Question Tag: NPV

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  • 25 Marks

QMDM – APR 2024 – L2 – Q6 – Rural Bank Investment Proposals NPV

The management of a Rural Bank must decide between two investment proposals using Net Discounted Value (NPV) calculations at a 14% discount rate, explain the term, compute NPVs, and advise on selection.

The Management of a Rural Bank must decide between two proposals, on the basis of the following information:

Proposal Investment Now Net Cash Inflow at the End of 1991 1992 1993
A GHS 80,000 GHS 95,400 GHS 39,400 GHS 12,000
B GHS 100,000 GHS 35,000 GHS 58,000 GHS 80,000

Assume that on Projects of this type of the company can earn 14 percent per annum.                                                                                     (a) Explain briefly the term Net Discount Value in relation to the projects.                                                                                                      (b) Calculate the Net Discounted Value of Proposal A.                                                                                                                                          (c) Calculate the Net Discounted Value of Proposal B.                                                                                                                                            (d) Using the values in (a) and (b), advise Management regarding the proposal that should be selected.

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  • 20 Marks

FM – Mar 2025 – L2 – Q2 – Investment Appraisal and Financing Options

Compute loan balance, bond redemption, and NPV for a university hostel project with two financing options

The Governing Board of Dominase Agriculture University is considering a capital project and related financing options. The project involves the construction of a candidate hostel, which requires capital outlays of GH¢20 million in the first year and GH¢30 million in the second year.

The hostel will become operational in the third year. Net operating cash flows from the hostel are expected to be GH¢20 million annually for the first three years of operation (i.e. Years 3, 4, and 5) and then begin to grow at a constant rate of 10% annually to perpetuity.

The project finance advisory team has presented the following two financing options for the consideration by the Governing Board:

Option 1: A Syndicated Bank Loan

Through a syndication arrangement led by the National Investment Bank, the university can borrow the required GH¢50 million from five local banks at an annual interest rate of 28% with quarterly compounding. The loan amount will be released to the university immediately. The university will be given a moratorium (grace period) of two years to complete the construction of the hostel before it is required to start paying off the loan balance in equal instalments at the end of each quarter for ten years. Interest will accumulate on the loan during the grace period.

Option 2: Bond Issuance

The university can issue a bond to raise the GH¢50 million required to finance the construction of the hostel. The bonds will be issued in 50,200 units of GH¢1,000 face value each. The annual coupon rate on the bond will be set at 26%, but coupons will be paid semiannually starting as soon as the bond is issued. The bonds will be issued now and redeemed in 15 years at a premium of 10%. Although the total redemption value will be paid to the bondholders at maturity, the university will be required to establish a sinking fund to raise enough money to redeem the bonds. The university can deposit equal sums of money into the fund at the beginning of every six months, starting from the third year until the fifteenth year when the bond will be redeemed. The fund will be invested at an annual interest rate of 20%.

Required:

a) Regarding the syndicated loan,

i) Compute the loan’s balance at the end of the moratorium.

(3 marks)

ii) Compute the quarterly instalment required to amortise the loan over the ten-year repayment period.

(4 marks)

b) Regarding the bond issue,

i) Compute the total redemption value of the bond.

(3 marks)

ii) Compute the size of each semi-annual instalment into the sinking fund.

(4 marks)

c) Compute the project’s net present value (NPV) and provide an investment recommendation based on it. Assume the required rate of return on the project is 30%.

(6 marks)

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  • 20 Marks

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share) 800
Share premium 1,120
Revenue reserves 2,310
Total Equity 4,230
15% term loan 500
11% bond 900
Total Capital 5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

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  • 20 Marks

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

Tinco Limited (TL) is considering an expansion project. The project will involve the acquisition of an automated production machine costing ₦11,000,000 and payable now. The machine is expected to have a disposal value at the end of 5 years, which is equal to 10% of the initial expenditure.

The following schedule reflects a recent market survey regarding the estimated annual sales revenue from the expansion project over the project’s five-year life:

Level of Demand ₦’000 Probability
High 16,000 0.25
Medium 12,000 0.50
Low 8,000 0.25

It is expected that the contribution to sales ratio will be 50%. Additional expenditure on fixed overheads is expected to be ₦1,800,000 per annum. TL incurs a 20% tax rate on corporate profits. Corporate tax is paid one year in arrears.

TL’s after-tax nominal (money) discount rate is 15.5% per annum. A uniform inflation rate of 5% per annum will apply to all costs and revenues during the life of the project. All of the values above have been expressed in terms of current prices.

You can assume that all cash flows occur at the end of each year and that the initial investment does not qualify for capital allowances.

Required:

a.
i. Evaluate the proposed expansion from a financial perspective. (10 Marks)
ii. Calculate and interpret the sensitivity of the project to changes in:

  • The expected annual contribution (3 Marks)
  • The tax rate (2 Marks)

b.
You have now been advised that the capital cost of the expansion will qualify for written down allowances at the rate of 25% per annum on a reducing balance basis. Also, at the end of the project’s life, a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value.

You are required to calculate the financial impact of these allowances. (5 Marks)

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  • 30 Marks

FM – May 2018 – L3 – SA – Q1 – Investment Appraisal Techniques

Evaluate the NPV of Plateau Plc.'s project, assess sensitivity, discuss political risk, and explore real options for the project.

Plateau Plc. (PT) is a Nigerian company that manufactures and sells innovative products. Following favourable market research that cost N4,000,000, PT has developed a new product. It plans to set up a production facility in Kano, although its board had contemplated setting up the facility in an overseas country. The project will have a life of four years.

The selling price of the new product will be N5,900 per unit, with sales in the first year to December 31, 2019, expected to be 120,000 units, increasing by 5% per annum thereafter. Relevant direct labour and material costs are expected to be N3,400 per unit, and incremental fixed production costs are expected to be N60 million per annum. The selling price and costs are stated in December 31, 2018 prices and are expected to increase at a rate of 3% per annum. Research and development costs to December 31 will amount to N25 million.

Investment in working capital will be N30 million on December 31, 2018, and this will increase in line with sales volumes and inflation. Working capital will be fully recoverable on December 31, 2022.

The company will need to rent a factory during the life of the project. Annual rent of N20 million will be payable in advance on December 31 each year and will not increase over the life of the project.

Plant and machinery will cost N1 billion on December 31, 2018. The plant and machinery are expected to have a resale value of N300 million (at December 31, 2022, prices) at the end of the project. The plant and machinery will attract 20% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except in the final year when there will be a balancing allowance or charge.

Assume a corporate tax rate of 20% per annum in the foreseeable future and that tax flows arise in the same year as the cash flows which gave rise to them.

The directors are concerned by rumours in the industry of research by a rival company into a much cheaper alternative product. However, the rumours suggest that this research will take another year to complete, and if successful, it will take a further year before the alternative product comes on the market.

An appropriate weighted average cost of capital for the project is 10% per annum.

Required:

a. Calculate, using money cash flows, the NPV of the project on December 31, 2018, and advise the company whether to proceed with the project or not.
(15 Marks)

b. Calculate and interpret the sensitivity of the project to a change in:

  • (i) The annual rent of the factory (2 Marks)
  • (ii) The weighted average cost of capital (4 Marks)

c. If the board of PT decided to set up the manufacturing facility overseas, advise the board on how political risk could change the value of the project and how it might limit its effects. (4 Marks)

d. Discuss briefly FOUR real options available to PT in relation to the new project. (5 Marks)

(Total 30 Marks)

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q3 – Investment Appraisal Techniques

Calculate and compare NPV for two proposals involving equipment purchase vs. existing machinery for contract fulfillment.

Niko Plc, a large equity-financed company, has a year-end of December 31. It must fulfill a contract in Abuja and has two proposals to choose from: Proposal A (purchasing new machinery) and Proposal B (using existing machinery).

Proposal A:

  • Outlay of N312,500,000 on December 31, 2023, for new plant and machinery.
  • Projected net cash inflows (before tax, in nominal terms):
    • 2024: N200,000,000
    • 2025: N275,000,000
    • 2026: N350,000,000
  • Scrap value: N25,000,000 at end of 2026.

Proposal B:

  • Uses a machine with a net realizable value of N250 million, with an alternative sale value of N300 million on January 1, 2025, if unused.
  • Cash inflows (in nominal terms):
    • 2024: N350,000,000
    • 2025: N350,000,000
  • Labour costs:
    • 2024: N100 million (replacement staff cost of N110 million)
    • 2025: N108 million (replacement staff cost of N118.8 million)
  • Machine residual value: N0 at project end in 2025.

Additional Details:

  • Working capital: 10% of year-end cash inflows, released upon project completion.
  • Expected annual inflation rates: 2024 – 10%, 2025 – 8%, 2026 – 6%, 2027 – 5%.
  • Real cost of capital: 10%.
  • Income tax: 40%, payable one year after the accounting period.
  • Capital allowances: 20% reducing balance for Proposal A’s plant and machinery.

Required:

  • a. Calculate the NPV at December 31, 2023, for each proposal. (17 Marks)
  • b. State any reservations about making an investment decision based on these NPV figures. (3 Marks)

Answer:

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  • 30 Marks

PM – Nov 2015 – L2 – Q1 – Decision-Making Techniques

Comparison of two machine purchase options - ZIGMA 5000 and DELPHA 7000 using profitability statement, cash flows, payback period and NPV.

The Board of Directors of Danda Company Limited is proposing the purchase of either of two machines that have been proved adequate for the production of an engineering product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in the first year would be affected by installation challenges and inadequate understanding of the operating instructions of the machines.

Information available from the production profile of the two machines are as shown below:

ZIGMA 5000:

Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:

Cost of plant is N18,300,000 while the life span is 6 years.

Other information relevant to the company’s operations and administration are:

(i) Selling price per unit is N300.

(ii) Variable cost per unit is N150.

(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.

(iv) Company depreciation policy is straight line basis.

(v) The budgeted production capacity is 100,000 units.

(vi) No opening or closing inventory is envisaged.

(vii) All sales are for cash.

(viii) All costs are for cash.

Required:

a. Prepare the SIX year profitability statement for the two machines. (6 Marks)

b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)

c. What is the payback period for the two machines? (7 Marks)

d. Determine the Net Present Value (NPV) of the two machines if the acceptable discount rate for the company is 15%. (7 Marks)

e. Which of the two machines should the company acquire? (4 Marks)

 

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  • 1 Marks

BF – Nov 2015 – L1 – SA – Q10 – Investment Decisions

Identifying the correct formula for calculating Net Present Value (NPV) of an investment.

The formula for calculating Net Present Value (NPV) of an investment is:
A. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
B. Σₜ=₀ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
C. Σₜ=₀ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
D. Σₜ=₁ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
E. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] + C₀

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  • 20 Marks

SCS – Apr 2022 – L3 – Q6 – Investment decisions

Compute NPV for two investment options and evaluate potential benefits and difficulties for HPC.

a) For the two strategic development options being considered by HPC, compute:
i) the Net Present Value of Option 1.
ii) the Net Present Value of Option 2.
iii) the Net Present Value for the worst-case outcome for Option 1. (10 marks)

b) Discuss THREE (3) potential benefits and TWO (2) difficulties for HPC of undertaking each of the strategic development options. Your answer should include an evaluation of the calculations of the profitability index of each option. (10 marks)

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  • 7 Marks

SCS – Nov 2023 – L3 – Q5a – International Financial Management

Determine forward rates using interest rate parity and calculate the NPV for an international investment project.

In connection with the proposed investment in the United Kingdom by NSL for shito production in that country, the shareholders require information to make the final investment decision.

Required:
i) Using the interest rate parity formula/equation, determine the forward rates/future spot rates at the end of 2024, 2025, 2026, and 2027.
(4 marks)

ii) Calculate the net present value(s) for the project at the beginning of 2024 that will determine whether the project should be accepted by the shareholders. Advise the shareholders whether they should accept and proceed with the project or reject it.
(7 marks)

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  • 25 Marks

QMDM – APR 2024 – L2 – Q6 – Rural Bank Investment Proposals NPV

The management of a Rural Bank must decide between two investment proposals using Net Discounted Value (NPV) calculations at a 14% discount rate, explain the term, compute NPVs, and advise on selection.

The Management of a Rural Bank must decide between two proposals, on the basis of the following information:

Proposal Investment Now Net Cash Inflow at the End of 1991 1992 1993
A GHS 80,000 GHS 95,400 GHS 39,400 GHS 12,000
B GHS 100,000 GHS 35,000 GHS 58,000 GHS 80,000

Assume that on Projects of this type of the company can earn 14 percent per annum.                                                                                     (a) Explain briefly the term Net Discount Value in relation to the projects.                                                                                                      (b) Calculate the Net Discounted Value of Proposal A.                                                                                                                                          (c) Calculate the Net Discounted Value of Proposal B.                                                                                                                                            (d) Using the values in (a) and (b), advise Management regarding the proposal that should be selected.

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  • 20 Marks

FM – Mar 2025 – L2 – Q2 – Investment Appraisal and Financing Options

Compute loan balance, bond redemption, and NPV for a university hostel project with two financing options

The Governing Board of Dominase Agriculture University is considering a capital project and related financing options. The project involves the construction of a candidate hostel, which requires capital outlays of GH¢20 million in the first year and GH¢30 million in the second year.

The hostel will become operational in the third year. Net operating cash flows from the hostel are expected to be GH¢20 million annually for the first three years of operation (i.e. Years 3, 4, and 5) and then begin to grow at a constant rate of 10% annually to perpetuity.

The project finance advisory team has presented the following two financing options for the consideration by the Governing Board:

Option 1: A Syndicated Bank Loan

Through a syndication arrangement led by the National Investment Bank, the university can borrow the required GH¢50 million from five local banks at an annual interest rate of 28% with quarterly compounding. The loan amount will be released to the university immediately. The university will be given a moratorium (grace period) of two years to complete the construction of the hostel before it is required to start paying off the loan balance in equal instalments at the end of each quarter for ten years. Interest will accumulate on the loan during the grace period.

Option 2: Bond Issuance

The university can issue a bond to raise the GH¢50 million required to finance the construction of the hostel. The bonds will be issued in 50,200 units of GH¢1,000 face value each. The annual coupon rate on the bond will be set at 26%, but coupons will be paid semiannually starting as soon as the bond is issued. The bonds will be issued now and redeemed in 15 years at a premium of 10%. Although the total redemption value will be paid to the bondholders at maturity, the university will be required to establish a sinking fund to raise enough money to redeem the bonds. The university can deposit equal sums of money into the fund at the beginning of every six months, starting from the third year until the fifteenth year when the bond will be redeemed. The fund will be invested at an annual interest rate of 20%.

Required:

a) Regarding the syndicated loan,

i) Compute the loan’s balance at the end of the moratorium.

(3 marks)

ii) Compute the quarterly instalment required to amortise the loan over the ten-year repayment period.

(4 marks)

b) Regarding the bond issue,

i) Compute the total redemption value of the bond.

(3 marks)

ii) Compute the size of each semi-annual instalment into the sinking fund.

(4 marks)

c) Compute the project’s net present value (NPV) and provide an investment recommendation based on it. Assume the required rate of return on the project is 30%.

(6 marks)

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  • 20 Marks

FM – May 2023 – L3 – Q4 – Financing Decisions and Capital Markets

Evaluate the implications of equity financing decisions, analyze pre-emptive rights, estimate share price, and explore factors affecting price movement.

The directors of Kenny plc wish to make an equity issue to finance an ₦800 million expansion scheme, with an expected net present value of ₦110 million. It is also to re-finance an existing 15% term loan of ₦500 million and pay off a penalty of ₦35 million for early redemption of the loan.

Kenny has obtained approval from its shareholders to suspend their pre-emptive rights and for the company to make a ₦1,500 million placement of shares, which will be at the price of 185 kobo per share. Issue costs are estimated to be 4 per cent of gross proceeds. Any surplus funds from the issue will be invested in commercial paper, which is currently yielding 9 per cent per year.

Kenny’s current capital structure is summarised below:

₦ million
Ordinary shares (25 kobo per share) 800
Share premium 1,120
Revenue reserves 2,310
Total Equity 4,230
15% term loan 500
11% bond 900
Total Capital 5,630

The company’s current share price is 190 kobo, and bond price is ₦102. Kenny can raise bond or medium-term bank finance at 10 per cent per year.

The stock market may be assumed to be semi-strong form efficient, and no information about the proposed uses of funds from the issue has been made available to the public.

Taxation may be ignored.

Required:

a. Discuss FOUR factors that Kenny’s directors should have considered before deciding which form of financing to use. (6 Marks)

b. Explain what is meant by pre-emptive rights, and discuss their advantages and disadvantages. (4 Marks)

c. Estimate Kenny’s expected share price once full details of the placement, and the uses to which the finance is to be put, are announced. (8 Marks)

d. Suggest two reasons why the share price might not move to the price that you estimated in (c) above. (2 Marks)

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  • 20 Marks

FM – May 2023 – L3 – Q3 – Investment Appraisal Techniques

Evaluate Tinco Limited's expansion project using financial metrics, assess sensitivity to contribution and tax rate changes, and incorporate capital allowances.

Tinco Limited (TL) is considering an expansion project. The project will involve the acquisition of an automated production machine costing ₦11,000,000 and payable now. The machine is expected to have a disposal value at the end of 5 years, which is equal to 10% of the initial expenditure.

The following schedule reflects a recent market survey regarding the estimated annual sales revenue from the expansion project over the project’s five-year life:

Level of Demand ₦’000 Probability
High 16,000 0.25
Medium 12,000 0.50
Low 8,000 0.25

It is expected that the contribution to sales ratio will be 50%. Additional expenditure on fixed overheads is expected to be ₦1,800,000 per annum. TL incurs a 20% tax rate on corporate profits. Corporate tax is paid one year in arrears.

TL’s after-tax nominal (money) discount rate is 15.5% per annum. A uniform inflation rate of 5% per annum will apply to all costs and revenues during the life of the project. All of the values above have been expressed in terms of current prices.

You can assume that all cash flows occur at the end of each year and that the initial investment does not qualify for capital allowances.

Required:

a.
i. Evaluate the proposed expansion from a financial perspective. (10 Marks)
ii. Calculate and interpret the sensitivity of the project to changes in:

  • The expected annual contribution (3 Marks)
  • The tax rate (2 Marks)

b.
You have now been advised that the capital cost of the expansion will qualify for written down allowances at the rate of 25% per annum on a reducing balance basis. Also, at the end of the project’s life, a balancing charge or allowance will arise equal to the difference between the scrap proceeds and the tax written down value.

You are required to calculate the financial impact of these allowances. (5 Marks)

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  • 30 Marks

FM – May 2018 – L3 – SA – Q1 – Investment Appraisal Techniques

Evaluate the NPV of Plateau Plc.'s project, assess sensitivity, discuss political risk, and explore real options for the project.

Plateau Plc. (PT) is a Nigerian company that manufactures and sells innovative products. Following favourable market research that cost N4,000,000, PT has developed a new product. It plans to set up a production facility in Kano, although its board had contemplated setting up the facility in an overseas country. The project will have a life of four years.

The selling price of the new product will be N5,900 per unit, with sales in the first year to December 31, 2019, expected to be 120,000 units, increasing by 5% per annum thereafter. Relevant direct labour and material costs are expected to be N3,400 per unit, and incremental fixed production costs are expected to be N60 million per annum. The selling price and costs are stated in December 31, 2018 prices and are expected to increase at a rate of 3% per annum. Research and development costs to December 31 will amount to N25 million.

Investment in working capital will be N30 million on December 31, 2018, and this will increase in line with sales volumes and inflation. Working capital will be fully recoverable on December 31, 2022.

The company will need to rent a factory during the life of the project. Annual rent of N20 million will be payable in advance on December 31 each year and will not increase over the life of the project.

Plant and machinery will cost N1 billion on December 31, 2018. The plant and machinery are expected to have a resale value of N300 million (at December 31, 2022, prices) at the end of the project. The plant and machinery will attract 20% (reducing balance) capital allowances in the year of expenditure and in every subsequent year of ownership by the company, except in the final year when there will be a balancing allowance or charge.

Assume a corporate tax rate of 20% per annum in the foreseeable future and that tax flows arise in the same year as the cash flows which gave rise to them.

The directors are concerned by rumours in the industry of research by a rival company into a much cheaper alternative product. However, the rumours suggest that this research will take another year to complete, and if successful, it will take a further year before the alternative product comes on the market.

An appropriate weighted average cost of capital for the project is 10% per annum.

Required:

a. Calculate, using money cash flows, the NPV of the project on December 31, 2018, and advise the company whether to proceed with the project or not.
(15 Marks)

b. Calculate and interpret the sensitivity of the project to a change in:

  • (i) The annual rent of the factory (2 Marks)
  • (ii) The weighted average cost of capital (4 Marks)

c. If the board of PT decided to set up the manufacturing facility overseas, advise the board on how political risk could change the value of the project and how it might limit its effects. (4 Marks)

d. Discuss briefly FOUR real options available to PT in relation to the new project. (5 Marks)

(Total 30 Marks)

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q3 – Investment Appraisal Techniques

Calculate and compare NPV for two proposals involving equipment purchase vs. existing machinery for contract fulfillment.

Niko Plc, a large equity-financed company, has a year-end of December 31. It must fulfill a contract in Abuja and has two proposals to choose from: Proposal A (purchasing new machinery) and Proposal B (using existing machinery).

Proposal A:

  • Outlay of N312,500,000 on December 31, 2023, for new plant and machinery.
  • Projected net cash inflows (before tax, in nominal terms):
    • 2024: N200,000,000
    • 2025: N275,000,000
    • 2026: N350,000,000
  • Scrap value: N25,000,000 at end of 2026.

Proposal B:

  • Uses a machine with a net realizable value of N250 million, with an alternative sale value of N300 million on January 1, 2025, if unused.
  • Cash inflows (in nominal terms):
    • 2024: N350,000,000
    • 2025: N350,000,000
  • Labour costs:
    • 2024: N100 million (replacement staff cost of N110 million)
    • 2025: N108 million (replacement staff cost of N118.8 million)
  • Machine residual value: N0 at project end in 2025.

Additional Details:

  • Working capital: 10% of year-end cash inflows, released upon project completion.
  • Expected annual inflation rates: 2024 – 10%, 2025 – 8%, 2026 – 6%, 2027 – 5%.
  • Real cost of capital: 10%.
  • Income tax: 40%, payable one year after the accounting period.
  • Capital allowances: 20% reducing balance for Proposal A’s plant and machinery.

Required:

  • a. Calculate the NPV at December 31, 2023, for each proposal. (17 Marks)
  • b. State any reservations about making an investment decision based on these NPV figures. (3 Marks)

Answer:

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  • 30 Marks

PM – Nov 2015 – L2 – Q1 – Decision-Making Techniques

Comparison of two machine purchase options - ZIGMA 5000 and DELPHA 7000 using profitability statement, cash flows, payback period and NPV.

The Board of Directors of Danda Company Limited is proposing the purchase of either of two machines that have been proved adequate for the production of an engineering product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in the first year would be affected by installation challenges and inadequate understanding of the operating instructions of the machines.

Information available from the production profile of the two machines are as shown below:

ZIGMA 5000:

Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:

Cost of plant is N18,300,000 while the life span is 6 years.

Other information relevant to the company’s operations and administration are:

(i) Selling price per unit is N300.

(ii) Variable cost per unit is N150.

(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.

(iv) Company depreciation policy is straight line basis.

(v) The budgeted production capacity is 100,000 units.

(vi) No opening or closing inventory is envisaged.

(vii) All sales are for cash.

(viii) All costs are for cash.

Required:

a. Prepare the SIX year profitability statement for the two machines. (6 Marks)

b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)

c. What is the payback period for the two machines? (7 Marks)

d. Determine the Net Present Value (NPV) of the two machines if the acceptable discount rate for the company is 15%. (7 Marks)

e. Which of the two machines should the company acquire? (4 Marks)

 

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  • 1 Marks

BF – Nov 2015 – L1 – SA – Q10 – Investment Decisions

Identifying the correct formula for calculating Net Present Value (NPV) of an investment.

The formula for calculating Net Present Value (NPV) of an investment is:
A. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
B. Σₜ=₀ⁿ [(Cₜ / (1 + r)ᵗ)] – C₀
C. Σₜ=₀ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
D. Σₜ=₁ⁿ [(C₀ / (1 + r)ᵗ)] – C₀
E. Σₜ=₁ⁿ [(Cₜ / (1 + r)ᵗ)] + C₀

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Has Case Study
  • 20 Marks

SCS – Apr 2022 – L3 – Q6 – Investment decisions

Compute NPV for two investment options and evaluate potential benefits and difficulties for HPC.

a) For the two strategic development options being considered by HPC, compute:
i) the Net Present Value of Option 1.
ii) the Net Present Value of Option 2.
iii) the Net Present Value for the worst-case outcome for Option 1. (10 marks)

b) Discuss THREE (3) potential benefits and TWO (2) difficulties for HPC of undertaking each of the strategic development options. Your answer should include an evaluation of the calculations of the profitability index of each option. (10 marks)

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  • 7 Marks

SCS – Nov 2023 – L3 – Q5a – International Financial Management

Determine forward rates using interest rate parity and calculate the NPV for an international investment project.

In connection with the proposed investment in the United Kingdom by NSL for shito production in that country, the shareholders require information to make the final investment decision.

Required:
i) Using the interest rate parity formula/equation, determine the forward rates/future spot rates at the end of 2024, 2025, 2026, and 2027.
(4 marks)

ii) Calculate the net present value(s) for the project at the beginning of 2024 that will determine whether the project should be accepted by the shareholders. Advise the shareholders whether they should accept and proceed with the project or reject it.
(7 marks)

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