Many countries currently have an ageing population. At some time in the fairly near future, there will be about twice as many individuals who are past the normal age for retirement as there are individuals between 18 and 65 years of age.
Describe the possible consequences of an ageing population for a company that currently employs about 4,000 people.
(a) TechNova Ltd, a software company, has developed a new game “Zestora” which it plans to launch in the near future. Sales volumes, production volumes, and selling prices for “Zestora” over its four-year life are expected to be as follows:
Year
Sales and production (units)
Selling price (GH₵ per game)
1
15,000
45
2
25,000
40
3
20,000
38
4
10,000
35
Financial information relating to the production of Zestora:
Item
GH₵ per game
Direct materials
6
Direct labour
8
Variable production overheads
4
Additional information:
Annual fixed production overheads will be GH₵150,000.
Initial investment in equipment will be GH₵800,000.
Additional working capital of GH₵50,000 will be needed at the beginning of the project and will be released at the end of year four.
Tax at the rate of 25% is payable on profits one year in arrears.
Capital allowance is available at 25% per year on a reducing balance basis.
TechNova Ltd’s cost of capital is 10%.
The equipment will have no residual value at the end of year four.
Required: Calculate the net present value of the proposed investment and comment on your findings.
NexGen Enterprises is considering whether to acquire a new machine. The machine has a purchase cost of GH₵30,000, an expected useful life of five years, and a disposal value of GH₵6,000 at the end of year 5. The machine would generate additional cash flows of GH₵10,000 in each of its five years.
Two methods of financing are under consideration:
(i) To buy the machine with money obtained from a bank loan, at an interest rate of 8% after tax.
(ii) To lease the machine. The lease payments to the lessor would be GH₵7,000 at the end of each of the next five years.
The company’s cost of capital is 10% after tax.
Corporation tax is 30%. If the machine is purchased, the company will be able to claim capital allowances (tax depreciation allowances) of 25% each year on a reducing balance basis. Tax is payable at the end of the year following the year against profits earned during Year 1.
Required:
(a) Recommend whether the machine should be acquired.
(b) If your recommendation is to acquire the machine, recommend whether it should be purchased or leased.
Coastline Plc is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.
Year
Average unit sales price
Average unit variable cost
Incremental fixed costs
Sales volume (units)
1
GH¢73.55
GH¢50
GH¢1,200,000
65,000
2
GH¢76.03
GH¢45
GH¢1,200,000
110,000
3
GH¢76.68
GH¢45
GH¢1,200,000
125,000
4
GH¢81.86
GH¢45
GH¢1,200,000
80,000
The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs and do not allow for expected increases in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure.
Tax on profits is at the rate of 30%, and tax is payable in the same year.
The cost of capital is 10%.
Apex Ltd is considering whether to invest in the purchase of a new machine costing GH¢250,000. The machine will have a four-year life and a net disposal value of GH¢100,000 at the end of Year 4.
In addition, GH¢38,000 of working capital will be required from the start of the project, increasing to GH¢50,000 at the beginning of the second year. All the working capital will be recovered at the end of Year 4.
The project is expected to generate extra annual revenues of GH¢200,000 and incur annual cash operating costs of GH¢80,000 for each year of the project. Apex Ltd’s cost of capital is 10% after tax.
Corporation tax is charged on profits at 35%. Tax is payable in the year following the year in which the profits occur. There will be a 25% annual writing-down allowance on capital expenditure, for tax purposes. The tax-allowable depreciation is calculated by the reducing balance method.
Required
Calculate the NPV of the project and state whether or not it should be undertaken.
CVB Ltd is considering whether to invest in new equipment costing GH¢600,000. The equipment is expected to have an economic life of five years and will have no disposal value at the end of Year 5 (and no disposal costs).
CVB’s after-tax cost of capital is 15%. Tax is charged at an annual rate of 35% and is payable in the year following the year in which the taxable profits arise.
The following forecasts relate to the project under consideration:
Year
GH¢000
1
2
3
4
5
Sales income
250
250
300
350
400
Direct materials
50
55
58
64
70
Direct labour
25
25
30
30
35
Total direct costs
75
75
88
94
105
Depreciation
120
120
120
120
120
There will be tax allowances on the cost of the equipment, calculated at 25% each year on the reducing balance basis. The first depreciation tax allowance (capital allowance) would be claimed in year 0 (or very early in year 1).
Assume that:
(1) taxable profits are defined as income minus direct costs and capital allowances
(2) cash profits in each year = sales minus direct costs
Required
Calculate the net present value of the project and recommend whether or not the project should be undertaken.
Zest Ltd is considering whether or not to invest in a four-year investment project. The project will require the purchase of equipment costing GH¢800,000. This will have an estimated residual value of GH¢200,000 at the end of Year 4. The equipment will be depreciated by the straight-line method.
The profits before interest and tax from the project are expected to be GH¢400,000 each year. Tax is payable at 30% one year in arrears.
The equipment will qualify for capital allowances (tax depreciation allowances) of 25% each year, using the reducing balance method. The first claim for an allowance would be made against Year 0 profits.
The after-tax cost of capital is 15%.
Required:
Calculate the NPV of the project.
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).
A critical task of government in public financial management is raising revenues for development as the success of government’s programmes and projects depends large on the availability of funds. The central government raises money from taxes, non-tax revenues and grants.
Required:
(a) Explain the Constitutional provision on Taxation.
(b) Explain FOUR objectives of taxation other than for revenue mobilisation.
(c) Explain FOUR sources of non-tax revenue for the government.
