QUESTION 2 (a)

Year 1 2 3 4 5
RM 000 RM 000 RM 000 RM 000 RM 000
Sales income 6,084 6,327 6,580 6,844
Variable cost (2,374) (2,504) (2,642) (2,787)

Contribution 3,710 3,823 3,938 4,057

Fixed costs (263) (276) (289) (304)

Cash flow 3,447 3,547 3,649 3,753

Taxation (689) (709) (730)
CA tax benefits 250 188 141 (751)
372
After tax cash flow 3,447 3,108 3,128 3,164 (379)
Working capital (24) (25) (26) (27)
Scrap value 250

Net cash flow 3423 3,083 3,102 3,387 (379)

Discount at 12% 0.893 0.797 0.712 0.636 0.567
Present values 3,057 2,457 2,209 2,154 (215)
0000
PV of future cash flows 9,662
Initial investment (5,000)
Working capital (500)

NPV 4,162

As the net present value of RM 4.161 million is positive, the expansion can be recommended
as financially acceptable.

Workings :

Year 1 2 3 4
Selling price (per unit) RM 000 RM 000 RM 000 RM 000
Sales (units/year) 6,084 6,327 6,580 6,844
Sales income (RM 000) (2,374) (2,504) (2,642) (2,787)

Year 1 2 3 4
Variable cost (per unit) 263.75 278.26 293.56 309.71
Sales (units / year) 9,000 9,000 9,000 9,000
Variable cost (RM 000) 2,374 2,504 2,642 2,787

Year 1 2 3 4
RM 000 RM 000 RM 000 RM 000
Capital allowance 1,250.0 937.50 703.1 1,859.4
Tax benefit 250 188 141 372

Year 1 2 3 4
 RM 000 RM 000 RM 000 RM 000
Working Capital 523.50 548.11 573.87 600.84
Incremental 24 25 26 27

Alternative NPV calculation where capital allowance are subtracted and added back .

Year 1 2 3 4 5
RM 000 RM 000 RM 000 RM 000 RM 000
Cash flow 3,447 3,547 3,649 3,753
Capital allowances (1,250) (938) (703) (1,859)

Taxable profit 2,197 2,609 2,946 1,894

Taxation (439) (522) (589) (379)

After tax profit 2,197 2,170 2,424 1,305 (379)

Capital allowances 1,250 938 703 1,859

After-tax cash flow 3,447 3,108 3,127 3,164 (379)

Working capital (24) (25) (26) (27)
Scrap value 250

Net cash flow 3,423 3,083 3,101 3,387 (379)

Discount at 12% 0.893 0.797 0.712 0.636 0.567

Present Values 3,057 2,457 2,208 2,154 (215)

Therefore, NPV

= 9,661 – 5,000 – 500

= RM 4.161 million

The item that gave most difficulty with the capital allowance calculations was the balancing
allowance. The point to remember is that the sum of the capital allowances and the balancing
allowance must equal the cost of machinery minus the scrap value. Alternatively, the cost of
machinery minus the scrap value, multiplied by the corporation tax rate, must equal the total
tax benefit.
 Question 2 (b)

NPV at 11% was found to be RM 4.161 million.

NPV at 17% :

Net cash flow 340 238 238 238 368 (102)

Discount factors 0.855 0.731 0.624 0.534 0.456 0.390

Present Value 291 174 149 127 168 (40)

0000
Present value of cash inflows 869
Working capital investment (90)
Cost of Machine (800)

NPV (21)

Internal rate of return = 11 + (17 – 11) x 4.161 + 21,000)

= 11 + 5.0
= 16.0 % .

Since the internal rate of return of the investment (16%) is greater than the cost of capital of
HDW Co , the investment is financially acceptable. Although the value of the calculated IRR
will depend on the two discount rates used in linear interpolation, other discount rate choices
should produce values close to 16%.

Question 2(c)
Formula : Payback period =
= Completed Years + Remaining Amount / Available Amount

Year Cash inflows Cumulative Calculations

1 3,447 3,447 = 3,447
2 3,547 6,894 = 3,447 + 3,447
3 3,649 10,543 = 6,894 + 3,649
4 3,753 14,296 = 10,543 + 3,753
5 0 0 0
where, ,
Completed years = Year just after which Cumulative cash inflow exceeds the initial cash
outflow = 4 years.
Remaining amount = initial investment – cumulative cash flows earned till Year 4 :
= RM 53, 800 – RM 49,624
= RM 41, 758.
Therefore, payback period = 6.5 years.

QUESTION 3(a)

FV = C x [(1+r) n- 1 /r]

FV = Future value of annuity

= RM 75,000

C = Periodic Cash flows

r = Rate per period

= 10 % or 0.10 p.a.

n = Numbers of periods

= 15

RM 75,000 = C x [(1 + 0.10)15 – 1/0.10]

= C x [(1.08)15 – 1/0.10]

= C x [(3.172169 – 1)/ 0.10]

= C x (2.172169/0.10)

= C x 29.15211

C = RM 75,000/29.15211 = RM 27,622.22

Therefore, RM 27, 622.22 need to deposit manually to get the desired maturity amount.
Question 3(b)

Formula for compound interest can be used to compute the lump-sum deposit as:

A = P x (1+i/n)nxt

A = Amount on maturity

= RM 30,000

i = Annual interest rate = 8% or 0.08

n = Compounding frequency in a year = 1

t = No. of years = 15

RM 30,000 = P x (1+0.08/1)1x15

RM 30,000 = P x (1.08)15

RM 30,000 = P x 3.172169114

P = RM 30,000 / 3.172169114

= RM 19, 457.16

Therefore, RM 19,457.16 needs to deposit today.

Future value of RM 20,000 at the end of 15 years deposited after 5 year computed using
compound interest formula as:

A = P x (1+i/n)nxt

A = Amount on maturity

P = RM 20,000

i = Annual interest rate = 10% or 0.10

n = Compounding frequency in a year = 1

t = No. of years = 15 – 5 = 10

A = RM 20,000 x (1+0.10)15

A = RM 20,000 x (1.0.10)15

A = RM 20,000 x 2.158925
 A = RM 43,160.50

Future amount needs to deposit annually :

= RM 30,000 - RM 43,160.50

= RM 13, 160.00

Applying formula for FV of annuity, we get:

FV = C x [(1+r) n- 1 /r]

FV = Future value of annuity

= RM 31,821.61

C = Periodic Cash flows

r = Rate per period

= 10 % or 0.10 p.a.

n = Numbers of periods = 15

RM 13,160.00 = C x [(1 + 0.10)15 – 1/0.010]

= C x [(1.08)15 – 1/0.10]

= C x [(3.172169 – 1)/ 0.10]

= C x (2.172169/0.10)

= C x 21.72169.00

C = RM 31,821.61 /27.15211 = RM 1,171.98

Therefore, final answer is RM 1,171.98 needs to deposit annually along with lump-sum to
get the desired maturity amount.
QUESTION 3(c)

At first, we need to calculate the future value, present value and annuity.

Therefore, future value formula =

Items :
Annuity = RM 1000
n = 15 years
i = 12%

FVAN = RM 1000 x (1.0075180 – 1) / 0.0012

= RM 1000 x 378.40577
= RM 370, 840.58

QUESTION 3(d)
CAGR is the annual pace rate at which revenues grow each year. This concept is known as
the time value of money.

Formula : Computation of CAGR:

Where :
E = Revenue in 2018 : RM 3,149
I = Revenue in 2023 : RM 5,828
n = period of 5 years (from 2018 to 2023)

CAGR =
(3,149 ) 1/5 - 1 = 0.32 or 32%
(5,828 )

To get the final answer of CAGR, the future value of single cash flow formula is used.
Therefore, after rounding the answer into two decimal places, the final CAGR is 0.32 or 32%.
QUESTION 3 (e)
The Gordon Dividend Growth Model is given by :

The Gordon Dividend Growth Model is given by :

P0 = D1 / (r – g)

where,

P is the price of the stock,

D1 is the expected dividend per share,
r is the required rate of return, and
g is the dividend growth rate.

To solve for P, we need to estimate the dividend growth rate :

g = b*r
where,
b = Retention ratio
r = Return on equity = 12.75%.

(ii) Retention Ratio : (Net Income – Dividends) / Net Income

Where, net income = EPS x shares on issue.

Net Income = 10.15 x 21.2

= 215.18

Dividends = 6.75 x 21.2

= 143.10

Retention Ratio = 215.18 – 143.10 / 215.18

= 0.3350

Therefore,
Growth = Retention Ratio x Return of Capital
Growth = 0.3350 x 12.75
= 4.2713
Final step, we can use the Gordon Dividend Growth Model to calculate the price of stock.

P0 = D1 ( r – g )
P0 = 6.75 x (1+ 0.042713) / 0.1275 – 0.042713
= 83.01

Therefore, the capital cost to pay for the stock using the Gordon Dividend Growth Model is
RM 83.01 per share.