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Student No.

SEMESTER TEST 2 MEMORANDUM

MODULE DESCRIPTION : MANAGEMENT ACCOUNTING 3B

MODULE CODE : RKV302

FACULTY : BUSINESS AND ECONOMIC SCIENCES

QUALIFICATION : BACHELOR OF COMMERCE

DATE : 13 OCTOBER 2023

DURATION (IN MINUTES) : 90 MINUTES

TOTAL MARKS : 60 MARKS

EXAMINER : MR L JACOBUS

MODERATOR : MR K FREEMAN

Question 1
Question 2
Total marks 60.00
% %
 Available Marks
QUESTION 1 marks awarded

Required 1 - Assuming the real weighted average cost of capital is 11%, advise Petrona whether they should proceed with rolling out the electric vehicle charging stations based on a Net
Present Value (NPV) investment appraisal.

0 1 2 3 4 5
NPV Analysis
Cost of stations - 7,500,000.00 1
Resale/Residual value 1,500,000.00 1
Working capital - 90,000.00 90,000.00 1
Contribution (W2) 3,705,000.00 3,882,840.00 4,069,216.32 4,264,538.70 4,469,236.56 0.5
Annual fixed operating expenses (W3) - 1,230,000.00 - 1,289,040.00 - 1,350,913.92 - 1,415,757.79 - 1,483,714.16 0.5
Maintenance cost (W4) - 135,000.00 - 141,480.00 - 148,271.04 - 155,388.05 - 162,846.68 0.5
Taxation - 226,800.00 - 257,126.40 - 288,908.47 - 322,216.07 - 762,122.45 0.5
- 7,590,000.00 2,113,200.00 2,195,193.60 2,281,122.89 2,371,176.79 3,650,553.28 0.5

NPV (16.33%) 263,445.94 1

Conclusion: The expected net cash inflow from the electric vehicle roll out is R508 750.83. Since the project is expected to create value, it may be accepted. 1
1 2 3 4 5
Taxation
Contribution (W2) 3,705,000.00 3,882,840.00 4,069,216.32 4,264,538.70 4,469,236.56 0.5
Annual fixed operating expenses (W3) - 1,230,000.00 - 1,289,040.00 - 1,350,913.92 - 1,415,757.79 - 1,483,714.16 0.5
Maintenance cost (W4) - 135,000.00 - 141,480.00 - 148,271.04 - 155,388.05 - 162,846.68 0.5
Wear and tear allowance - 1,500,000.00 - 1,500,000.00 - 1,500,000.00 - 1,500,000.00 - 1,500,000.00 1
Recoupment 1,500,000.00 0.5
Taxable income 840,000.00 952,320.00 1,070,031.36 1,193,392.87 2,822,675.72 0.5
Taxation (27%) 226,800.00 257,126.40 288,908.47 322,216.07 762,122.45 0.5

W1: 10% Market share

# of stations 300 OR # of stations 300

Average # of EV per station 20 Average # of EV per station 20
Total # of EV 6,000 Total # of EV 6,000 0.5
Average # of km traveled p/a 7,300 10% market share 600
Total # of km traveled p/a 43,800,000 Average # of km traveled p/a 7,300 0.5
Recharge interval 365 Total # of km traveled p/a 4,380,000
# of recharges p/a 120,000 Recharge interval 365 1
# of kWh per charge 65 # of recharges p/a 12,000
Total kWh charge p/a 7,800,000 # of kWh per charge 65 1
10% market share 780,000 Total kWh charge p/a 780,000 1

W2: Contribution

10% market share (W1) 780,000

Contribution 3,705,000.00 3,882,840.00 4,069,216.32 4,264,538.70 4,469,236.56 2.5

W3: Total annual fixed operating expenses (cash)

Total (including depreciation) 2,430,000

Less: Depreciation -1,200,000 1
Annual cash fixed operating expenses 1,230,000.00 1,289,040.00 1,350,913.92 1,415,757.79 1,483,714.16 2.5

W4: Maintenance 135,000.00 141,480.00 148,271.04 155,388.05 162,846.68 2.5

W5: Nominal discount rate 16.33% 2

26
Communication skills - Layout, logical argument 1

Required 2 - Briefly explain why discounted cash flow techniques should be used when evaluating a long-term investment project.

Discounted cash flow techniques are used in capital budgeting in recognition of the fact that money has a time value. 1
It reflects the fact the value of R1.00 today is greater than the value of R1.00 in one year's time. It recognises the fact that due to inflation, in this case 4.8%, more can be purchased today than at some other time in the 2
future.
Alternatively the money can be invested to earn interest or borrowings can be reduced. The rate of interest on the investment reflects both inflation and the risk involved in the investment. 2
The use of NPV in capital budgeting recognises the time value of money and discounts cash flows at the investors' required rate of return, in this case, the nominal WACC. 1
Effectively future cash flows are reduced in value in order to reflect their value if they were received today, i.e., to express them in present value terms. 1

Available 7
Max 3

Required 3 - Explain in detail how Petrona can benefit from carrying out a sensitivity analysis before making the investment decision.

Sensitivity analysis recognises the fact that most cash flows for a project are not known with certainty (estimates). 1
Sensitivity analysis would enable Petrona to determine the effect of changes to variables on the expected net present value. 1
For example, Petrona could assess the effect of a reduced market share on the expected contribution, annual cash flows and net present value, or the effect a change in the contribution margin would
have on annual cash flows generated and expected net present value. 1
Particular attention can then be paid to those variable that are identified as being of special significance - those variables that can materially affect the net present value of the investment. 1
By carrying out a sensitivity analysis, an analysis can be made of all the key variables to ascertain by how much each variable would need to change before the net present value reaches Rnil. 1
In this case, Petrona could assess the lowest % market share or even contribution margin before the project would no longer be viable. 1
Considering the current expected net present value is only R263 445.94, the slightest reduction in market share or contribution margin would result in the project no longer being viable. 2

Available 8
Max 5

TOTAL MARKS 35
 Available Marks
QUESTION 2 marks awarded

Required 1 - Use the free cash flow valuation method to estimate the equity value of Arenas (Pty) Ltd as at the end of FY2021. (No reasonability check is required.)

2022 2023 2024

R'000
Profit before tax 28,736.00
Add: Finance charges
Interest on the long-term loan [(37 500 + 7500) * 10%] 4,500.00 1
Preference share dividend (20 000 * 9%) 1,800.00 1
Operating profit before tax 35,036.00
Taxation - 9,459.72 1
Operating profit after tax 25,576.28
Add: Amortisation (non-cash) 825.00 0.5
Add: Depreciation (non-cash) 5,350.00 0.5
Cash generated before working capital changes and capex 31,751.28

Working capital changes - 10,781.00 - 10,781.00

Accounts receivable 1,618.00 0.5
Work-in-progress 233.00 0.5
Current liabilities - 12,632.00 2

CAPEX - 10,075.00 1

Free cash flow 10,895.28 11,766.90 12,708.25 3

Terminal value 130,571.09 2

PV2022 CF 9,474.16
PV2023 CF 8,897.47
PV2024CF 94,208.49
Value of core operation 112,580.12 1
Add: Cash (assume it is surplus) 27,064.00 1
Less: Long-term loan (BV = MV) - 45,000.00 Non-current plus current portion as at 31 December 2021 1
Less: Non-redeemable preference shares - 16,363.64 1
Equity value 78,280.48 1

18
Communication skills - appropriate style 1

Required 2 - Explain in detail what the Earnings Multiple method of valuation entails and list the conditions which are appropriate for the application of this method.

Explanation of what the Earning Multiple method of valuation entails

This method of valuation is based on utilising the market price and earnings of a listed entity to derive an earnings multiple and adjusting this multiple due to certain risk factors 2
to make it applicable to the unlisted entity being valued.
This adjusted multiple is then multiplied by the entity’s (being valued) maintainable earnings. 0.5
It can be used to value a majority or minority shareholding. 0.5

Conditions appropriate for the application of this method of valuation

The entity being valued is a going concern 1
A similar comparable listed entity is available 0.5
The entity's earnings information is available 0.5
Expected maintainable earnings can be determined and is positive 1

TOTAL MARKS 25