Advanced Cost and Management Accounting

Target group: First year Accounting and Finance Masters students

Requirements:
➢ Follow strictly the instruction given bellow.

➢ The project is to be submitted on January 23, 2022.

➢ Each group should have 4 to 6 members.

➢ The Project will be marked out of 20%.

➢ Doing this assignment negligently will reduce your point.

Instruction: The following information is given from Al-Sam company which is in need

of your advice as a financial advisor on its two mutually exclusive projects. The

company asks you to evaluate the projects by using all evaluation techniques

currently used by analysts and explain for them the result of each evaluation for them.

In addition, the company requires from you a final conclusive advice on the projects.

Al-SAM research and development office have invented two model machinery which are

used to produce COVID-19 Testing Kit. The research and development office prepare

two project proposals by evaluating the capital needed to develop, manufacture and sell

the machinery and their cash inflow. In addition, the research and development office

believe that the two machineries should not be produced side by side because the

expected cashflow of one project is affected by the other one. That is, they are mutually

exclusive projects.

Both projects require an initial investment in plant and equipment of Birr 3 billion each.

These investments will be depreciated straight-line over fifteen years to a value of zero,

but when the projects come to an end at the end of fifteen years, the equipment will, in

fact, be sold for Birr 1,800,000 for Project A and Birr 2,500,000 for project B (i.e. values

are net amount after deduction of tax). The company’s working capital is expected to

increase by Birr 1,000,000 because of increases in inventories and receivables. The firm
 expects to recover the investment in working capital at the end of the project’s life. The

research and development team believes that materials needed for production at each

year must be maintained and employed at 10% of that specific year sales revenue for

Project A and 15% for project B starting from the first year. Production costs other than

material cost are estimated at 25% of sales revenue for project A and 15% for project B.

(There are no marketing expenses.) Interest expense allocated for each project is

100,000 birrs for each year. Sales forecasts are given in the following table. The firm pays

tax at 25% and the risk adjusted cost of capital is 12% (WACC=12%).

Note

1. Employed materials in each year, gets finished and expensed in that specific year
2. All sales and expenses are expected to be on cash

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Project A

0.00

800

804

854

900

956

998

999

890

880

870

850

700

620

620

610
Sales (in million birr)

Project B

0.00

700

730

750

760

780

800

820

880

885

892

900

950

980

990

990
The project must be organized as follows: -
 Title page: title of your project (Evaluation report on Al-Sam grand Projects), your

institution, department, group members name list, and submission date

 Table of content

 Information on proposed projects which is given from the company

 Summarization of cash flows of each project based on the company’s given

estimation

 NPV evaluation with your interpretation

 IRR evaluation with your interpretation

 MIRR evaluation with your interpretation

 Payback period evaluation with your interpretation

 Discounted payback period evaluation with your interpretation

 Your final conclusion and advise for the company