FINANCIAL PRINCIPLES AND PROJECT COST MANAGEMENT ASSIGNMENT

A. QUESTION 1

1. Answer is (b)
12 SHIFT P/YR – This will set the calculator to 12 payments per year
150000.00 = +/- PV
12 = I/YR
50 = N
3826.91 = PMT

2. Answer is (e)
12 SHIFT P/YR – This will set the calculator to 12 payments per year
15 = I/YR
20 = N
650 = +/- PMT
11439.56 = PV

3. Answer is (d)
1 SHIFT P/YR – This will set the calculator to 1 payment per year
10 = I/YR
0 = CFj
200+/- = CFj
400 = CFj
600 = CFj
800+/- = CFj
400 = CFj
800 = CFj
SHIFT NPV = 753.09

4. Answer is (b)
1 SHIFT P/YR – This will set the calculator to 1 payment per year
1500.00 = +/- PV
7 = I/YR

Financial Principles and Project Cost Management Assignment – EM / 059 Page 1

 3=N
1837.56 = FV
FV – PV
1837.56 – 1500.00
= 337.56
337.56 = INTEREST EARNED

5. Answer is (a)
1 SHIFT P/YR – This will set the calculator to 1 payment per year
INVESTMENT A
18000.00 = +/- PV
30000.00 = FV
5=N
10.76 = I/YR
INVESTMENT B
600.00 = +/- PV
3000.00 = FV
20 = N
8.38 = I/YR
INVESTMENT C
3400.00 = +/- PV
10000.00 = FV
10 = N
11.39 = I/YR
ALTERNATIVE INVESTMENT = 11%
THERFORE INVESTMENT C HAS HIGHER INTEREST

6. Answer is (d)
1 SHIFT P/YR – This will set the calculator to 1 payment per year
2400.00 = +/- PMT
5=N
14 = I/YR
15864.25 = FV
15864.25 – 5000.00

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 = 10864.25
10864.25 = +/- PV
10 = I/YR
5=N
17496.98 = FV

7. Answer is (d)
12 SHIFT P/YR – This will set the calculator to 12 payments per year
1000000.00 X 0.75 = 750000.00
750000.00 = +/-PV
12 = I/YR
20 = SHIFT x P/YR
8258.15 = PMT

8. Answer is (a)
1 SHIFT P/YR – This will set the calculator to 1 payment per year
50000.00 = +/-CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
12000.00 = CFj
30520.98 = NPV
20.18 = IRR

9. Answer is (d)
If NPV is greater than zero then the IRR has to be greater than the cost of Capital
Therefore if Cost of Capital is 20% then the IRR rate has to be greater than 20%

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 10. Answer is (a)
Initial Investment is R500
Add Cash flows together from year 1 to 5 = R762
This is more than the initial investment
Add cash flows together from year 1 to 4 = R585
This is more than the initial investment
Add cash flows together from year 1 to 3 = R415
This is less than the initial investment
Add cash flows together from year 1 to 3 plus half of year 4 = R500
Therefore the payback period for Project A is 3.5 Years

11. Answer is (c)

1 SHIFT P/YR – This will set the calculator to 1 payment per year
1000 = +/-PV
3=N
10 = I/YR
1331.00 = FV
1000 = +/-PV
2.5 = N
10 = I/YR
1269.06 = FV
1331.00 – 1269.06
= 61.94

12. Answer is (c)

1 SHIFT P/YR – This will set the calculator to 1 payment per year
100 = +/-PV
200 = FV
8.7 = I/YR
8.31 = N

13. Answer is (b)

2 SHIFT P/YR – This will set the calculator to 2 payment per year
10000 = +/-PV
6 = I/YR
5 = SHIFT N

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 13439.16 = FV
1 SHIFT P/YR – This will set the calculator to 1 payment per year
13439.16 = FV
8 = I/YR
5=N
9149.47 = PV
9149.47 – 10000
= -853.53 Decrease in purchasing power

14. Answer is (a)

1 SHIFT P/YR – This will set the calculator to 1 payment per year
21144567 = +/-CFj0
2500000 = CFj1
2500000 = CFj2
2500000 = CFj3
2500000 = CFj4
2500000 = CFj5
2500000 = CFj6
2500000 = CFj7
2500000 = CFj8
2500000 = CFj9
2500000 = CFj10
15000000 = CFj11
18855433 = NPV
9.56 = IRR
Therefore the maximum amount that Company ABC should be willing to pay is R21144567

15. Answer is (c)

CASH FLOW ANALYSIS

PERIOD 0 1 2 3 4 5
COST OF ASSET -R 100,000.00
WEAR AND TEAR TAX
SAVINGS @ R 100,000.00 X
0.25 X 0.3 R 6,000.00 R 6,000.00 R 6,000.00 R 6,000.00 R 6,000.00

TOTALS -R 100,000.00 R 6,000.00 R 6,000.00 R 6,000.00 R 6,000.00 R 6,000.00

16. Answer is (a)

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 CASH FLOW ANALYSIS

PERIOD 0 1 2 3 4
COST OF NEW MACHINE -R 2,000,000.00
SAVING IN OPERATIONAL COSTS R 1,000,000.00 R 1,000,000.00 R 1,000,000.00 R 1,000,000.00
TAX ON SAVINGS @ 0.30 -R 300,000.00 -R 300,000.00 -R 300,000.00 -R 300,000.00
WEAR AND TEAR TAX SAVINGS @
R 2,000,000.00 X 0.25 X 0.3 R 150,000.00 R 150,000.00 R 150,000.00 R 150,000.00
SALE OF MACHINE R 120,000.00
TAX ON SALE OF MACHINE 0.30 -R 36,000.00

TOTALS -R 2,000,000.00 R 850,000.00 R 850,000.00 R 850,000.00 R 934,000.00

17. Answer is (c)

1 SHIFT P/YR – This will set the calculator to 1 payment per year
2000000 = +/-CFj0
8500000 = CFj1
8500000 = CFj2
8500000 = CFj3
9340000 = CFj4
1484000 = NPV
26.15 = IRR

18. Answer is (a)

1 SHIFT P/YR – This will set the calculator to 1 payment per year
100000000 = +/-PV
50 = N
10 = I/YR
10085917.40 = PMT
10000000 = Interest per year
= 10085917.40 + 10000000
= 20085917.40 Cost per Year
= 2000000 Units per Year
Therefore 20085917.40 / 2000000
= R 10.04 per Unit to cover the Cost per Year
= Breakeven Point

B. QUESTION 2

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 a.

1. Initial Investment

INITIAL COSTS

Initial Investment YR0

Purchase Price of new colour press -R 800,000.00
Installation cost of press -R 50,000.00
Increase in Working Capital R 120,000.00

TOTAL INITIAL COSTS -R 730,000.00

2. Net operating cash flows

NET OPERATING CASH FLOW ANALYSIS

PERIOD 0 1 2 3 4
Purchase Price of new colour press -R 800,000.00
Installation cost of press -R 50,000.00
Decpreciation Costs - Wear and Tear @
800000 x 0.20 x 0.28% R 44,800.00 R 44,800.00 R 44,800.00 R 44,800.00
Sale of Press R 300,000.00
Increase in Working Capital R 120,000.00 R 120,000.00 R 120,000.00 R 120,000.00 R 120,000.00
Profits R 250,000.00 R 270,000.00 R 300,000.00 R 330,000.00
Tax on Profits -R 70,000.00 -R 75,600.00 -R 84,000.00 -R 92,400.00
TOTALS -R 730,000.00 R 344,800.00 R 359,200.00 R 380,800.00 R 702,400.00

3. Terminal Cash Flows

TERMINAL CASH FLOW

PERIOD YR0
Decpreciation Costs - Wear and Tear @
800000 x 0.20 x 0.28% R 44,800.00
Sale of Press R 300,000.00
Increase in Working Capital R 120,000.00
Profits R 330,000.00
Tax on Profits -R 92,400.00
TOTALS R 702,400.00

b.
CASH FLOW ANALYSIS

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 NET OPERATING CASH FLOW ANALYSIS

PERIOD 0 1 2 3 4
Purchase Price of new colour press -R 800,000.00
Installation cost of press -R 50,000.00
Decpreciation Costs - Wear and Tear @
800000 x 0.20 x 0.28% R 44,800.00 R 44,800.00 R 44,800.00 R 44,800.00
Sale of Press R 300,000.00
Increase in Working Capital R 120,000.00 R 120,000.00 R 120,000.00 R 120,000.00 R 120,000.00
Profits R 250,000.00 R 270,000.00 R 300,000.00 R 330,000.00
Tax on Profits -R 70,000.00 -R 75,600.00 -R 84,000.00 -R 92,400.00
TOTALS -R 730,000.00 R 344,800.00 R 359,200.00 R 380,800.00 R 702,400.00

c.

1. NPV

1 SHIFT P/YR – This will set the calculator to 1 payment per year
730000 = +/-CFj0
344800 = CFj1
359200 = CFj2
380800 = CFj3
702400 = CFj4
1057200 = NPV

2. IRR

41.72 = IRR

3. Payback Period

PP = 2 (730000-704000)/380800

= 2 (26000)/380800

= 2 (0.68)

= 2.68

d. Based on the above calculations I would recommend the new press be acquired

C. QUESTION 3

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 a. Breakeven Sales Units per year
Selling Price per Unit (SP) = R900
Variable Cost per Unit (VC) = R300
Contribution (CON) = R600

Fixed Costs per Year (FC) = R 18 000 (thousands)

Current Sales Volume/Units (CS) = R 35 (thousands)

Sales (SP) = VC + FC + Profit (for breakeven use profit of zero)

900x = 300x+18000+0
600x = 18000
x = 18000/600
x = 30000 Units (BES)
Therefore the Breakeven Point is 30,000 Units

b. Margin of Safety
Margin of Safety (MOS) = (CS – BES) / CS
MOS = (35 – 30) / 35
MOS = 5/35
MOS = 0.14
MOS x 100 = 14.29%
This is the % by which current sales can drop before you start making a loss

c. Current Profit
Current Profit = CS x CON – FC
= 35 x R600 – 18000
= 21000 – 18000
= 3000
Therefore = R 3,000,000.00

How many units must be sold for operating profit of R6 million

Sales = VC + FC + Profit
900x = 300x + 18000 + 6000

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 600x = 24000
x = 24000/600
x = 40
Therefore = 40,000 Units

d. As per the above calculation in c. the Current Sales Profit is R3,000,000.00

To increase operating profit by 25% means that Current Profit should be
R3,750,000.00
How many units must be sold for operating profit of R3,750,000.00
Sales = VC + FC + Profit
900x = 300x + 18000 + 3750
600x = 21750
x = 21750/600
x = 36.25
Therefore = 36,250 Units is required to be sold

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