Program (SQ): PROFESSIONAL PROGRAM

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  • 10 Marks

FM – L2 – Q73 – Discounted Cash Flow

Calculate the breakeven rate of return for Kofi's taxi service project using NPV criteria with given cash flows and costs.

Kofi, after his National Service and with no hope of securing a job in the formal sector, has decided to run a taxi service. The following have been made for the operation of a service between Asikrom and Sunyasi:
(i) Revenue totalling GH¢300 a week for 52 weeks in a year. This is net of fuel and other variable costs.
(ii) Tyres; four pieces for a year at GH¢120 per unit.
(iii) Maintenance and servicing; GH¢120 per month.
(iv) Salaries GH¢3,000 per year.
(v) Insurance GH¢350 per year.
The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the vehicle is estimated at GH¢28,000. The project appears quite profitable based on the NPV criteria using the Government policy rate of 26%. However, the banks are offering rates far higher than the policy rate.

Required:
Calculate the breakeven rate of return for the project.

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  • 10 Marks

PSAF – L2 – Q9.1 – International Public Sector Accounting Standards

Account for borrowing costs for a tunnel project by the Ministry of Transport under IPSAS 5 for 2023.

The Ministry of Transport decided to construct a tunnel that will link two major cities in the country to ease traffic congestion. The project, which commenced in January 2023, is expected to take two years to complete. The financing for the project includes the following borrowings:

  • Bank Term Loans: GHc50 million at 7% interest per annum
  • Institutional Borrowings: GHc70 million at 8% interest per annum
  • Corporate Bonds: GHc100 million at 9% interest per annum

The total borrowings amount to GHc220 million, of which GHc20 million was used for routine maintenance of existing roads, and the remaining was for the tunnel construction. During the year, the Ministry earned GHc5 million from temporary investments of the borrowed funds.

Required:
(a) Explain the accounting treatment for the borrowing costs under the benchmark treatment option (expense recognition) for the year ended 31st December 2023.
(b) Explain the accounting treatment for the borrowing costs under the alternative treatment option (capitalization of borrowing costs) for the year ended 31st December 2023.

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  • 15 Marks

FM – L2 – Q72 – Discounted cash flow

Calculate NPV for two machines with given cash flows, tax, and capital allowances.

72 NANTWI PLC
The directors of Nantwi Plc are meeting to decide about the replacement of a machine. The existing machine has to be replaced soon, and there is a choice of two machines that could be purchased to replace it. These are Machine A and a larger Machine, B. The following information is available about each machine:

Machine A Machine B
Expected working life 4 years 5 years
Initial cost GH₵600,000 GH₵750,000
Residual value GH₵0 GH₵0
Working capital requirement GH₵100,000 GH₵200,000

The forecast pre-tax cash flows that will be earned using each machine are as follows:

Year 1 Year 2 Year 3 Year 4 Year 5
GH₵000 GH₵000 GH₵000 GH₵000 GH₵000
Machine A 470 520 490 450
Machine B 580 640 500 500 400

Nantwi Plc uses 10% as its cost of capital for capital expenditure evaluation.
Taxation at 30% is payable one year in arrears. Capital allowances are available at the rate of 25% each year on the reducing balance method. Inflation should be ignored.

Required
(a) Calculate the NPV with each of the machines.

(b) Calculate the payback period for each machine.

(c) Recommend with reasons which machine should be purchased.

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  • 20 Marks

FM – L2 – Q71 – Discounted Cash Flow

Calculate NPV for a project with GH₵3M equipment cost, 5-year cash flows, and 8% cost of capital, ignoring inflation and taxation.

A company, Zenith Innovations Ltd, is considering an investment in a new project to manufacture and sell a new product with a five-year lifespan. The project requires an investment of GH₵3 million in equipment. The residual value of this equipment after five years will be 30% of its original cost.

The estimates of net cash flows from operations in each year of the project are as follows:

Year Net Cash Flow (GH₵)
1 400,000
2 800,000
3 800,000
4 700,000
5 400,000

These cash flows are based on estimates that the annual increase in cash spending on fixed costs will be GH₵200,000, and the contribution/sales ratio from transactions will be 40%. The company’s cost of capital is 8%.

The management of Zenith Innovations Ltd is aware that actual cash flows could be higher or lower than expected, and sensitivity analysis should be carried out to establish the extent to which costs or revenues could differ from the estimate before the project ceases to have a positive NPV.

The investment in working capital will be minimal. Inflation and taxation should be ignored.

Required
(a) Calculate the net present value of the project.

(b) Carry out sensitivity analysis on the following items:

(i) The cost of the equipment, assuming that the residual value will be 30% of cost.

(ii) The residual value of the equipment.

(iii) Sales revenue.

(iv) Variable costs.

(v) Annual fixed costs.

(c) Comment on the risk in undertaking this project.

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  • 10 Marks

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

Discuss the criteria for recognising revenue under IPSAS 47: Revenue and contrast these criteria with the criteria for revenue recognition under IPSAS 9 AND IPSAS 23.

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  • 10 Marks

PSAF – L2 – Q8.3 – Revenue from Exchange Transactions

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

The academic year of Wisdom Academy starts from September each year but has a financial year from January 1 to December 31, consistent with the fiscal year of the Government of Ghana. With respect to the 2023/2024 academic year, a total of 6,000 students were on the roll of students, each expected to pay tuition fees of GHc8,000 for the academic year, divided into two equal parts for each semester. All students are expected to pay 25% of the first semester tuition fees at the start of September each year and pay the remaining 25% before the end of first semester examinations which starts in the first week of December. Similar arrangements pertain to the second semester which starts in February of the following year and ends in May. As at 31st December 2023, 20% of the total students’ population had paid their entire fees for the academic year, 60% of the students had paid full fees for the first semester only, the remaining 20% of the students had managed to pay only 90% of the tuition fees for the first semester but were allowed to write the end of semester examinations.

Required:

Explain the accounting treatment of tuition fees in the financial statements of Wisdom Academy for the year ended 31st December 2023 being guided by IPSAS 9: Revenue from exchange transactions.

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  • 10 Marks

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.

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.

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  • 10 Marks

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.

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.

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  • 20 Marks

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.

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.

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  • 10 Marks

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.

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.

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