Global Corporate Accounting
ACFI 3050
Revision Pack – Questions
(Investment Appraisal)
April 2021
Question 1
A manufacturing company based in the UK is considering an overseas investment in Bellota, a politically stable country. It will initially cost
B$12m and is expected to earn post-tax cash flows of:
Year B$’000
1 2,500
2 3,900
3 4,500
4 6,700
Real interest rates in the two countries are the same and are expected to remain the same in the future.
The current spot rate is B$2.5000 / £1.
The risk-free rate of interest in Bellota is 3% and in the UK is 5%.
The company requires a sterling return of 10% from the investment.
Required:
Question 2
Spot Ltd is a UK based company. It is considering a three-year project in Nolland. The project will require an initial investment of N80m and this will have a resale value at the end of the third year of N10 million.
Writing down allowances are available at 25% on the reducing balance basis.
The projects pre-tax net inflows are expected to be:
Year 1 N 35 million
Year 2 N 80 million
Year 3 N 50 million
The current spot rate is N5 / £1.
UK inflation is expected to be 2% per annum and Nolland inflation is expected to be 4% per annum.
Nolland’s tax rate is 20% and is payable one year in arrears.
The UK tax rate is 30% and payable one year in arrears.
Spot Ltd uses a discount rate of 10%.
Required:
Calculate the NPV of the project in £ and state whether it should be accepted or rejected.
Show all your workings.
Question 3
A Plc. is a company based in the UK. It is considering a project investment in North America including the acquisition of new machinery which it hopes will increase its profits.
The initial investment in machinery would be $25 million immediately and the project is expected to last for three years.
Investment in machinery receives tax allowable depreciation of 25% per annum (on a straight-line basis). Allowances are receivable in the same year.
The machinery will be sold at the end of the project for $7 million, in year 3 prices.
Sales are estimated to be $10 million per annum in current terms. Sales prices are expected to rise by 2% per annum.
Purchases of raw materials and labou are expected to be $2 million each in current terms, but expected to rise by 3% and 5% respectively.
Corporation tax in the UK is 30% payable in the following year and in North America corporation tax is 30% payable in the same year.
The project will require an injection of working capital immediately of $10 million and will be released at the end of the project. The working capital requirement is expected to rise by 5% per annum.
The nominal cost of capital of A Plc. is 10%. General inflation in the UK is predicted to be 5% per annum, and in North America is 2%, throughout the duration of the project.
The current spot rate for the £ to the $ is £1 = $1.8000.
Required:
Calculate the annual discounted cash flows in £ millions, using the nominal rate method. (Use 3 decimal places where possible in your calculations.)
State the net present value of the project and whether you recommend for the project to commence.
Question 4
Tax allowable depreciation is used to increase/ reduce taxable profits, and the consequent reduction in the payment should be treated as cash saving/ cash payment arising from acceptance of the project. When plant or equipment is eventually sold, the difference between the sales price and the reducing balance amount is treated as a taxable profit/ tax allowable loss if the sales price exceeds the reducing balance and as a taxable profit/ tax allowable loss if the reducing balance exceeds the sales loss.
Question 5
Ajay Plc is considering whether or not to invest in the new project that will have an expected life of 4 years. The managing director’s estimates for the project are as follows:
Year | 0 | 1 | 2 | 3 | 4 |
£000 | £000 | £000 | £000 | £000 | |
Cost of machinery |
2,000 | ||||
Cash Inflow | |||||
Sales |
2,500 | 3,000 | 3,500 | 3,500 | |
Cash Outflow | |||||
Materials cost |
500 | 600 | 700 | 700 | |
Labour costs |
750 | 900 | 1,100 | 1,100 | |
Overheads |
300 | 350 | 350 | 350 | |
Depreciation |
400 | 400 | 400 | 400 | |
Total Costs | 1,950 | 2,250 | 2,550 | 2,550 | |
Profit | 550 | 750 | 950 | 950 |
Additional Information:
Required:
Estimate the net present value (NPV) of the project, and advise whether the project should be undertaken.
ACFI 3050
Revision Pack – Questions
(Investment Appraisal)
April 2021
Question 1
A manufacturing company based in the UK is considering an overseas investment in Bellota, a politically stable country. It will initially cost
B$12m and is expected to earn post-tax cash flows of:
Year B$’000
1 2,500
2 3,900
3 4,500
4 6,700
Real interest rates in the two countries are the same and are expected to remain the same in the future.
The current spot rate is B$2.5000 / £1.
The risk-free rate of interest in Bellota is 3% and in the UK is 5%.
The company requires a sterling return of 10% from the investment.
Required:
Question 2
Spot Ltd is a UK based company. It is considering a three-year project in Nolland. The project will require an initial investment of N80m and this will have a resale value at the end of the third year of N10 million.
Writing down allowances are available at 25% on the reducing balance basis.
The projects pre-tax net inflows are expected to be:
Year 1 N 35 million
Year 2 N 80 million
Year 3 N 50 million
The current spot rate is N5 / £1.
UK inflation is expected to be 2% per annum and Nolland inflation is expected to be 4% per annum.
Nolland’s tax rate is 20% and is payable one year in arrears.
The UK tax rate is 30% and payable one year in arrears.
Spot Ltd uses a discount rate of 10%.
Required:
Calculate the NPV of the project in £ and state whether it should be accepted or rejected.
Show all your workings.
Question 3
A Plc. is a company based in the UK. It is considering a project investment in North America including the acquisition of new machinery which it hopes will increase its profits.
The initial investment in machinery would be $25 million immediately and the project is expected to last for three years.
Investment in machinery receives tax allowable depreciation of 25% per annum (on a straight-line basis). Allowances are receivable in the same year.
The machinery will be sold at the end of the project for $7 million, in year 3 prices.
Sales are estimated to be $10 million per annum in current terms. Sales prices are expected to rise by 2% per annum.
Purchases of raw materials and labou are expected to be $2 million each in current terms, but expected to rise by 3% and 5% respectively.
Corporation tax in the UK is 30% payable in the following year and in North America corporation tax is 30% payable in the same year.
The project will require an injection of working capital immediately of $10 million and will be released at the end of the project. The working capital requirement is expected to rise by 5% per annum.
The nominal cost of capital of A Plc. is 10%. General inflation in the UK is predicted to be 5% per annum, and in North America is 2%, throughout the duration of the project.
The current spot rate for the £ to the $ is £1 = $1.8000.
Required:
Calculate the annual discounted cash flows in £ millions, using the nominal rate method. (Use 3 decimal places where possible in your calculations.)
State the net present value of the project and whether you recommend for the project to commence.
Question 4
Tax allowable depreciation is used to increase/ reduce taxable profits, and the consequent reduction in the payment should be treated as cash saving/ cash payment arising from acceptance of the project. When plant or equipment is eventually sold, the difference between the sales price and the reducing balance amount is treated as a taxable profit/ tax allowable loss if the sales price exceeds the reducing balance and as a taxable profit/ tax allowable loss if the reducing balance exceeds the sales loss.
Question 5
Ajay Plc is considering whether or not to invest in the new project that will have an expected life of 4 years. The managing director’s estimates for the project are as follows:
Year | 0 | 1 | 2 | 3 | 4 |
£000 | £000 | £000 | £000 | £000 | |
Cost of machinery |
2,000 | ||||
Cash Inflow | |||||
Sales |
2,500 | 3,000 | 3,500 | 3,500 | |
Cash Outflow | |||||
Materials cost |
500 | 600 | 700 | 700 | |
Labour costs |
750 | 900 | 1,100 | 1,100 | |
Overheads |
300 | 350 | 350 | 350 | |
Depreciation |
400 | 400 | 400 | 400 | |
Total Costs | 1,950 | 2,250 | 2,550 | 2,550 | |
Profit | 550 | 750 | 950 | 950 |
Additional Information:
Required:
Estimate the net present value (NPV) of the project, and advise whether the project should be undertaken.
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