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2017 GMA 711S Test 1 - Final-1

The document provides information about two investment projects, Machine A and Machine B, that a company is considering. It includes cash flow information for Machine A and calculations of NPV, IRR and payback period. Students are asked to evaluate the projects, recommend one, and differentiate between independent and mutually exclusive projects. The second question discusses capital rationing and selecting projects under that constraint, and the purpose of sensitivity analysis.

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Nolan Titus
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55 views3 pages

2017 GMA 711S Test 1 - Final-1

The document provides information about two investment projects, Machine A and Machine B, that a company is considering. It includes cash flow information for Machine A and calculations of NPV, IRR and payback period. Students are asked to evaluate the projects, recommend one, and differentiate between independent and mutually exclusive projects. The second question discusses capital rationing and selecting projects under that constraint, and the purpose of sensitivity analysis.

Uploaded by

Nolan Titus
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

BACHELOR OF ACCOUNTING

(23BACF)
________________________________________________________________________

MANAGEMENT ACCOUNTING 310 (GMA711S)

DATE: 11 March 2017


DURATION: 2 Hours
MARKS: 50
TEST 1

INSTRUCTIONS
1. This test paper is made up of two (2) questions
2. Answer both questions in blue or black ink
3. Start each question on a new page in your answer sheet & show all your workings
4. Round off only final answers to 2 decimal places
5. Questions relating to this test may be raised in the initial 30 minutes after the start of the
paper. Thereafter, candidates must use their initiative to deal with any perceived error or
ambiguities & any assumptions made by the candidate should be clearly stated.

REQUIREMENTS: None

EXAMINERS: S. Kasita and L. Odada MODERATOR: A Makosa

This paper consists of 2 pages excluding this cover page


Question 1 [25 Marks]
Barloworld is considering acquiring new machinery to expand its production capacity. Two alternative machines
have been identified, Machine A and Machine B. The expected cash flows of Machine A are as follows:
The following data are supplied relating to the two investment projects, only one of which may be selected:
Machine A
N$000
Purchase cost of machine 500
Working capital requirement at year 0 60
Estimated annual net cash inflows:
Year 1 120
Year 2 260
Year 3 200
Year 4 130
Estimated disposal value of machine 30

Additional information:
 The working capital required at year zero will be released at the end of year four.
 The machines are to be depreciated on a straight line basis.
 Both machines have a lifespan of four years.
 The company’s cost of capital is ten percent per annum

Required:
a) Calculate for machine A, the:
i. Net present value [6]
ii. Internal rate of return [6]
iii. Discounted payback period [3]

The following figures have been calculated for machine:


Net present value N$86 010
Internal rate of return 14.08%
Discounted payback period 3.71 years

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b) Evaluate each of the two machines as an investment opportunity and recommend which machine
should be purchased. [6]

c) Use appropriate examples to differentiate between independent and mutually exclusive projects. [4]

Question 2 [25 Marks]


a) Trustco Ltd is evaluating the following three investment projects:

Project X (N$000) Project Y (N$000) Project Z (N$000)


0 10 000 10 000 20 000
1 4 000 2 000 7 000
2 4 000 2 000 8 000
3 3 000 6 000 8 000
4 3 000 6 000 6 000

The company is subject to capital rationing and the capital budget is limited to N$20 million for the year. The
company is unable to defer any of the projects. The cost of capital is twelve percent.
Required:
i. Discuss the concept of capital rationing and the circumstances under which it may arise. [5]
ii. Which projects should be selected assuming that the company is subject to stringent capital
rationing? [16]
b) Explain the purpose of sensitivity analysis in making investment decisions. [4]

End of paper

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