TUTORIAL QUESTIONS

QUESTION 1
The following data relates to project A.
Initial cash investment TZS 500,000,000
Expected cash flow over the next four years is as follows:

YEAR NET CASH FLOWS

1 172,160,000
2 197,650,000
3 196,795,000
4 161,095,000

Required:
i. Calculate the payback period of project A
ii. If the required payback period were 3 years would the project be accepted?
QUESTION 2
Suppose that a project will involve capital expenditure of TZS 80,000,000 and the annual net
cash returns from the project will be TZS 30,000,000 each year for five years. What is the
payback period?

QUESTION 3
A company requires all investment projects to pay back their initial investment within three
years. It is considering a new project requiring a capital outlay of TZS 140,000,000 on plant and
equipment and an investment if TZS 20,000,000 in working capital. The project is expected to
earn the following net cash receipts:
Year TZS '000
1 40,000
2 50,000
3 90,000
4 25,000

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Should the investment be undertaken? Use both the payback and NPV methods: use a discount
rate of 10%

QUESTION 4
A company must choose between two investments, Project A and Project B. It
cannot undertake both investments. The expected cash flows for each project are:
Year Project A Project B
TZS TZS
0 (80,000) (80,000)
1 20,000 60,000
2 36,000 24,000
3 36,000 2,000
4 17,000 -
The company has a policy that:
􀂄 The maximum permissible payback period for an investment is three years.
􀂄 If a choice has to be made between two projects, the project with the earlier
payback will be chosen.
Required: Calculate the payback period for each project:
QUESTION 5

A company is considering a project which requires an investment of TZS 120,000,000 in

machinery. The machinery will last four years after which it will have scrap value of TZS
20,000,000. The investment in additional working capital will be TZS 15,000,000. The expected
annual profits before depreciation are:
Year TZS '000
1 45,000
2 45,000
3 40,000
4 25,000

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The company requires a minimum accounting rate of return of 15% from projects of this type.
ARR is measured as average annual profits as a percentage of the average investment. Should the
project be undertaken?
QUESTION 6
A company is considering an investment in equipment costing TZS 70,000,000. Working capital
of TZS 5,000,000 will also be required early in Year 1. The equipment will have a resale value
of TZS 7,000,000 at the end of Year 5. The operating profits from the investment, in cash flows,
will be:
Year Cash flow TZS'000

1 25,000
2 20,000
3 30,000
4 20,000
5 3,000
Required: Calculate the NPV of the project if the cost of capital is:
(a) 12% and
(b) 8%

QUESTION 7
Assume that you have been appointed Finance Director of Smart Company. The company is
considering investing in the manufacturing of an electronic security device. The project requires
machinery costing Tshs 20,000,000 with an economic life of four years and net salvage value of
Tshs 5,000,000 at the of fourth year. The machine is to be depreciated on straight line basis.
Profits before depreciation from the project will be Tshs 8,000,000 per annum. An investment of
working capital of Tshs 2,000,000 will be required for the duration of the project. Tax is payable
at a rate of 30%. Tax cash flow on profits occurs in the same year as profits, giving rise to the tax
charge. The cost of capital for Smart Company is 15%.
Required: Estimate the net present value (NPV) of the proposed project and state with reasons
whether the project should be accepted.

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QUESTION 8
TTT Company has been operating in Tanzania since the early twentieth century dealing in the
manufacturing of roofing material. Because of stiff competition ushered in by the ongoing trade
liberalization in the country, the company is currently evaluating whether to make a Tshs 400
millions investment in purchasing machines that will enable the company to diversify into a new
product area. It is estimated that the project will last for five years after which the machines will
have zero scrap value.
Other best estimate forecasts are:
 Sales volume of 220,000 units per year
 Sales price Tshs 2,100 per unit
 Variable direct cost Tshs 1,600 per unit
Assume There are no other costs involved in the particular investment and inflation should not
be considered
Required:
i. Calculate the internal rate of return of the project
ii. If the required rate of return is 18% should the project be accepted?

QUESTION 9
Consider the project with the following expected cashflows:
Year 0 1 2 3
Cashflows TZ (200,000) 50,000 50,000 50,000
‘000

a) If the discount rate is 0%, what is the project NPV?

b) If the discount rate is 0%, what is the project NPV?
c) What is the project IRR?

QUESTION 10
A project requiring TZS 1,000,000,000 investment has a profitability index of 0.96. What is the
NPV?

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QUESTION 11
Given the following two mutually exclusive projects:

YEAR PROJECT X (TZS PROJECT Y(TZS

000) 000)
0 (5,000) (5,000)
1 2,085 0
2 2,085 0
3 2,085 0
4 2,085 9,677

a. Calculate the payback period for each project

b. Initially, the cost of capital is uncertain, so construct the NPV profiles for the two
projects (on the same graph) to assist in the analysis. The profiles cross at what cost of
capital? What is the significance of that?
c. It is now determined that the cost of capital for both projects is 14%, which project
should be selected? Why?

QUESTION 12
A business requires a minimum expected rate of return of 12% on its investments. A
proposed capital investment has the following expected cash flows.
Year TZS
0 (80,000)
1 20,000
2 36,000
3 30,000
4 17,000
Required
Calculate the NPV at a cost of capital of 10% and a cost of capital of 15%.
Use these NPV figures to estimate the IRR:

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QUESTION 13
Given the expected cash flows for a project:

YEAR CASHFLOWS (TZS 000)

0 (700)
1 200
2 370
3 225
4 700

If the discount rate of return is 10%, what is the discounted payback period?

QUESTION 14

YEAR PROJECT M (TZS PROJECT N(TZS

000) 000)
0 (100) (100)
1 10 70
2 60 50
3 80 20

Both projects have a cost of capital of 10%

a. Calculate the PBP for both
b. Calculate the NPv for both
c. Calculate the IRR for both

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QUESTION 15
A MACHINE has a cost of TZS 180,000,000. It will have a life of 3 years, and will be
depreciated straight line to zero salvage value. It will result in sales revenue of TZs 200,000,000
per year and cash operating costs of TZS 110,000,000 per year. Use of the machine will require
an increase in working capital of TZS 70,000,000 the three years beginning at year 0. The
appropriate discount rate is 8% and the firm,s corporate tax rate is 40%.
REQUIRED:
a. Calculate the initial cashflow at time 0.
b. Calculate the annual operating cashflows (they are identical each year)
c. Calculate the relevant terminal cashflows at the end of year 3
d. What is the NPV of this machine?
QUESTION 16
Suppose a company has the opportunity to bring out a new product, the Vitamin-Burger. The
initial cost of the assets is TZS100,000,000, and the company’s working capital would increase
by TZS 10,000,000 during the life of the new product. The new product is estimated to have a
useful life of four years, at which time the assets would be sold for TZS 5,000,000.
Management expects company sales to increase by TZS 120,000,000 the first year, T
ZS160,000,000 the second year, TZS 140,000,000 the third year, and then trailing to TZS
50,000,000 by the fourth year because competitors have fully launched competitive products.
Operating expenses are expected to be 70% of sales, and depreciation is based on an asset life of
three years under straight line method
If the required rate of return on the Vitamin-Burger project is 8% and the company’s tax rate is
35%, should the company invest in this new product? Why or why not?

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QUESTION 17
ARSENAL. Plc is considering a new investment which would start immediately and last for
four years. The company has gathered the following information: Asset cost is TZS 160,000,000.
Annual sales are expected to be 300,000 units in year 1 and 2 and will then fall by 50,000 units
per year in both years 3 and 4.
The selling price for the first year is expected to be TZS 44 per unit and this is then expected to
inflate by 3% per annum. The variable costs are expected to be TZS 7 per unit for the first year
and these costs are expected to inflate at 5% per annum.
The asset is expected to have a residual value of TZS 40,000,000 at the end of the project.
The project will require working capital investment equal to 10% of the expected sales revenue.
This investment must be in place at the start of each year. Corporate tax rate is 30% per annum
and is paid one year in arrears. 25% reducing balance writing-down allowance are available on
the asset cost. The required rate of return for the company is 10%. TZS 12,000,000 has already
been spent on initial research.
REQUIRED: Calculate the NPV of the project and decide on whether the company should
undertake it.

QUESTION 18
A company is considering whether to invest in a new item of equipment. The equipment would
cost TZS 120,000,000 and have a useful life of four years, after which it would be disposed of
for TZS 45,000. The equipment will reduce running costs by TZS 50,000,000 each year (before
taxation). Taxation is at the rate of 30%. The equipment would attract tax-allowable depreciation
of 25% each year, by the reducing balance method. Taxation cash flows occur one year in arrears
of the cost or benefit to which they relate. The cost of capital is 11% .
Required: Calculate the NPV of the project and recommend whether the investment in the
project is worthwhile.

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QUESTION 19
A company is considering an investment in a non-current asset costing TZS 80,000,000. The project
would generate the following cash profits:
Year TZS'000
1 50,000
2 40,000
3 20,000
4 10,000
The asset is eligible for tax-allowable depreciation at 25%, by the reducing balance method. It is
expected to have a residual value of TZS 20,000,000 at the end of year 4, when it will be
disposed of. The after-tax cost of capital is 9%. The rate of tax on profits is 3 0%. Taxation cash
flows occur one year in arrears.
Required: Calculate the NPV of the project.

QUESTION 20
TIGO PLC, a software company, has developed a new game, 'Biko' which it plans to launch in
the near future. Sales of the new game are expected to be very strong, following a favourable
review by a popular PC magazine. Tigo Plc has been informed that the review will give the game
a' best buy' recommendation. Sales volumes, production volumes and selling prices for 'Biko'
over the four years are expected to be as follows:
year 1 2 3 4
Sales & 150,000 70,000 60,000 60,000
production.(units)
Selling price per 250 240 230 220
game
(TZS/game)

Financial information on 'Biko' for the first year of production is as follows:

Direct material cost TZS 54 per game
Other variable cost TZS 60 per game
Fixed costs TZS 40 per game

Investment in working capital of TZS 500,000 will be required at the start of the first year of
operation and is expected and working capital will be recovered in full at the end of four years.
Advertising costs to stimulate demand are expected to be TZS 6,500,000 in the first year of
production and TZS 1,000,000 in the second year of production. no advertising costs are

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expected in the third and fourth years of production. Fixed costs represent incremental cash fixed
production overheads. 'Biko' will be produced on a new production machine costing TZS
8,000,000. Although this production machine is expected to have a useful life of up to ten years,
government legislation allows Tigo Plc to claim the capital cost of the machine against the
manufacture of a single product. Capital allowance will therefore be claimed on a straight line
basis over four years.
Tigo Plc pays tax on profit at a rate of 30% per year and tax liability are settled in the year in
which they arise. Tigo Plc uses an after- tax discount rate of 10% when appraising new
investments. ignore inflation.
REQUIRED:
a) Calculate the NPV of the proposed investment
b) calculate the internal rate of return of the proposed investment and comment on your
results
c) briefly explain why the NPV investment appraisal method is preferred to other
investment appraisal methods such as payback, accounting rate of return and internal rate
of return

QUESTION 21
a) Differentiate mutual exclusive projects from independent projects as far as capital
budgeting is concerned
b) BACBBF3 COMPANY LTD is considering investing in two projects A and B. The
cashflows for project A and B are as estimated below:

Year Project A in TZS'000'000 Project B in TZS'000'000

0 (20,000) (10,000)
1 2,200 1,110
2 3,630 1,848
3 5,324 2,736
4 7,320 3,795
5 9,666 5,055

The cost of capital for the company is 8%.

Required:
i. Calculate the NPV for each project
ii. Calculate the IRR for each project
iii. Assume the projects are mutually exclusive. Advice the management as to which project
should be selected

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QUESTION 22
TSHs
A company has decided to whether to buy the machine for 210,000,000
TSHs
Saving for each of the 5 years 55,000,000
TSHs
Resale value at the end of 5 years 22,500,000

Decide whether or not to take on this project using;

a) Return on Capital employed (ROCE or ARR)
b) Internal Rate of Return (IRR)

QUESTION 23
Posterity Inc manufactures and distributes over the counter drugs. The Company has formulated
a new painkiller, ‘Anodyne’ which is expected to have a life of four years. Posterity will launch
the new painkiller within four years. The Company has paid TSHS 15,000,000 to a firm to
conduct market research on ‘Anodyne’.
The following are the forecasts relating to ‘Anodyne’
Sales Cost of Variable Fixed Net
(TSHS sales Gross Profit overheads overheads Profit/Loss
Year M) (TSHS M) (TSHs M) (TSHs M) (TSHs) (TSHs)

1 90.0 (58) 32.5 (14) (112.5) 6.5

2 100.0 (70) 30.0 (15) (12.5) 2.5

3 80.0 (55) 25.0 (12) (12.5) 0.5

4 60.0 (43) 17.5 (9) (12.5) (4.0)

Additional information:
1. Posterity’s cost of capital is 10%

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2. Anodyne will be manufactured on idle equipment. The equipment has a written down value
of TSHS 40,000,000 but its current realisable value is only TSHs 35,000,000. After four
years, the piece of equipment will be sold for Tshs 5,000,000
3. Posterity will immediately require additional capital of TSHS 10,000,000 to manufacture
Anodyne.
4. The fixed overhead costs will include

a) Tshs 7,500,000 per year on account of depreciation

b) TSHS 2,500,000 for reallocating an existing business overhead

Ignore inflation and taxation

Required:
a) Calculate the incremental cash flows arising out of ‘Anodyne’
b) Calculate the Net present value of Anodyne for Posterity
c) Calculate the Internal Rate of return of ‘Anodyne’ for posterity.
d) List the advantages and disadvantage of using the Net present value method for
appraising investments projects.

QUESTION 24
Sisyphean Inc Manufactures office stationery. It is planning to augment its product facility by
purchasing new equipment, It has received quotations from two suppliers.
The details of the equipment are given below
Equipment 1
TSHS
Cost of equipment 150,000
Net expected cash flows for six years 40,000
Salvage value 0

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 Equipment 2
TSHS
Cost of equipment 100,000
Net expected cash flows for six years 28,000
Salvage value 0

The piece of equipment has a life of six years.

The cost of capital for Sisyphean is 11%

Ignore taxation and inflation

Required;
a) Calculate the Net present value (NPV) of both pieces of equipment
b) Calculate the internal rate of return (IRR) for both pieces of equipment
c) Consider both pieces of equipment as mutually, which pieces of equipment should
Sisyphean buy?

QUESTION 25
MEM Co needs to increase production capacity to meet increasing demand for an existing
product, ‘Combi3’, which is used in food processing. A new machine, with a useful life of four
years and a maximum output of 600,000 kg of Combi3 per year, could be bought for Shs
80,000,000 payable immediately. The scrap value of the machine after four years would be Shs
3,000,000. Forecast demand and production of Combi3 over the next four years is as follows:
Year 1 2 3 4
Demand (kg) 1,400,000 1,500,000 1,600,000 1,700,000
Existing production capacity for Combi3 is limited to one million kilograms per year and the
new machine would only be used for demand additional to this.
The current selling price of Combi3 is Shs 800 per kilogram and the variable cost of materials is
Shs 500 per kilogram. Other variable costs of production are Shs 190 per kilogram. Fixed costs
of production associated with the new machine would be Shs. 24,000,000 in the first year of
production, increasing by Shs 2,000,000 per year in each subsequent year of operation.

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MEM Co pays tax one year in arrears at an annual rate of 30% and can claim capital allowances
(tax-allowable depreciation) on a 25% reducing balance basis. A balancing allowance is claimed
in the final year of operation.
MEM Co uses its after-tax weighted average cost of capital when appraising investment projects.
It has a cost of equity of 11% and a before-tax cost of debt of 8·6%. The long-term finance of the
company, on a market-value basis, consists of 80% equity and 20% debt.
REQUIRED:
Calculate the net present value of buying the new machine and advise on the acceptability of the
proposed purchase

QUESTION 26
SANAMU POSTA MPYA Co is preparing to launch a new product in a new market which is
outside its current business operations. The company has undertaken market research and test
marketing at a cost of TZS 500,000,000 as a result of which it expects the new product to be
successful. SANAMU Co plans to charge a lower selling price initially and then increase the
selling price on the assumption that the new product will establish itself in the new market.
Forecast sales volumes, selling prices and variable costs are as follows:
Year 1 2 3 4
Sales volume (units/year) 200,000 800,000 900,000 400,000
Selling price (TZS/unit) 15 18 22 30
Variable costs (TZS/unit) 9 15 19 8
Incremental fixed costs of TZS 500,000 would arise in year one as a result of producing the new
product. Fixed cost inflation of 8% per year is expected.
The initial investment cost of production equipment for the new product will be TZS
2,500,000,000, payable at the start of the first year of operation. Production will cease at the end
of four years because the new product is expected to have become obsolete due to new
technology. The production equipment would have a scrap value at the end of four years of 5%
of the initial cost.
Investment in working capital of TZS 1,500,000,000 will be required at the start of the
operation. Working capital inflation of 6% per year is expected and working capital will be
recovered in full at the end of four years.

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SANAMU Co pays corporation tax of 30% per year, with the tax liability being settled in the
year in which it arises. The company can claim tax-allowable depreciation on a 25% reducing
balance basis on the initial investment cost, adjusted in the final year of operation for a balancing
allowance or charge. SANAMU Co currently has a weighted average cost of capital (WACC) of
12% to discount all investment projects cashflows.
REQUIRED: Calculate
a) net present value of the investment project and comment on its financial acceptability.
b) Internal rate of return for the project and comment on its suitability
c) payback period and the discounted payback period for the project and decide if the cut-
off period is 5 years

QUESTION 27
Simba Sports Football Club is a professional football club that has enjoyed considerable success
in recent years. As a result, the club has accumulated TZS 100,000,000 to spend on its further
development. The board of directors is currently considering two mutually exclusive options for
spending the funds available.
The first option is to acquire another player. The team manager has expressed a keen
interest in acquiring Perfect Chikwende, a striker, who currently plays for a rival club Platinum
FC. The rival club has agreed to release the player immediately for TZS 100,000,000 if required.
A decision to acquire Chikwende would mean that the existing striker, Medie Kagere, could be
sold to another club. Simba Sports Football Club has recently received an offer of TZS
22,000,000 for this player. This offer is still open but will be accepted only if Chikwende joins
Simba Sports Football Club. If this does not happen, Medie Kagere will be expected to stay on
with the club until the end of his playing career in five years’ time. During this period, Kagere
will receive an annual salary of TZS 4,000,000 and a loyalty bonus of TZS 2,000,000 at the end
of his five-year period with the club.
Assuming Chikwende is acquired, the team manager estimates that gate receipts will increase by
TZS 25,000,000 in the first year and TZS 13,000,000 in each of the four following years.
There will also be an increase in advertising and sponsorship revenues of TZS 12,000,000 for
each of the next five years if the player is acquired. At the end of five years, the player can be
sold to a club in a lower division and Simba Sports Football Club will expect to receive TZS

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10,000,000 as a transfer fee. Chikwende will receive an annual salary of TZS 8,000,000 during
his period at the club and a loyalty bonus of TZS 4,000,000 after five years.

The second option is for the club to improve its ground facilities. The Bunju MO Arena could be
extended and executive boxes could be built for businesses wishing to offer corporate hospitality
to clients. These improvements would also cost TZS 100,000,000 and would take one year to
complete. During this period, the Bunju MO Arena would be closed, resulting in a reduction in
gate receipts of TZS 18,000,000. However, gate receipts for each of the following four years
would be TZS 44,000,000 higher than current receipts. In five years’ time, the club has plans to
sell the existing ground and to move to a new stadium nearby Msimbazi street. Improving the
ground facilities is not expected to affect the ground’s value when it comes to be sold. Payment
for the improvements will be made when the work has been completed at the end of the first
year.
Whichever option is chosen, the board of directors has decided to take on additional
ground staff. The additional wages bill is expected to be TZS 3,500,000 a year over the next five
years. The club has a cost of capital of 10 per cent. Ignore taxation and inflation

Required:
a) Calculate the incremental cash flows arising from each of the options available to the
club, and calculate the net present value of each of the options.
b) On the basis of the calculations made in (a) above, which of the two options would Simba
sports club choose and why?
c) Discuss the validity of using the net present value method in making investment
decisions for a professional football club like Simba.

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