Topic: Introduction to capital budgeting

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  • 15 Marks

MA – Nov 2024 – L2 – Q4a – Cost-Benefit Analysis (CBA) for Public Sector Investment

Evaluation of a healthcare capital investment project using cost-benefit analysis.

The Faith Specialist Hospital (FSH) is a special government health facility under the Ghana Health Service (GHS) that provides specialized medical scans for complex health conditions. Management of FSH is planning to install an ultra-modern imaging machine that will improve the quality and accuracy of scans. The new installation will require an additional capital investment of GH¢420,000. The GHS policy on capital projects is that all new projects should achieve an internal rate of return of at least 30%.

Forecast demand for the services of this new machine over its five-year useful life are as follows:

Year Number of Scans
1 1,250
2 2,700
3 3,500
4 1,400
5 675

Projected charge per scan: GH¢650
Variable costs per scan:

  • Consumables: GH¢330
  • Labour and overheads: GH¢176

Operating fixed costs per year: GH¢264,000 (includes depreciation on a straight-line basis)

Apart from the financial forecasts above, it is also envisaged that the project will produce non-financial benefits in several forms. Although it is hard to place a precise value on this, expert opinion suggests that this could approximate GH¢70,000 per annum.

Required:

i) Using cost-benefit analysis (CBA) computations, evaluate if the project should be undertaken.

ii) Enumerate TWO limitations of evaluating projects in the public sector.

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  • 10 Marks

MA – May 2020 – L2 – Q4a – Introduction to capital budgeting, Decision making techniques

Identify and explain the stages in the capital investment decision-making process.

a) Senchi Ltd is evaluating an investment proposal to manufacture River boat, which has performed well in test marketing trials conducted recently by the company’s research and development division.

Required:

Identify and explain the stages in the capital investment decision-making process. (10 marks)

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  • 10 Marks

MA – May 2017 – L2 – Q1a – Introduction to capital budgeting,

Calculate the break-even rate for a taxi service investment considering a 5% annual cash flow increase over five years.

Kwame, after his National Service and with no hope of securing a job in the formal sector, has decided to run a taxi service. The following forecast has been made for the operation of a service between Abisim and Sunyani:

  1. Revenue totaling GH¢300 a week for 52 weeks in a year. This is net of fuel and other variable costs.
  2. Tyres: four pieces for a year at GH¢120 per unit.
  3. Maintenance and servicing: GH¢120 per month.
  4. Salaries: GH¢3,000 per year.
  5. Insurance: GH¢350 per year.

The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the vehicle is estimated at GH¢28,000. The project appears quite profitable based on the NPV criteria using the Government policy rate of 26%. However, the banks are offering rates far higher than the policy rate.

Required:

You are to calculate the break-even rate for the project.

(10 marks)

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  • 15 Marks

MA – Nov 2024 – L2 – Q4a – Cost-Benefit Analysis (CBA) for Public Sector Investment

Evaluation of a healthcare capital investment project using cost-benefit analysis.

The Faith Specialist Hospital (FSH) is a special government health facility under the Ghana Health Service (GHS) that provides specialized medical scans for complex health conditions. Management of FSH is planning to install an ultra-modern imaging machine that will improve the quality and accuracy of scans. The new installation will require an additional capital investment of GH¢420,000. The GHS policy on capital projects is that all new projects should achieve an internal rate of return of at least 30%.

Forecast demand for the services of this new machine over its five-year useful life are as follows:

Year Number of Scans
1 1,250
2 2,700
3 3,500
4 1,400
5 675

Projected charge per scan: GH¢650
Variable costs per scan:

  • Consumables: GH¢330
  • Labour and overheads: GH¢176

Operating fixed costs per year: GH¢264,000 (includes depreciation on a straight-line basis)

Apart from the financial forecasts above, it is also envisaged that the project will produce non-financial benefits in several forms. Although it is hard to place a precise value on this, expert opinion suggests that this could approximate GH¢70,000 per annum.

Required:

i) Using cost-benefit analysis (CBA) computations, evaluate if the project should be undertaken.

ii) Enumerate TWO limitations of evaluating projects in the public sector.

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  • 10 Marks

MA – May 2020 – L2 – Q4a – Introduction to capital budgeting, Decision making techniques

Identify and explain the stages in the capital investment decision-making process.

a) Senchi Ltd is evaluating an investment proposal to manufacture River boat, which has performed well in test marketing trials conducted recently by the company’s research and development division.

Required:

Identify and explain the stages in the capital investment decision-making process. (10 marks)

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You're reporting an error for "MA – May 2020 – L2 – Q4a – Introduction to capital budgeting, Decision making techniques"

  • 10 Marks

MA – May 2017 – L2 – Q1a – Introduction to capital budgeting,

Calculate the break-even rate for a taxi service investment considering a 5% annual cash flow increase over five years.

Kwame, after his National Service and with no hope of securing a job in the formal sector, has decided to run a taxi service. The following forecast has been made for the operation of a service between Abisim and Sunyani:

  1. Revenue totaling GH¢300 a week for 52 weeks in a year. This is net of fuel and other variable costs.
  2. Tyres: four pieces for a year at GH¢120 per unit.
  3. Maintenance and servicing: GH¢120 per month.
  4. Salaries: GH¢3,000 per year.
  5. Insurance: GH¢350 per year.

The net cash flow will increase at 5% per annum for the next five years due to inflation. The cost of the vehicle is estimated at GH¢28,000. The project appears quite profitable based on the NPV criteria using the Government policy rate of 26%. However, the banks are offering rates far higher than the policy rate.

Required:

You are to calculate the break-even rate for the project.

(10 marks)

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