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Hbc2202:Project Appraissal Question Paper
Hbc2202:Project Appraissal
Course:Bachelor Of Commerce
Institution: Meru University Of Science And Technology question papers
Exam Year:2012
QUESITON ONE – (30 MARKS)
(a) Discuss the term project and explain the need for project appraisal. (3 Marks) (b) Citing relevant examples, differentiate between shadow prices and border prices. (4 Marks) (c) How do costs and benefits of a society differ from those of a private enterprise? (3 Marks) (d) Afya Ltd is expected to increase the production of maize in Kenya. Maize is a traded good whose cost of distribution and marketing services account for 18% of the unit price. If the shadow price is estimated to be Sh.120, determine the average international price of the commodity. (5 Marks) (e) Suppose the maize in the country was to be harvested by domestic lab our and the market wage rate is Sh.800 per hour. Taking a standard conversation factor to be 2.5, determine the shadow wage rate. (5 Marks) (f) Konza city, also known as African silicon Savanah is being established to be the link of Information Technology in Kenya. This is one of the key eight landmark projects the government intends to implement in line with Vision 2030.
Required: Explain how this project may be appraised using the factor of project appraisal. (10 Marks)
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QUESTION TWO – (20 MARKS)
(a) Discuss three methods of incorporating the premium on foreign exchange in economic analysis. (3 Marks) (b) The following position statement was extracted from the books of Linkways Ltd as at 31.12.2012: Shs. ‘000’ Property, plant and equipment 9000 Long term investments 1500 Net current assets 4500 15000 Financed by: 10,000 ordinary shares @sh.10 1000 Capital reserves 2000 Revenue reserves 9000 10% debentures (2015) 3000 15000
Additional information: 1. Profit before interest and tax amounted Sh.2,000,000 2. Dividend payout ratio for the year was 40% 3. Market price per share as at 31.12.12 was Sh.50 4. The corporation tax rate is 30%
Required:
Calculate and interpret the following ratios:
(i) Gearing ratio (3 Marks) (ii) Dividend yield ration (3 Marks) (iii) Interest coverage ratio (3 Marks) (iv) Price earnings ratio (3 Marks) (v) Return on capital employed (ROCE) (3 Marks) (c) Using relevant techniques, comment on the liquidity of the company. (2 Marks)
QUESTION THREE – (20 MARKS)
(a) Discuss the importance of capital budgeting decisions to a firm. (4 Marks) (b) Why is environmental analysis importance in project appraisal? (4 Marks)
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(c) The following are the balance sheets of Q Ltd as at 31.12
2013 (Sh.) 2012 (Sh.)
Ordinary share capital 600,000 500,000 Retained earnings 427,100 395,800 Debentures 300,000 200,000 Creditors 167,500 125,800 Proposed dividends 40,000 54,000 Taxation 60,000 50,000 Bank overdraft 9,900 - 1,604,500 1,325,600 Plant and machinery (cost) 769,900 658,300 Less depreciation (371,600) (263,500) 398,300 394,800 Fit property at cost 350,000 300,000 Stocks 608,300 327,100 Debtors 247,900 265,700 Bank - 38,000 1,604,500 1,325,600
During the year to 31 Dec 2013, plant and machinery with a written down value of Sh.202,500 was sold for Sh.169,500. This plant had originally cost Sh.390,000.
Required Prepare a cash flow statement (12 Marks)
QUESTION FOUR – (20 MARKS)
(a) Discuss the relevance of risk and uncertainty in project appraisal. (4 Marks) (b) A company is considering replacing a lathe machine with a new one. The new machine is expected to cost Sh.700,000. Transportation and installation costs amount to Sh.50,000 and Sh.150,000 respectively. The new machine is expected to operate for 5 years with a salvage value of Sh.50,000. The expected earnings before depreciation and tax is sh.750,000 per annum. The company pays tax at the rate of 30% and cost of capital is 20% Required: Assess the project’s viability using: (i) Payback period method. (4 Marks) (ii) Accounting rate of return (4 Marks)
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(c) A project has the following cash flows distribution Year 1 Year 2 Cash flow (sh) Probability Cash flows (sh) Probability 60,000 .3 50,000 .3 60,000 .5 70,000 .2 80,000 .4 60,000 .5 80,000 .2 100,000 .3 100,000 .3 80,000 .3 100,000 .5 120,000 .2
The project’s initial outlay was Sh.10,000 with a cost of capital of 12%.
Required: Find the project’s net present value (NPV). (8 Marks)
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