TUTORIAL QUESTION 2

Faculty of Business

BBCA2053

MANAGEMENT
ACCOUNTING

SEMESTER 201909
Course : Management Accounting

Lecturer : Lim Ann Wei

Total marks : 30 MARKS (WORTH 30%)

Instructions to candidates:

Write your student number and IC number on your answer paper

Name : THEVA A/L LETCHUMANAN

Student ID : 201711040016

NRIC/Passport No : 971112-10-6523

Program : BBA CT9

Ahmad Bhd is considering investing in a new timber machine costing RM400,000. Its
life is expected to be four years and it will have no scrap value at the end of this period.
The following details are given relating to the machinery’s activities:

i. Unit selling price is RM30.00 and unit variable costs of production are:
RM
Direct materials 4.00
Direct labour 2.50
Variable overheads 3.50

ii. Sales volume relating to production from the machinery is expected to be:
Year Sales Volume (units)
1 8,400
2 8,800
3 10,000
4 10,400
iii. Fixed costs amount to RM64,000 per annum. One quarter of the fixed costs is
cash flow related items.

iv. The company anticipates a cost of capital to be 10%.

Required ;
Answers

a) Explain the Net Present Value relating to investment of funds in long term
investments.
i. Present value is the future value expected amount to amount would be pay
or received now.
ii. The conversion requires the amount of future cash flow, the length to the
receive the cash flow and discounting factor (rate required by the investor).
iii. Net Present Value is the difference between the discounted cash inflow and
discounted cash outflow.
iv. It is assumed that an investment with a positive NPV will be profitable, and
an investment with a negative NPV will result in a net loss. This concept is
the basis for the Net Present Value Rule, which dictates that only
investments with positive NPV values should be considered.
v. Net Present Value theory, investing in something that has a net present
value greater than zero should logically increase a company's earnings.

b) Determine cash flows in Years 1-4.

Unit selling price is RM 30

Variable cost

Direct Materials RM 4.00

Direct Labour RM 2.50
Variable overheads RM 3.50

TOTAL
RM 4.00 + RM 2.50 + RM 3.50 = RM10

Contribution Per Unit

Unit selling price - Variable Cost
Rm 30 - RM 10 = RM 20
 Fixed costs amount to RM64,000 per annum.
One quarter of the fixed costs is cash flow related items.

Fixed Cost: 64,000 x 1/4= RM16,000

Year Cash inflow - Cash Net Cash

outflow
Flow

1 8400 x 20 - 16,000 152,000

2 8800 x 20 - 16,000 160,000

3 10000 x 20 - 16,000 184,000

4 10400 x 20 - 16,000 192,000

c) Calculate the Net Present Value for the project.

Year Net Discount Rate Present

Cash Factor @ 10% Value
Flow

0 (400,000) 1 (400,000)

1 152,000 0.909 138,168

2 160,000 0.826 132,160

 3 184,000 0.751 138,184

4 192,000 0.683 131,136

NET
PRESENT
VALUE RM 139643

Discount Rate Factor Formula

1/(1+r)n which is the r is 0.1 and the n is year 0,1,2,3,4 accordingly.

d) Comment on the viability of the project.

The project is viable and should proceed to invest as the NPV is positive of
RM139,643.
e) Calculate the net present value at the discount rate of 30 per cent and
Internal Rate of Return (IRR) for the project.

Year Net Cash Discount Rate Present

Flow Factor @ 30% Value

0 (400,000) 1 (400,000)

1 152,000 0.769 116,888

2 160,000 0.592 94,720

3 184,000 0.455 83,720

4 192,000 0.350 67,200

Net Present Value RM 37,472

Discount Rate Factor Formula

1/(1+r)n which is the r is 0.3 and the n is year 0,1,2,3,4 accordingly.

f) Based on your answer in (e) above, should the project be accepted?
Explain your decision.

This project is to be accepted if the best alternatives return rate is less than IRR of
25.77 %

g) “IRR technique cannot be used by Ahmad Bhd. to assess potential

investment projects.” Discuss the above statement.

(i) Non conventional cash flows can cause inconsistency

(ii) Non stereotypical cash flows can cause more than one IRR
(iii) Changing discounting rates from time to time