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The Mentala Plastics Company has been dumping in the local council waste collection
centre some 30,000 Kg. of unusable chemicals each year. In addition to being...
(Solved)
The Mentala Plastics Company has been dumping in the local council waste collection
centre some 30,000 Kg. of unusable chemicals each year. In addition to being an
eyesore, the residents of a nearby estate have started complaining of bad odour
emanating from the dump and suspect that the company is to blame.
The company has received information that these chemicals can be recycled at relatively little
cost. The equipment to do it is however rather expensive and, in addition, the chemicals
recovered are of a relatively poor quality. Investigations have shown that these chemicals can
be sold to another firm at an average price of Sh.35 per Kg. The direct cost of recycling has
been calculated at Sh.15 per Kg. but this is before depreciation and taxes.
The equipment for this process has an expected life of 10 years and a current cost of Sh.2 million. At the
end of the ten years, it will be virtually worthless.
For financial analysis, the company uses the straight line method of depreciation and an average tax rate of
40%. It has a required rate of return of 15%.
REQUIRED:
i. Compute the project's net present value (N.P.V).
ii. Compute the payback period and the accounting rate of return.
iii. Compute the internal rate of return (IRR).
iv. Should this project be undertaken? Explain.
Are there any other important matters that the company should consider in evaluating this project?
Date posted:
April 13, 2021
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Answers (1)
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The Zeda Company Ltd. is considering a substantial investment in a new production process. From a
variety of sources, the total cost of the project has...
(Solved)
The Zeda Company Ltd. is considering a substantial investment in a new production process. From a
variety of sources, the total cost of the project has been estimated at Sh.20 million. However, if the
investment were to be increased to Sh.30 million, the productive capacity of the plant could be substantially
increased. Due to the nature of the process, it would be exorbitantly expensive to increase capacity once the
equipment is installed.
Once of the problems facing the company is that there is a considerable degree of uncertainty regarding
demand for the product. After some research which has been conducted jointly by the marketing and
finance departments, some data has been produced. These are shown below:
REQUIRED:
(a) Prepare a statement which clearly indicates the financial implications of each of the two alternative
investment scenarios.
(b) Comment on other matters which the management should take into account before reaching
the final decision.
PVIFA: 10% 5 years = 3.79
PVIFA: 10% 10 years = 6.14
PVIFA: 10% 10 years = 0.62
Date posted:
April 13, 2021
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Answers (1)
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A project has the following cash flows
The projects initial cash outlay is Sh 100,000 with a cost of capital of 12%.
Required:
Determine:
(a) The projects expected monetary...
(Solved)
A project has the following cash flows
The projects initial cash outlay is Sh 100,000 with a cost of capital of 12%.
Required:
Determine:
(a) The projects expected monetary value (EMV)
(b) The projects NPV
Date posted:
April 13, 2021
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Answers (1)
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Assume a project costs Sh 30,000 and yields the following uncertain cashflows:
Compute the NPV of the project
(Solved)
Assume a project costs Sh 30,000 and yields the following uncertain cash flows:
Year Cash flow
1 12,000
2 14,000
3 10,000
4 6,000
Assume also that the certainty equivalent coefficients have been estimated as follows:
α0 = 1.00
α1 = 0.90
α2 = 0.70
α3 = 0.50
α4 = 0.30
The risk-free discount rate is given as 10%
Required
Compute the NPV of the project
Date posted:
April 13, 2021
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Answers (1)
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Management is faced with eight projects to invest in. The capital expenditures during the year has been rationed to Sh 500,000 and the projects have...
(Solved)
Management is faced with eight projects to invest in. The capital expenditures during the year has been rationed to Sh 500,000 and the projects have equal risk and therefore should be discounted at the firm's cost of capital of 10%.
Required:
Determine the optimal investment sets.
Date posted:
April 13, 2021
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Answers (1)
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A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh 10,000 each and with a useful life of 5 years....
(Solved)
A company is considering two mutually exclusive projects requiring an initial cash outlay of Sh 10,000 each and with a useful life of 5 years. The company required rate of return is 10% and the appropriate corporate tax rate is 50%. The projects will be depreciated on a straight line basis. The before depreciation and taxes cash flows expected to be generated by the projects are as follows.
Required:
Calculate for each project
i. The payback period
ii. The average rate of return
iii. The net present value
iv. Profitability index
v. The internal rate of return
Which project should be accepted? Why?
Date posted:
April 13, 2021
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Answers (1)
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Two neighbouring countries have chosen to organize their electricity supply industries in different ways. In
country A, electricity supplies are provided by a nationalized industry. On...
(Solved)
Two neighbouring countries have chosen to organize their electricity supply industries in different ways. In
country A, electricity supplies are provided by a nationalized industry. On the other hand in country B
electricity supplies are provided by a number of private sector companies.
Required:
(a) Explain how the objectives of the nationalized industry in country A might differ from those of the private sector companies in country B.
(b) Briefly discuss whether investment planning and appraisal techniques are likely to differ in the nationalized industry and private sector companies.
Date posted:
April 13, 2021
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Answers (1)
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List and explain the 14 principles of management
(Solved)
List and explain the 14 principles of management
Date posted:
March 5, 2019
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Answers (1)
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Identify the various methods of issuing new ordinary shares to shareholders.
(Solved)
Identify the various methods of issuing new ordinary shares to shareholders.
Date posted:
February 12, 2019
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Answers (1)
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Why does ordinary share capital have a high cost relative to debt capital?
(Solved)
Why does ordinary share capital have a high cost relative to debt capital?
Date posted:
February 12, 2019
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Answers (1)
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What practical problems are faced by finance managers in capital budgeting decisions.
(Solved)
What practical problems are faced by finance managers in capital budgeting decisions.
Date posted:
February 12, 2019
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Answers (1)
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What are the features of a sound appraisal technique?
(Solved)
What are the features of a sound appraisal technique?
Date posted:
February 12, 2019
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Answers (1)
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What are the advantages of having a farmers' bank compared with an ordinary
commercial bank in the provision of services to farmers
(Solved)
What are the advantages of having a farmers' bank compared with an ordinary
commercial bank in the provision of services to farmers
Date posted:
February 12, 2019
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Answers (1)
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Why do different sources of finance have different costs?
(Solved)
Why do different sources of finance have different costs?
Date posted:
February 12, 2019
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Answers (1)
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The Kitale Maize Mills is contemplating the purchase of a new high-speed grinder to replace an
existing one. The existing grinder was purchased two years ago...
(Solved)
The Kitale Maize Mills is contemplating the purchase of a new high-speed grinder to replace an
existing one. The existing grinder was purchased two years ago at an installed cost of Sh.300,000.
The grinder was estimated to have an economic life of 5 years but a critical analysis of its
performance now shows it is usable for the next five years with no resale value.
The new grinder would cost Sh.525,000 and require Sh.25,000 in installation costs. It has a five
year usable life. The existing grinder can currently be sold for Sh.350,000 without incurring any
removal costs. To support the increased business resulting from purchase of the new grinder,
accounts receivable would increase by Sh.200,000, inventories by Sh.150,000 and trade creditors
by Sh.290,000. At the end of 5 years the new grinder would be sold to net Sh.145,000 after
removal costs and before taxes. The company provides for 40% taxes on ordinary income. The
estimated profit before depreciation and taxes over the five years for both machines are given as
follows:
The company uses straight line method of depreciation for both machines.
Required:
a) Calculate the initial investment associated with the replacement of the existing grinder
with the new one. Show your full workings.
b) Determine the incremental operating cash flows associated with the proposed grinder
replacement.
c) Calculate the terminal cash flow expected from the proposed grinder replacement.
Date posted:
February 12, 2019
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Answers (1)
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The valuation of ordinary shares is more complicated than the valuation of bonds and
preference shares. Explain the factors that complicate the valuation of ordinary shares.
(Solved)
The valuation of ordinary shares is more complicated than the valuation of bonds and
preference shares. Explain the factors that complicate the valuation of ordinary shares.
Date posted:
February 12, 2019
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Answers (1)
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Within a Financial Management context, discuss the problems that might exist in the
relationships (sometimes referred to as agency relationships) between:
1. Shareholders and managers, and
2. Shareholders...
(Solved)
Within a Financial Management context, discuss the problems that might exist in the
relationships (sometimes referred to as agency relationships) between:
1. Shareholders and managers, and
2. Shareholders and creditors.
Date posted:
February 12, 2019
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Answers (1)
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Distinguish between the following terms:
(i) Weighted average cost of capital and marginal cost of capital.
(ii) Finance lease and operating lease.
(Solved)
Distinguish between the following terms:
(i) Weighted average cost of capital and marginal cost of capital.
(ii) Finance lease and operating lease.
Date posted:
February 12, 2019
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Answers (1)
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The management of Biashara Ltd. is in the process of evaluating two
alternative machine models, Alpha and Beta for possible purchase in order to
increase the company's...
(Solved)
The management of Biashara Ltd. is in the process of evaluating two
alternative machine models, Alpha and Beta for possible purchase in order to
increase the company's production level.
The following additional information is available:
1. Alpha costs Shs. 3,800,000 and will have a useful life of four years.
2. Beta costs Shs. 8,000,000 and will have a useful life of six years.
3. Both machines have no salvage value after their useful lives.
4. An investment in working capital amounting to Shs. 825,000 will have to be made
at the beginning of the first year of the machine‟s life regardless of the
model purchased.
5. The estimated pre-tax cash inflows for each of the machines are shown below:
6. The cost of capital to the company is 12% and the corporation tax rate is 30%.
Required:
(i) Calculate the undiscounted pay back period for each machine model.
(ii) Calculate the net present value (NPV) for each machine model.
(iii) Using the net present values computed in
(ii) above, advise the management on
which model to purchase.
(iv) The management of the company has received an alternative offer to lease
Alpha at an annual lease charge of Shs. 1,200,000 for four years, payable at
the year end. All other details remain unchanged.
Will this offer affect your selection in part
(iii) above? Explain.
Date posted:
February 12, 2019
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Answers (1)
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Mwongozo Limited has approached you for advice on an equipment to be purchased
for use in a five year project.
The investment will involve an initial capital...
(Solved)
Mwongozo Limited has approached you for advice on an equipment to be purchased
for use in a five year project.
The investment will involve an initial capital outlay of Shs. 1.4 million and the expected
cash flows are given below:
The equipment is to be depreciated on a straight line basis over the duration of the
project with a nil residual value.
The cost of capital and the tax rate are 12% and 30% respectively.
Required:
The net present value (NPV) of the investment.
Date posted:
February 12, 2019
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Answers (1)