Get premium membership and access questions with answers, video lessons as well as revision papers.
If the project is used over its entire life, the NPV is negative.
NPV = (4,000 × 0.9091) + (3,750 × 0.8264) + (3,500 × 07513) – 9,600
= 3,636.4 + 3,099 + 2,629.55 – 9,600
= -235.05 × 1,000
= -235,050
If the project is abandoned after one year
NPV = (4,000 × 0.9091) + (6,000 ×0.9091) – 9,600
= 3,636.4 + 5,454.6 – 9,600
= -509 x 1,000
= -509,000
NPV = (4,000×0.9091) + (3,750 ×0.8264) + (3,800×0.8264) – 9,600
= 3,636.4 + 3,099 + 3,140.32 – 9,600
= 275.72 x 1,000
= 275,720
Advice
Project X should be abandoned after 2 years as its net present value is positive.
Kavungya answered the question on April 25, 2022 at 11:25
- Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model...(Solved)
Bram Ltd. has found out that, after two years of using a machine, a more advanced model has arrived in the market. The advanced model is expected to increase output. The existing machine had cost sh. 32,000 and was being depreciated using the straight – line method over ten years. The current market value of the existing machine is sh. 15,000.
Bram Ltd. is considering the acquisition of the advanced model which costs sh. 123,500 including installation costs and has a salvage value of sh. 20,500 at the end of 8 years of its useful life. The following data has been provided:
The required rate of return is 15%. Ignore taxation.
Required:
Compute the following in respect of the new machine:
i. Payback period.
ii. Net present Value (NPV).
iii. Internal rate of return (IRR).
Date posted: April 25, 2022. Answers (1)
- Kiwanda Ltd. is considering the launch of a new product "M" for which an investment of Sh.6
million in plant and machinery will be required. The...(Solved)
Kiwanda Ltd. is considering the launch of a new product "M" for which an investment of Sh.6
million in plant and machinery will be required. The production of "M" is expected to last for five
years after which the plant and machinery would be sold for Sh.1.5 million.
Additional information:
1. "M" would be sold at Sh.600 per unit with a variable cost of Sh.240 per unit.
2. Fixed production costs (excluding depreciation) would amount to Sh.600,000 per annum.
3. The company applies the straight line method of depreciation.
4. The cost of capital is 10% per annum.
5. The number of units of "M" expected to be produced and sold per annum for the next five
years is shown below:
6. The corporation tax rate is 30%.
Required:
Advise the management of Kiwanda Ltd. on the appropriate course of action using:
(i) The net present value (NPV) approach.
(ii) The internal rate of return (IRR) approach.
Date posted: April 25, 2022. Answers (1)
- Explain four features of an ideal investment appraisal method.(Solved)
Explain four features of an ideal investment appraisal method.
Date posted: April 25, 2022. Answers (1)
- Bidii Ltd. is considering investing in a plant which is expected to operate for the next four years after which it will have no salvage...(Solved)
Bidii Ltd. is considering investing in a plant which is expected to operate for the next four years after which it will have no salvage value. The plant will cost Sh.5 million. Annual tax depreciation of 25% will be allowed in respect of the expenditure.
Revenue from the plant will be Sh.7 million per annum for the first two years and Sh.5 million per annum thereafter. Incremental costs will be Sh.4 million throughout. Bidii Ltd. pays corporation tax at 30% and has a cost of capital of 10%. Assume that all cash flows occur at the end of the year to which they relate.
Required:
Advise Bidii Ltd. on whether to proceed with the investment.
Date posted: April 25, 2022. Answers (1)
- Explain why capital budgeting decisions are important.(Solved)
Explain why capital budgeting decisions are important.
Date posted: April 25, 2022. Answers (1)
- The following information relates to the forecast returns of securities A and B and their probabilities during the financial year ending 30 June 2010.
Required;-
i) The...(Solved)
The following information relates to the forecast returns of securities A and B and their probabilities during the financial year ending 30 June 2010.
Required;-
i) The expected return and standard deviation
ii) Based on the relative risk, which security would you recommend
Date posted: April 25, 2022. Answers (1)
- Briefly explain the following:
(i) Financial risk
(ii) Asset risk(Solved)
Briefly explain the following:
(i) Financial risk
(ii) Asset risk
Date posted: April 25, 2022. Answers (1)
- An investor has two securities, A and B. with the following return characteristics
Required
Assess the riskiness of securities A and B.(Solved)
An investor has two securities, A and B. with the following return characteristics
Required
Assess the riskiness of securities A and B.
Date posted: April 25, 2022. Answers (1)
- Differentiate between Business risk and financial risk as used in finance.(Solved)
Differentiate between Business risk and financial risk as used in finance.
Date posted: April 25, 2022. Answers (1)
- Distinguish between Futures and forwards as used in finance.(Solved)
Distinguish between Futures and forwards as used in finance.
Date posted: April 25, 2022. Answers (1)
- Distinguish between Perfect markets and efficient markets as used in finance.(Solved)
Distinguish between Perfect markets and efficient markets as used in finance.
Date posted: April 25, 2022. Answers (1)
- West Limited has forecasted the following end of period prices for its shares.
The current price per share is Sh.50.
Required:
(i) Expected return.
(ii) Variance of end of...(Solved)
West Limited has forecasted the following end of period prices for its shares.
The current price per share is Sh.50.
Required:
(i) Expected return.
(ii) Variance of end of period returns.
Date posted: April 25, 2022. Answers (1)
- Explain the relationship between risk and return.(Solved)
Explain the relationship between risk and return.
Date posted: April 25, 2022. Answers (1)
- The following data relate to price and related financial details of three ordinary shares for the year 2012.
Required:
i) Total expected return for each of the...(Solved)
The following data relate to price and related financial details of three ordinary shares for the year 2012.
Required:
i) Total expected return for each of the three ordinary shares.
ii) Relative return for each of the three ordinary shares.
Assuming an investor combines all the three ordinary shares X, Y, Z in a portfolio in the ratio of 4:2:4 respectively. Determine the expected return of the portfolio.
Date posted: April 25, 2022. Answers (1)
- The following information relates to two potential investments namely; A and B.
Required:
The standard deviation of each of the two investments.(Solved)
The following information relates to two potential investments namely; A and B.
Required:
The standard deviation of each of the two investments.
Date posted: April 25, 2022. Answers (1)
- Musa Onyango has invested in a portfolio that comprises two assets as shown below;-
Correlation coefficient between the rates of return of asset “C” and asset...(Solved)
Musa Onyango has invested in a portfolio that comprises two assets as shown below;-
Correlation coefficient between the rates of return of asset “C” and asset “S” is 0.30
Required;-
i. Portfolio expected return
ii. Portfolio risk
Date posted: April 25, 2022. Answers (1)
- Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.(Solved)
Using a well-labelled diagram, differentiate between ‘systematic risk’ and ‘unsystematic risk’.
Date posted: April 25, 2022. Answers (1)
- Two firms. A Ltd. And B Ltd. Operate in the same industry. The two firms are similar in all aspects except for their capital structures.
The...(Solved)
Two firms. A Ltd. And B Ltd. Operate in the same industry. The two firms are similar in all aspects except for their capital structures.
The following additional information is available.
i) A ltd. Is financed using sh.100 million worth of ordinary shares.
ii) B ltd. Is financed using sh.50 million in ordinary share and sh.50 million in 7% debentures.
iii) The annual earnings before interest and tax sh.10 million for both firms. These earning are expected to remain constant indefinitely.
iv) The cost of equity in A LTD.IS 10%.
v) The corporate tax rate is 30%.
Required:
Using the Modigliani miller (mm) model, determine the following.
i) The market value of A ltd. and B ltd.
ii) The weighted average cost of capital of A ltd. And B ltd.
Date posted: April 14, 2022. Answers (1)
- Biashara Ltd is financed by debt and equity. The company is in the process of determining the optimal capital structure that will minimize its weight...(Solved)
Biashara Ltd is financed by debt and equity. The company is in the process of determining the optimal capital structure that will minimize its weight average cost of capital.
The cost of debt at various levels of leverage is as follows:
Date posted: April 14, 2022. Answers (1)
- The following balance sheet relates to Mapeo Ltd for the year ending 31 December 2006:
Additional information:
i) The company’s earnings before interest and tax average sh.16,...(Solved)
The following balance sheet relates to Mapeo Ltd for the year ending 31 December 2006:
Additional information:
i) The company’s earnings before interest and tax average sh.16, 000,000 per annum
ii) The current market price per share is sh.90
iii) The corporate tax rate is 30%
iv) All the company’s profit are distributed as dividends
v) Assuming that all the assumptions of the traditional theory of capital structure hold, except for the existence of taxes
Required:
The company’s market-weight average cost of capital using the traditional theory
Date posted: April 14, 2022. Answers (1)