova Ltd’s cost of capital is 10%.
  • The equipment will have no residual value at the end of year four.

Required: Calculate the net present value of the proposed investment and comment on your findings.

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