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F9_2012_jun_a

F9_2012_jun_a

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Published by: abgreat89 on Oct 08, 2012
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11/28/2012

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Fundamentals Level – Skills Module, Paper F9Financial ManagementJune 2012 Answers1(a)
Calculation of net present value (NPV)
As nominal after-tax cash flows are to be discounted, the nominal after-tax weighted average cost of capital of 7% must beused.
Year12345$000$000$000$000$000
Sales revenue1,3002,4663,6222,018Variable costs(513)(1,098)(1,809)(1,035)Contribution7871,3681,813983Fixed costs(105)(115)(125)(125)Taxable cash flow6821,2531,688858Tax liabilities(205)(376)(506)(257)CA tax benefits1138463160After-tax cash flow6821,1611,396415(97)Scrap value100Net cash flow6821,1611,396515(97)Discount at 7%0·9350·8730·8160·7630·713Present values6381,0141,139393(69)
$000
Present value of cash inflows3,115Cost of machine(1,500)––––––NPV1,615––––––Project 1 has a positive NPV of $1,615,000 and so it is financially acceptable to Ridag Co. However, the discount rate usedhere is the current weighted average after-tax cost of capital. As this is a recently-developed product, it may be appropriateto use a project-specific discount rate that reflects the risk of the new product launch.
WorkingsSales revenueYear1234
Selling price ($/unit)25·0024·0023·0023·00Inflated selling price ($/unit)26·0025·9625·8726·91Sales volume (units/year)50,00095,000140,00075,000Sales revenue ($/year)1,300,0002,466,2003,621,8002,018,250
Variable costYear1234
Variable cost ($/unit)10·0011·0012·0012·50Inflated variable cost ($/unit)10·2511·5612·9213·80Sales volume (units/year)50,00095,000140,00075,000Variable costs ($/year)512,5001,098,2001,808,8001,035,000
Capital allowance tax benefitsYearCapital allowanceTax benefitYear benefit received
11,500,000 x 0·25 = $375,000375,000 x 0·3 = $112,500221,125,000 x 0·25 = $281,250281,250 x 0·3 = $84,37533843,750 x 0·25 = $210,938210,938 x 0·3 = $63,28144$532,812*532,812 x 0·3 = $159,8445*843,750 – 210,938 – 100,000 = $532,812
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