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November 2008

Question 5(Pg 20)

a)

Year 2008 2009 2010 2011 2012 2013Cost inflation 1 1.04(1*1.04) 1.0816(1.04^2) 1.125 1.170 1.217Price inflation 1 1.03(1*1.03) 1.061(1.03^2) 1.093 1.126 1.159

$000s Before Incremental 2009 2010 2011 2012Food sales 180 54(180*30%) 55.62(54*1.03) 57.289(45*1.061) 59.007 60.77Drink sales 150 45(150*30%) 46.35(45*1.04) 47.741(45*1.0816) 49.173 50.648Food costs 125 37.5(125*30%) 39 40.56 42.182 43.870Drink costs 70 21(70*30%) 21.84 22.714 23.622 24.567Staff costs 55 11(55*20%) 11.44 11.898 12.373 12.868

Other fixedcosts 31.5(45*70%) 10 10.4 10.816 11.249 11.699

Othervariablecosts

13.5(45*30%) 4.05(13.5*30%) 4.212 4.380 4.556 4.734

Netcashflow

15.078 14.661 14.198 13.684

Written down allowances Investment 40,000

2009 Year 1- WDA 30,000Balance 10,000

2009 Year 2- WDA 2000(10000*20%)Balance 8,000

2010 Year 3-WDA 1600(8000*20%)Balance 6400

2011 Year 4- WDA 1280(6400*20%)Balance 5120

2012 Balancing allowance(sincedisposal value is zero)

5120

Year Cashflows($000s) WDA($000s) Profits Tax(20%) 2009 2010 2011 2012 20132009 15.078 32(30+2) -

16.922-3.384 -3.384

2010 14.661 1.6 13.061 2.612 2.6122011 14.198 1.28 12.918 2.584 2.5842012 13.684 5.12 8.564 1.713 1.713

Tax inflow

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Year Cash flows Tax Net cashflows Discountfactor(8%)

Present value

2008 -40 - -40 1 -402009 15.078 - 15.078 0.926 13.9622010 14.661 -3.384(Tax

inflow)

18.045 0.857 15.465

2011 14.198 2.612 11.586 0.794 9.1992012 13.684 2.584 11.1 0.735 8.1592013 1.713 -1.713 0.681 -1.165

NPv 5.62

b)

IRR= 0.08+{(0.20-0.08)*5.62/(5.62- -3.534)}= 15.36%

The IRR is only an estimate, so it lacks some accuracy, but it shows that whilst the cost of money isless than 14%, the project is worthwhile; if the cost of money were to exceed 15% then theinvestment is not worthwhile. Between these values more analysis is required to establish whetherthe investment is worthwhile or not. However, since the current cost of capital is 8%, an increase to14% would represent an increase of 75% of the existing level.Management needs to consider the likelihood of an increase of this size.

c)Sensitivity=NPv/ Pv of variable

Year Cashflows D/f (20%) Pv2008 -40 1.000 -40.000

2009 15.078 0.833 12.5652010 18.045 0.694 12.5312011 11.586 0.579 6.7052012 11.1 0.482 5.3532013 -1.713 0.402 -0.688

NPv -3.534

2009 2010 2011 2012 2013Capacity variables pretax 36.918 37.37502 37.81973 38.25072Tax at 20% -7.3836 -7.475 -7.56395 -7.65014

Capacity variables posttax 36.918 29.99142 30.34473 30.68677 -7.65014DF at 8% 0.925926 0.857339 0.793832 0.73503 0.680583Present value 34.18333 25.71281 24.08862 22.55569 -5.20656

NPV = 101.3339Sensitivity = 0.055486

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November 2007

Question 5 (Pg 14)

a)

I. Existing production = 120,000 units per annumCost saving per unit = $11(30*0.2+25*0.2)Annual cost saving = $11 x 120,000 units = $132m

YearPre- taxcashflows WDA Profit Tax(30%) 2008 2009 2010 2011 2012 2013

2008 1850 1000 850 255 127.5 127.5

2009 2320 750 1570 471 235.5 235.52010 2642 563 2079 623.7 311.85 311.852011 2994 422 2572 771.6 385.8 385.82012 3106 865 2241 672.3 336.15 336.15

127.5 363 547.35 697.65 721.95 336.15

2008 2009 2010 2011 2012Additional Units (000s) (130-120) 10 (140-120) 20 (147-120) 27 (154-120) 34 (156-120) 36

$000 $000 $000 $000 $000Contribution per unit (150- 50-30*0.8-25*0.8-10)= 46Annual Contribution (46*10) 460 (46*20) 920 1242 1564 1656Maintenance cost saved 70 80 80 110 130Cost saving on existing units 1320 1320 1320 1320 1320Cash flows pre tax 1850 2320 2642 2994 3106

Written down allowances $000Cost 4000

2008 WDA(4000*25%) 1000Balance 3000

2009 WDA(3000*25%) 750Balance 2250

2010 WDA 563Balance 1687

2011 WDA 422Balance 1265

2012 Disposal 400865

Bal. allowance 865

Since max capacity is 156000(120000*1.3) with a 30% increase incapacity

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Year Cash flow Tax Net cashflow D/f(12%) Present value2008 beg -4000 -4000 1 -4000.000

2008 1850 127.5 1722.5 0.893 1538.1932009 2320 363 1957 0.797 1559.7292010 2642 547.35 2094.65 0.712 1491.3912011 2994 697.65 2296.35 0.636 1460.4792012 (3106+400)3506 721.95 2784.05 0.567 1578.5562013 0 336.15 -336.15 0.507 -170.428

NPv 3457.919

II.

b)

I.

Year Cash flow ($) DF at 15% PV $0 -15000 1 -15000

1 to 3 7500 2.283 17122.5NPv 2122.5

IRR= 10% + [(3652.5/(3652.5-2122.5)] x 5) = 22%

II. The present value of the annual cash inflows would have to reduce by $3,6525 before theproject has a negative NPV.The present value of the forecast annual cash inflows is:

$30,000 x 2487 = $74,610 therefore the sensitivity is $3,6525 / $74,610 = 49%

Other factors that should be considered before making their decision include: Reliability of demand estimates;

Expected levels of inflation and how customer demand might be affected if selling priceswere increased to compensate for cost inflation; Reliability of cost structure analysis

Scrap value

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November 2006

Question 7 (pg 9)

a)

m 2007 2008 2009 2010Sales 100*1200 105*1200*1.05 (110*1200*1.05^2) 108*1200*1.05^3

120 132.3 145.5 150Var. Prod. 75 85.1 96.2 102Var. Sales 10 11.1 12.4 12.9Fixed Prod. 4 4.3 4.7 5Fixed Sales 2 2.1 2.2 2.4Fixed Admin. 1 1.1 1.1(1.1*1.05) 1.2Total 28 28.6 28.9 26.5

Year Cashflows Tax Net Cashflows D/f(12%) Pv2007 beg -50 -50 1 -50.00

2007 28 2.3 25.7 0.893 22.952008 28.6 5.2 23.4 0.797 18.652009 28.9 6.2 22.7 0.712 16.162010 27.5 4.3 23.2 0.636 14.762011 1 -1 0.567 -0.57

NPv 21.95 All figures in millions

WDA calculations m

Investment 50Year 2007 WDA 12.5Year 2007 Balance 37.5Year 2008 WDA 9.4Year 2008 Balance 28.1Year 2009 WDA 7Year 2009 Balance 21.1Sales proceeds 1Loss on disposal 20.1

Year Cashflows WDA Profit Tax(30%) 2007 2008 2009 2010 20112007 28 12.5 15.5 4.7 2.3 2.32008 28.6 9.4 19.2 5.8 2.9 2.92009 28.9 7 21.9 6.6 3.3 3.32010 26.5 20.1 8.4 2.0 1 1

2.3 5.2 6.2 4.3 1

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b)

Year Cashflows DCF(20%) PV2007 beg -50 1 -50.0

2007 25.7 0.833 21.4

2008 23.4 0.694 16.22009 22.7 0.579 13.12010 23.2 0.482 11.22011 -1 0.402 -0.4

NPv 11.6

IRR=29%(after applying to the formula)

c) The main difference between the real rate and the money rate is the INFLATION.If real cash flows are used in the appraisal then the real cost of capital needs to be used

and vice versa

November 2005Question 2(pg 6)

Every 2 yearsYear Cashflow workings Cashflows DCF Pv

0 -15000 -15000 1 -150001 (-500*1.1) -550 0.893 -491.152 (-2500*1.1^2+7000*1.05^2-15000*1.05^2) -11845 0.797 -9440.473 (-500*1.1^3) -665.5 0.712 -473.8364 (-2500*1.1^4+7000*1.05^4-15000*1.05^2) -13384.3 0.636 -8512.41

5 (-500*1.1^5) -805.255 0.567 -456.586 (-2500*1.1^6+7000*1.05^6) 4951.766 0.507 2510.545

NPv -31863.9

Every 3 yearsYear Cashflow workings Cashflows DCF Pv

0 -15000 -15000 1 -150001 (-500*1.1) -550 0.893 -491.152 (-2500*1.1^2) -3025 0.797 -2410.933 (-4000*1.1^3+4000*1.05^3-15000*1.05^3) -18057.875 0.712 -12857.2

4 (-500*1.1^4) -732.05 0.636 -465.5845 (-2500*1.1^5) -4026.275 0.567 -2282.96 (-4000*1.1^6+4000*1.05^6) -1725.861 0.507 -875.012

NPv -34382.8

The owner should replace his vehicle every 2 years and the oppurtunity cost of making the wrongdecision is 2518.9(34382.8-31863.9)

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May 2005Question 3 (Pg 4)

If PurchasedWDA calculations

Investment 15000Year 1 WDA -3750Year 1 Balance 11250Year 2 WDA -2812.5Year 2 Balance 8437.5Year 3 Sales Proceeds -5000Balancing Allowance 3437.5

Year WDA Tax(30%) Year 1 Year 2 Year 3Year 1 3750 1125 562.5 562.5

Year 2 2812.5 843.75 421.875 421.875Year 3 3437.5 1031.25 515.625

562.5 984.375 937.5

Year Cash flows Dcf(15%) Pv0 -15000 1 -150001 562.5 0.87 489.3752 984.375 0.756 744.1883 (937.5+5000) 0.658 3906.8754 515.625 0.572 294.938

NPv -9564.625

If leasedYear Outflows 30% Year 1 Year 2 Year 3

1 (1250+4992) 1872.6 936.3 936.32 4992 1497.6 748.8 748.83 4992 1497.6 748.8

936.3 1685.1 1497.6

Year Outflows Tax Saving Net Cash Flow DCF Pv

0 -1250 -1250 1 -12501 -4992 936.3 -4055.7 0.87 -3528.4592 -4992 1685.1 -3306.9 0.756 -2500.0163 -4992 1497.6 -3494.4 0.658 -2299.3154 748.8 748.8 0.572 428.3136

NPv -9149.477Therefor based on NPv leasing is the best option since it is less costly.

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May 2005Question 5 (pg 4)

WDA calculationsInvestment 3000

Year 1 WDA -750Year 1 Balance 2250Year 2 WDA -562.5Year 2 Balance 1687.5Year 3 WDA -421.875Year 3 Balance 1265.625Year 4 WDA -316.406Year 4 Balance 949.219Year 5 Sales Proceeds -3000Loss on disposal 649.219

Cash flowsBefore After

Sales 100% 100%Variable cost 60% 48% (60%*80%)Contribution 40% 52%Revenue 4000 4800 (4000*120%)Variable cost 2400 2304Contribution 1600 (4000*40%) 2496 (4800*52%)

Increase in cont.( Cashflow) 896 (2496-1600)

Year Cashflow WDA Taxable profit Tax(30%) Year 1 Year 2 Year 31 896 750 146+ 150(Profit from sale) 88.8 44.4 44.42 896 562.5 333.5 100.05 50.03 50.0253 896 421.875 474.125 142.238 71.1884 896 316.406 579.594 173.8785 896 649.219 246.781 74.034

44.4 94.43 121.213

Continuation for the above tableYear 4 Year 5 Year 6

71.18886.939 86.939

37.017 37.017158.127 123.956 37.017

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Year Cashflows Tax N.C.F D.C.F(14%) Pv0 400-3000 0 -2600 1 -26001 896 -44.4 851.6 0.877 746.8532 896 -94.425 801.575 0.769 616.4113 896 -121.213 774.787 0.675 522.9814 896 -158.127 737.873 0.592 436.8215 896+300 -123.956 1072.044 0.519 556.3916 -37.017 -37.017 0.456 -16.880

NPv 262.578Since the NPv is positive the project should be accepted.

b)

1. Annual contribution

Year 1 to Year 5Contribution 2496*0.7*3.433 5998.1376Year 1Tax adjustment 2496*0.3*0.5*0.877 328.349Year 6Tax adjustment 2496*0.3*0.5*0.456 -170.73Present value of Contribution 6155.759

Sensitivity= NPv/Pv of variable= 4.27%

2. Tax rate

Tax Cashflows DCF Pv44.4 0.877 38.939

94.425 0.769 72.613121.213 0.675 81.819158.127 0.592 93.611123.956 0.519 64.333

37.017 0.456 16.880368.195

Sensitivity= 71.36%

Sensitivity Analysis is carried out before a decision is finally made. It is used to test howsensitive a potential decision is to a change or inaccuracy in the variables that have been usedto reach the initial decision. Each variable is tested independently. The smaller the changerequired to change the initial decision then the more sensitive is that variable and the more

justified is a manager in taking more care over the value of that variable. A key issue is theextent to which each variable is controllable by management. These factors enablemanagement to decide whether or not to proceed with the initial decision.