Tag (SQ): Cash Flows

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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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  • 15 Marks

FM – L2 – Q21 – Discounted cash flow

Calculate NPV for a machine investment at Tema Electrical Plc and recommend if it should be undertaken, considering cash flows, WACC, and tax.

Tema Electrical Plc is considering whether to purchase a machine for the manufacture of a new product, Product X. It has been estimated that Product X would have a life of four years and at a selling price of GH¢8 per unit, annual sales demand would be 400,000 units in Year 1, 600,000 units in Year 2 and 800,000 in each of Years 3 and 4.

Variable production and selling costs would be GH¢6 per unit. Incremental annual fixed cost expenditures (all cash cost items) would be GH¢500,000 in Year 1, rising by GH¢20,000 each year.

The machine, which has an annual output capacity of 700,000 units of Product X, would cost GH¢1,200,000 and would have a resale value of GH¢200,000 at the end of Year 4. Capital allowances would be available on a 25% annual reducing balance basis, with a balancing charge or allowance in the year of disposal. Tax at 25% is payable one year in arrears of the profits to which it relates.

Tema Electrical Plc is financed 70% by equity capital and 30% by debt capital. The equity has a cost of 10% and the debt has a cost of 8.9% (before tax).

Required

Calculate the net present value of the proposed project and recommend whether the investment in the machine should be undertaken.

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  • 6 Marks

FM – L2 – Q9 – Financial Policy Decisions

Discuss investment, financing, and dividend policy decisions, their interrelation, and impact on firm value.

When determining the financial objectives of a company, it is necessary to take three types of policy decision into account: investment policy, financing policy, and dividend policy.

Required:

Discuss the nature of these THREE types of decisions, commenting on how they are inter-related and how they might affect the value of the firm (that is the present value of projected cash flows).

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  • 20 Marks

FA – L1 – Q102 – Statement of cash flows

Prepare a statement of cash flows for ZA Ltd for the year ended 31 May 20X9 using the indirect method per IAS 7.

The statements of financial position for the last two years for ZA Ltd are shown below. ZA Ltd implemented an expansion programme during the year ended 31st May 20X9.

20X8 20X9
GH¢ GH¢ GH¢ GH¢
Non-current assets (net) 380,000 530,000
Current assets
Inventory 80,000 108,000
Receivables 32,000 37,000
Bank 13,000 –
Cash 1,000 3,000
Total assets 506,000 678,000
Current liabilities
Payables 26,000 30,000
Corporation Tax 22,000 28,000
Overdraft – 5,000
Dividends – 21,000
Accruals – 4,000
Total liabilities 68,000 88,000
Capital and Reserves
Ordinary shares 350,000 490,000
General reserve 62,000 62,000
Revaluation reserve – 10,000
Retained earnings 26,000 28,000
Total capital and liabilities 506,000 678,000

Additional information:
(i) The total depreciation provision incorporated in the statements of financial position was GH¢48,000 at 31st May 20X8 and GH¢122,000 at 31st May 20X9.
(ii) During the year ended 31st May 20X9 a non-current asset costing GH¢22,000 with a carrying amount of GH¢6,000 was sold for GH¢1,000. No other disposals took place.
(iii) The revaluation surplus represents a revaluation of premises during the year ended 31st May 20X9.

Required:
(a) Prepare a statement of cash flows for ZA Ltd for the year ended 31st May 20X9 in accordance with IAS 7. (Use the indirect method).

(b) State the effects of the expansion policy on ZA Ltd.

Answer:

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  • 20 Marks

FA – L1 – Q101 – Statement of cash flows

Prepare a statement of cash flows for StarPharma Ltd for the year ended 30 June 20X9 using the indirect method.

The financial statements of StarPharma Ltd, a limited liability company that operates in the pharmaceuticals sector, at 30 June were as follows.

20X9 20X8
GH¢000 GH¢000 GH¢000 GH¢000
Assets
Non-current assets
Property cost 22,000 12,000
Depreciation (4,000) (1,000)
Plant and equipment 18,000 11,000
Cost 5,000 5,000
Depreciation (2,250) (2,000)
2,750 3,000
20,750 14,000
Current assets
Inventories 16,000 11,000
Trade receivables 9,950 2,700
Cash and cash equivalents – 1,300
25,950 15,000
Total assets 46,700 29,000
Equity and liabilities
Capital and reserves
Equity capital 3,000 3,000
Accumulated profits 16,200 3,800
19,200 6,800
Non-current liabilities
Loan 6,000 10,000
Current liabilities
Operating overdraft 11,000
Trade payables 8,000 11,000
Income tax payable 1,800 1,000
Accrued interest 700 200
21,500 12,200
Total equity and liabilities 46,700 29,000

Statement of profit or loss (extracts)
Operating profit
Financing cost (Interest)
Profit before tax
Income tax expense
Net profit for the year

Equipment of carrying amount GH¢250,000 was sold at the beginning of 20X9 for GH¢350,000. This equipment had originally cost GH¢1,000,000.
In recent years, no dividends have been paid.

Required
Prepare a statement of cash flows, under the indirect method, for the year ended 30 June 20X9.

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  • 20 Marks

FA – L1 – Q100 – Statement of cash flows

Prepare a statement of cash flows for SpicyFlare Limited for the year ended 31 December 20X9 using provided financial data.

SpicyFlare Limited
SpicyFlare Limited summarised final accounts are as follows:

Statements of financial position

31 December 20X8 31 December 20X8
GH¢000 GH¢000 GH¢000
Non-current assets:
Plant and machinery at cost 2,700
Accumulated depreciation (748)
Carrying amount 1,952
Current assets:
Inventory 203
Receivables 147
Bank 51
401
Total assets 2,353
Ordinary share capital (GH¢1 shares) 740
Share premium account
Retained earnings 671
1,411
Non-current liabilities:
Loans
Current liabilities:
Bank overdraft
Trade payables and accruals 152
Current taxation 470
Total equity and liabilities 2,353

Statement of profit or loss for year ended 31 December 20X9
Profit before tax
Taxation
Profit after tax
Dividend payments during the year were GH¢230,000.

The following information is also available:
(1) The only new loan raised during the year was a five-year bank loan amounting to GH¢65,000.
(2) Interest charged during the year was GH¢156,000. Interest accrued was GH¢24,000 last year and GH¢54,000 this year.
(3) Depreciation charged during the year amounted to GH¢401,000. This does not include any profit or loss on disposal of non-current assets.
(4) During the year plant which originally cost GH¢69,000 was disposed of for GH¢41,000.
(5) During the year the company issued 200,000 new shares.

Required
Prepare a statement of cash flows.

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  • 20 Marks

FA – L1 – Q99 – Statement of Cash Flows

Prepare a statement of cash flows for Nordex Limited for 20X9 using financial statements and non-current asset details.

The following information has been extracted from the draft financial information of Nordex Limited.

Statement of Profit or Loss for the Year Ended 31 December 20X9

GH¢’000 GH¢’000
Sales revenue 1,350
Administration costs (346)
Distribution costs (246)
Operating profit 758
Interest expense (110)
Profit before tax 648
Taxation (208)
Profit after tax 440
Dividends paid (120)
Retained profit for the year 320

Statements of Financial Position

31 December 20X9 31 December 20X8
GH¢’000 GH¢’000 GH¢’000 GH¢’000
Non-current assets 1,145 957
Current assets
Inventory 157 142
Receivables 203 184
Cash and cash equivalents 41 10
401 401 336 336
Total assets 1,546 1,293
Equity and liabilities
Equity
Share capital 200 200
Revaluation surplus 170 100
Retained earnings 604 404
974 974 704 704
Non-current liabilities
Loans 350 450
Current liabilities
Trade payables 43 43
Taxation 29 36
Accruals 150 100
222 222 179 179
Total equity and liabilities 1,546 1,293

Note on Non-Current Assets

Land and Buildings Machinery Fixtures & Fittings Total
GH¢’000 GH¢’000 GH¢’000 GH¢’000
Cost or Valuation
At 31 December 20X8 830 470 197 1,497
Additions – 43 55 98
Disposals – (18) – (18)
Adjustment on revaluation 70 – – 70
At 31 December 20X9 900 495 252 1,647
Depreciation
At 31 December 20X8 (90) (270) (180) (540)
Charge for the year (10) (56) (8) (74)
Disposals – 12 – 12
Adjustment on revaluation 100 – – 100
At 31 December 20X9 0 (314) (188) (502)
Carrying Amount
At 31 December 20X8 740 200 17 957
At 31 December 20X9 900 181 64 1,145

You have been informed that included within distribution costs is GH¢4,000 relating to the loss on a disposal of a non-current asset.

Required
Prepare a statement of cash flows for Nordex Limited for the year ended 31 December 20X9.

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