Cost of Capital – Page 2

FM – L2 – Q55 – Discounted Cash Flow

Calculate NPV for Unified Energy Ltd's project with given cash flows and 10% discount rate.

Question

Unified Energy Ltd is evaluating a project with the following cash flows:

Year	0	1	2	3	4	5
	GH₵000	GH₵000	GH₵000	GH₵000	GH₵000	GH₵000
Sales			7,400	8,300	9,800	5,800
Wages			(550)	(580)	(620)	(520)
Materials			(340)	(360)	(410)	(370)
Licence fee		(300)	(300)	(300)	(300)	(300)
Overheads			(100)	(100)	(100)	(100)
Equipment	(5,200)	(5,200)				2,000
Specialised equipment			(150)
Working capital		(650)				650
	(5,200)	(6,150)	5,960	6,960	8,370	7,160
Discount factor at 10%	1.000	0.909	0.826	0.751	0.683	0.621

The company’s cost of capital is 10%.
Required:
Calculate the net present value (NPV) of the project and recommend whether it should be undertaken.

Answer

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Tags: Cash Flows, Cost of Capital, Discounted cash flow, investment appraisal, NPV
Level: Level 2

Topic: Discounted cash flow

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.

Question

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.

Answer

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Tags: capital allowances, Cash Flows, Cost of Capital, Discounted cash flow, Financial management, investment appraisal, NPV, project evaluation, Taxation, WACC
Level: Level 2

Topic: Discounted cash flow

FM – L2 – Q9 – Financial Policy Decisions

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

Question

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).

Answer

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Tags: Cash Flows, Cost of Capital, Debt Finance, Dividend Policy, Equity Finance, Financial Decisions, Financing Policy, Investment Policy, Project Viability, Shareholder Value
Level: Level 2

Topic: Introduction to Investment Appraisal

Tag (SQ): Cost of Capital

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FM – L2 – Q55 – Discounted Cash Flow

Calculate NPV for Unified Energy Ltd's project with given cash flows and 10% discount rate.

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.

FM – L2 – Q9 – Financial Policy Decisions

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

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FM – L2 – Q55 – Discounted Cash Flow

Calculate NPV for Unified Energy Ltd's project with given cash flows and 10% discount rate.

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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.

You're reporting an error for "FM – L2 – Q21 – Discounted cash flow"

FM – L2 – Q9 – Financial Policy Decisions

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

You're reporting an error for "FM – L2 – Q9 – Financial Policy Decisions"

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