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Final Mock1 - Answer
Final Mock1 - Answer
Final Mock1 - Answer
Explain the tools of management accounting which help the financial manager in taking
decisions.
The company has an estimated cost of capital of 10 per cent and employs the straight-line
method of depreciation for all fixed assets when calculating net profit. Neither project
would increase the working capital of the company. The company has sufficient funds
to meet all capital expenditure requirements.
Required
(b) State which, if any, of the two investment projects the directors of Mylo Ltd should
accept, and why.
State, in general terms, which method of investment appraisal you consider to be most
appropriate for evaluating investment projects and why.
Question 3 (25 marks)
Sale 50,000
Cost of sales 30,000
Gross profit 20,000
Administration costs 14,000
Profit before interest and tax 6,000
Interest 300
Profit before tax 5,700
Tax @ 30% 1,710
Profit after tax 3,990
Dividends 2, 394
Retained earnings 1, 596
Answer 1
The following are the important tools of management accounting which help the financial
manager in taking decisions:
a) Ratio Analysis: this is tool of management accounting with the help of which
different variables in the financial statements are analyzed. Then the different ratios
are formed with the help of these variables. Comparison can be made with the
ratios within industry and with past performances. There are different categories of
ratio such as
Answer 2
Mylo plc
(a)
Year
0 1 2 3
£ £ £ £
Cash flows* (100,000) 60,000 30,000 40,000
Discount rate 10% 1.0 0.91 0.83 0.75
Present value (100,000) 54,600 24,900 30,000
Net present value 9,500
* Calculated by adding the depreciation charge (i.e. capital outlay less residual value
spread over 3 years) to the profit.
0 1 2 3
£ £ £ £
Cash flows (60,000) 36,000 16,000 28,000
Discount rate 18% 1.0 0.85 0.72 0.61
Present value (60,000) 30,600 11,520 17,080
Net present value 800
Difference 7,840
67, 040
Project 2 = 60, 000
= 1.117
(iv) Payback period
= 2.25 years
(b) Based on the information given, Project 1 should be chosen in preference to Project 2
as it has a higher positive net present value. Given that the net present value of Project 1
is only slightly higher, it would be useful to undertake some assessment of the degree of
risk associated with each project.
(c) The net present value method is the most appropriate method for evaluating investment
projects because:
(i) It takes account of all relevant information unlike the payback method, for example, that
ignores cash flows beyond the payback period.
(ii) It is directly related to the objective of wealth maximisation which is the assumed goal of
a business enterprise.
Answer 3
$4 m
1. ROCE = x 100 = 20%
$ (15+5) m
$ 2.1 m
2. ROSC = x 100 = 14%
$ 15 m
$ 0.8 m
3. DPS = = 4 cents
20 m shares
(Tip: students usually find it useful to calculate the number of share in issue before doing
the main calculation. In this case the number of shares in issue in 20m ($5m/$0.25)
$ 2.10
4. EPS = = 10.5 cents
20 m shares
i
Question 02-page 145