Program (SQ): PROFESSIONAL PROGRAM

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  • 20 Marks

FM – L2 – Q54 – Discounted Cash Flow

Calculate NPV for Kumasi Motors Ltd's new product line, considering capital expenditure, market share, and opportunity costs over four years.

Kumasi Motors Ltd, a manufacturer of car accessories, is considering a new product line. This project would commence at the start of Kumasi Motors Ltd’s next financial year and run for four years. Kumasi Motors Ltd’s next year-end is 31st December 2005.

The following information relates to the project:
A feasibility study costing GH¢8 million was completed earlier this year but will not be paid for until March 20X6. The study indicated that the project was technically viable.

Capital expenditure
If Kumasi Motors Ltd proceeds with the project, it would need to buy new plant and machinery costing GH¢180 million to be paid for at the start of the project. It is estimated that the new plant and machinery would be sold for GH¢25 million at the end of the project.
If Kumasi Motors Ltd undertakes the project, it will sell an existing machine for cash at the start of the project for GH¢2 million. This machine had been scheduled for disposal at the end of 20X7 for GH¢1 million.

Market research
Industry consultants have supplied the following information:
Market size for the product is GH¢1,100 million in 20X5. The market is expected to grow by 2% per annum.

Market share projections should Kumasi Motors Ltd proceed with the project are as follows:

20X6 20X7 20X8 20X9
Market share – 0.07 0.09 0.15

Subcontractors
Some of the work on the project would be performed by subcontractors who would be paid the following amounts:

Year 20X6 20X7 20X8 20X9
Payments to subcontractors (GH¢ million) 10 12 15 15

Fixed overheads
Incremental fixed overheads (all cash expenses) will be GH¢5 million in each of the four years of the project.

Labour costs
At the start of the project, employees currently working in another department would be transferred to work on the new product line. These employees currently earn GH¢3.6 million. An employee currently earning GH¢2 million would be promoted to work on the new line at a salary of GH¢3 million per annum. A new employee would be recruited to fill the vacated position.
As a direct result of introducing the new product line, employees in another department currently earning GH¢4 million would have to be made redundant at the end of 20X6 and paid redundancy pay of GH¢6 million at the end of 20X7.

Material costs
The company holds a stock of Material X which cost GH¢6.4 million last year. There is no other use for this material. If it is not used, the company would have to dispose of it at a cost to the company of GH¢2 million in 20X6. This would occur early in 20X6.
Material Z is also in stock and will be used on the new line. It cost the company GH¢3.5 million some years ago. The company has no other use for it, but could sell it on the open market for GH¢3 million early in 20X6.

Further information
The year-end payables are paid in the following year.
The company’s cost of capital is a constant 10% per annum.
It can be assumed that operating cash flows occur at the year-end.
Time 0 is 1st January 20X6 (t1 is 31st December 20X6, etc.)

Required
Calculate the net present value of the proposed new product line (work to the nearest million).

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  • 8 Marks

FM – L2 – Q53 – Discounted cash flow

Calculate NPV for a new machine investment with given sales, costs, and 9% cost of capital.

Accra-Nungua Transport Limited is considering an investment in a new machine that would be used to manufacture a new product at its existing production centre. The product and the machine are both expected to have an economic life of four years. The following estimates of revenues and costs have been made.

Year 1 2 3 4
Selling price per unit GH¢8 GH¢9 GH¢10 GH¢10
Variable cost per unit GH¢4 GH¢4.50 GH¢5 GH¢5.50
Sales volume (units) 30,000 40,000 50,000 20,000

It has been estimated that there would be no increase at all in fixed costs, except for depreciation of the new machine. The machine would cost GH¢40,000 at the end of its four-year life it would have no residual value.
The company has a cost of capital of 9%.
Required
Calculate the net present value of the proposed project

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  • 15 Marks

FM – L2 – Q52 – Discounted cash flow

Calculate NPV and IRR for two mutually exclusive projects for Dambai Energy Ltd.

Dambai Energy Ltd is considering whether to invest in either of two mutually-exclusive projects, Project 1 and Project 2. Both projects involve the purchase of machinery with a life of five years.
Project 1: The machine would cost GH₵556,000 and would have a net disposal value of GH₵56,000 at the end of Year 5. The project would earn annual cash flows (receipts minus payments) of GH₵200,000.
Project 2: The machine would cost GH₵1,616,000 and would have a net disposal value of GH₵301,000 at the end of Year 5. The project would earn annual cash flows (receipts minus payments) of GH₵500,000.
Dambai Energy Ltd uses the straight-line method of depreciation. Its cost of capital is 15%.
Ignore taxation, inflation, and investment in working capital.

Required
(a) For each of the two projects, calculate:
(i) the net present value, and
(ii) the internal rate of return to the nearest one per cent.

(b) State which project, if any, you would select for acceptance.

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  • 20 Marks

PSAF – L2 – Q2.4- Public expenditure and financial accountability framework

Explain the two methods for scoring PEFA indicators and provide two advantages of each.

PEFA employs a robust methodology in developing its framework for assessing public financial management performance in the public sector. It uses two methods to convert dimensions into indicators.

Required:

(a) Explain the two methods used in scoring indicators under the PEFA framework and provide two advantages of each.

(b) In a recent PEFA assessment, a country received the following scores for the Indicators of Accounting and Reporting:

 

Indicator Score
Financial data integrity D
In-year budget reports C
Annual financial reporting D

Required:

(i) Discuss the performance of the country in relation to the accounting and financial reporting pillar of public financial management.

(ii) Suggest a practical way of improving performance in each of the indicators.

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  • 8 Marks

FM – L2 – Q51 – Introduction to investment appraisal

State two justifications for payback period and one for ARR as investment appraisal techniques.

ZESTA VENTURES

It is said that of all the capital investment evaluation approaches, the Payback (PB) and Accounting rate of return (ARR) methods are widely used in practice. But these methods are not without limitations.

Required:

(a) State TWO justifications of payback period and ONE justification of ARR for their popularity in practice as investment appraisal techniques.

(b) Outline TWO limitations each for payback and ARR, as investment appraisal techniques.

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  • 20 Marks

PSAF – L2 – Q2.3 – Public expenditure and financial accountability framework

Discuss seven PEFA pillars for building a public financial management system in a developing country.

You have been appointed as the consultant to develop a robust public financial management system for a developing country.

Required:

(a) Discuss seven pillars upon which you will build your public financial management system, referencing the PEFA framework.

(b) Explain three outcomes you would expect from the public financial management system you have designed, guided by the PEFA framework.

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  • 20 Marks

FM – L2 – Q50 – Sources of finance

Explain five types of PPP arrangements and five types of risks associated with PPPs in Ghana.

PPP ARRANGEMENTS

(a) The PPP arrangements are explained below:
(i) Operate and Maintain (O&M)
(ii) Build-Operate Transfer (BOT)
(iii) Build Transfer and Operate (BTO)
(iv) Rehabilitate, Operate and Transfer (ROT)
(v) Service Concession

(b) Explain five types of risk associated with a PPP arrangement that allocation between the parties.

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  • 20 Marks

PSAF – L2 – Q2.2 – Public expenditure and financial accountability framework

Map eight observations on Zamora's PFM to PEFA pillars and discuss their impact on the related pillar.

The following observations were made regarding public financial management in Zamora:

(i) Over the years, governments have included superfluous projects and programs in the annual budget, which were not intended to be achieved. Consequently, these projects and programs were not delivered to the people.

(ii) In Zamora, the annual budget is presented to the entire parliament and broadcast live on radio and television for all Zamorians to hear and see. Subsequently, the entire budget is published in newspapers and finally gazetted when approved.

(iii) It is becoming difficult to access the financial reports of many covered entities, and these entities also fail to post the financial reports on their websites for public access.

(iv) In recent years, the government has invested significant resources into implementing the International Public Sector Accounting Standards (IPSAS), resulting in over 90% implementation of the standards across the public sector.

(v) The Audit Service has been denied resources to operate because it is perceived as overly critical of corruption in the public sector.

(vi) Managers of State-Owned Enterprises (SOEs) were given high salaries and allowances despite making huge losses for the state.

(vii) Resource allocation is mostly done based on intuition and personal preferences rather than a well-formulated policy-based fiscal strategy.

(viii) The adoption and implementation of the Zamora Integrated Financial Management Information System (ZIFMIS) have helped the government improve budget controls.

Required:

Map out each observation (a-h) to PEFA’s pillars of public financial management and discuss how each affects the related pillar.

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  • 20 Marks

FM – L2 – Q49 – Sources of finance: equity

Discuss benefits of Public Private Partnerships (PPP) to government, citizens, and private sector in Zamora.

(a) Discuss the benefits of PPP to the government, citizens, and private business partners.

(b) Public partnership is an alternative to PPP. Explain Public-Public Partnership and Discuss the advantages of Public-Public Partnership (PUP).

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  • 20 Marks

FM – L2 – Q48 – Sources of finance: debt

Explain Public Private Partnership, discuss its guiding principles, and outline challenges to its use in Ghana.

PUBLIC PRIVATE PARTNERSHIP

Governments may explore new public financing initiatives for the provision of public infrastructure and services. Public Private Partnership (PPP) is a common vehicle used by governments to achieve this objective.

Required:
(a) Explain the term Public Private Partnership.
(b) Discuss the principles guiding the use of the Public Private Partnership.
(c) What are the challenges to the use of PPP in Ghana?

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