- 20 Marks
MA – Mar 2025 – L2 – Q4 – Capital Budgeting
Evaluate two projects using benefit-cost ratio for GKIA with given financial data and 20% required rate of return.
Question
a). GKIA, an Early Childhood Development Centre (ECDC) under Ghana’s Ministry of Health (MOH) has obtained funding from the Global Fund (GF) to implement targeted programmes in line with the vision of the GF. In GF’s recent grant releases, GKIA received an amount of GH¢2 million and has the option of spending the amount on any project provided it falls within any of the thematic areas specified by the GF.
Accordingly, GKIA is considering spending the funds on either of two projects. The first option involves the construction, equipping and full furnishing of a 30-bed paediatric unit for the Centre. The second option involves the refurbishment of all existing leisure and recreational facilities that the Centre currently operates. Both options qualify for funding under the thematic areas of the GF.
The information in the table below presents financial details of both options that GKIA is considering.
| Option A: Paediatric Unit | Option B: Leisure and recreational facilities | |||
|---|---|---|---|---|
| Initial capital outlay | GH¢2 million | GH¢2 million | ||
| Year | Costs (GH¢) | Benefits (GH¢) | Costs (GH¢) | Benefits (GH¢) |
| 1 | 175,000 | 150,000 | 150,000 | 1,000,000 |
| 2 | 218,750 | 225,000 | 187,500 | 1,050,000 |
| 3 | 262,500 | 562,500 | 225,000 | 997,500 |
| 4 | 301,875 | 1,687,500 | 258,750 | 847,875 |
| 5 | 332,062.50 | 5,906,250 | 271,687.50 | 975,056.25 |
The required rate of return on any investment project undertaken by GKIA is 20%.
Required:
As the Management Accountant of GKIA, you are required to evaluate the acceptability of each project on the basis of benefit-cost ratio.
b). The term Value for Money (VFM) is synonymous with spending in the public sector, where it is expected that little resources should be used to generate the best possible output/outcome for the public good.
Required:
Explain the ‘three Es’ that public sector management accountants will need to take into consideration when making public spending decisions.
c). In the application of the controllability principle, identify the cost centre manager who is responsible for any adverse impact of labour on production. (provide three reasons to justify your answer).
Find Related Questions by Tags, levels, etc.
