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1 a) Explain the following terms

i. Pay-back period (2)
ii. Net present value (2)

b) A firm has $200 000 to invest and the following proposals are under consideration
Initial Annual Cash Life of
Project investment flow project
($) ($) (Years)
A 100 000 25 000 10
B 70 000 20 000 8
C 30 000 6 000 20
D 50 000 15 000 10
E 50 000 12 000 20

Rank the above projects on the basis of

i. Pay-back method (9)
ii. Net present value method using a discount of 15% which is
8yrs = 4.6586, 1 0yrs = 5.1790, 20yrs = 6.3345 (12)


a) Explain the term return on capital employed.(4)

b) Give two uses to management of the above ratios (4)
c) Karina investments are faced with an investment decision based on future projects
they intend to embark on. The expected cash flows are as follows:

Year Project $ Project B $

0 -200 000 -140 000

1 50 000 30 000
2 50 000 45 000
3 50 000 50 000
4 50 000 60 000
5 50 000 70 000
i. For each project calculate the annual average rate of return and the pay back period
ii. Give the decision that Karina investments might make based on the information
derived from the two methods above. (4)
iii. Discuss one advantage and one disadvantage of payback method of project


1 Explain the importance of cost estimation to an engineering firm (10)

2 Describe all the elements of cost estimation of a product in an engineering firm. (15)
3 Explain the term capital budgeting (4)
4 Discuss the stages of capita budgeting by referring to a practical named example of
equipment a company intends to buy. (21

Explain the following terms

i. Marginal costing (2)
ii. Absorption costing (2)
iii. Direct costs (2)
iv. Prime costs (2)

b) A company manufactures 1000units and sold 500 units in one year. The costs
and selling price are shown in the table below.

Amount in $ per unit

Selling price 25
Production cost:
Material 5
Labor 5
Variable 3
Total fixed overheads 5000

Prepare income statements based on marginal costing and absorption costing (17)

Chaffs limited produces and sells a single type of specialized computer graphic
programmes. Estimated unit data and estimated cost for the year are:

Selling Price 600
Variable cost
Labor 200
Materials 10
selling 10

Anticipated cost for the year are USD80 000.00 for administration and USD60 000.00
for selling and distribution. Estimated sales for the year are 640 programmes. Find:
a) Break even point in terms of the number of programmes sold
b) Margin of safety as a percentage of estimated sales.
c) The company’s target for the year is USD56 00, will the estimated volume be
sufficient to achieve this? By how much will profit from the estimated sales
volume exceed/fall short of the target profit.
d) Prepare a break-Even chart for Chaffs limited showing clearly the break-even
point and margin of safety.
e) The company is currently negotiating with an overseas client; if the negotiations
are successful a five year contract will be signed for purchase by this client of 300
programs per year of the contract. Discuss the possible implications for the cost-
volume-profit model employed above if chaffs limited wins the overseas contract
and expands accordingly.