Specific Investment Decisions

SPECIFIC INVESTMENT DECISIONSQ1. If a company leases rather than subvert an asset, which of the fol wretcheding willing not be a eudaemonia to the purchaser? (MCQ)Avoiding Tax exhaustionExploiting a low cost of enceinte Attract lease customers Potential future scrap(2 marks)Q2. Willow Co has already distinct to accept a run across and is now considering how to finance the digest. The asset could be leased over trey geezerhood at a rental of $23,000 per annum, due at the start of each stratum. Tax is collectable at 25%, one class in arrears. The post-tax cost of borrowing is 8%. Calculate the unclutter present care for of the leasing option. (FIB)Years Cash flows ($)0 2 Rentals (23,000)2 4 Tax relief 5,75041084542545000NOTE Negative answer should be shown with a negative sign (-)$(2 marks)Q3. Select the correct Lease option based on the statements given. (HA)It is a rental contract in operation(p) FINANCEMaintenance & Servicing cost of Lessee OPERATING FINANCEAgree ment for the useful life of the asset OPERATING FINANCEIncluded in the balance pall of the Lessor OPERATING FINANCE(2 marks)Q4. Tango Co. needs to decide about an asset that will be used in a pouch. The company has an option to either Buy the asset or Lease it. If Tango Co. opts for Buy option the following(a) study is given The asset is bought victimisation a bank loan for $400,000 for a time period of three days. The scrap value of the asset is $30,000 & classly maintenance cost will be $12,000 per annum. Calculate the present value for course both using a cost of borrowing of 5% (ignoring taxation)? (MCQ)$30,000$(11,424)$(10,884)$15,552(2 marks)Q5. What are the relevant cash flows for Buy option? (MRQ)Investment and government proceedsRepair & Maintenance costTax allowable depreciationTax saving on Servicing cost(2 marks)Q6. Beamer Co. wants to replace a Dyeing gondola on 31st December 2017. The machine is expected to cost $360,000 if purchased immediately, payable on 31st December 2017. afterward four years company expects technological changes in the market making this machine redundant and passing a scrap value of $20,000 on 31st December 2021.Capital allowance on 25% reducing balance basis. A full year allowance is given for acquisition but no writing down allowance in the year of disposal. If the maintenance cost is $15,000 per year payable at each year end & tax rate is 30%.What will be the Balancing spud/Allowance? (MCQ)$28,172 Balancing Charge$27,000 Balancing Allowance$11,391 Balancing Charge$28,172 Balancing Allowance(2 marks)Q7. Putin Co has opinionated to invest in a new machine which has a ten-year life and no disposal proceeds. The machine can either be purchased now for $55,000, or it can be leased for ten years with lease rental payments of $10,000 per annum payable at the end of each year. The cost of jacket crown to be utilise is 11% and taxation should be ignored. What should be done? (MCQ)Purchase the machineLease the m achineSale or LeasebackDo nothing(2 marks)Q8. A machine is leased using run lease & the annual lease rental for six years will be $67,000 payable at each year-end. The first rental will be payable at the start of year one. Calculate shekels present value using a cost of capital of 13%? (FIB) 3816353683000$(2 marks)Q9. A machine is leased using finance lease & the annual lease rental for three years will be $95,000 payable at each year-end. The first rental will be payable at end of year zero in advance. The maintenance cost is $10,000 per annum for three years. Calculate net cash flow for year two using tax and rate of 30% arranging in the year cash flow arises? (MCQ)$(66,500)$(73,500)$(7,000)$28,500(2 marks)Q10. Assets with unequal lives cannot be compared to a comparison will not be worry with like. Which of the following option relates to the above statement? (MCQ)Equivalent annual costProfitability mightAsset Replacement decisionProbability depth psychology (2 marks)Q11. plan A with an NPV of $4m with six-year duration. Project B with an NPV of $5m with seven-year duration. Project C with NPV of $6m with a three-year duration. Cost of capital is 12%. Which of the following will be ranked second? (MCQ)Project AProject BProject CNone of the above(2 marks)Q12. The net present value of the be of operating a machine for the next three years is $10,437 at a cost of capital of 16%. What is the equivalent annual cost of operating the machine? (FIB)4114806477000$ (2 marks)Q13. KD Co. is deciding to replace freight planes every year or every two years. The initial cost of the plane is $200,000. The maintenance charges are as follows jump year its Nil $25,000 at the end of the second year. The second-hand value would fall from $110,000 to $90,000 if it held on the plane for two years instead of a one year.KD Co. cost of capital is 4%. How often should KD Co. replace their cargo planes % what will be the equivalent annual cost of the option they choose? (MC Q)Replace every 1 year $(94,180)Replace every 1 year $(97,900)Replace every 2 years $(139,875)Replace every 2 years $(48,450)(2 marks)Q14. Which of the following statements is/are a limitation for Asset Replacement Decision? (MRQ)Replacement make every time is best(p) than the previous(prenominal) assetAssets replaced have same cash inflows every yearAssumed that Machines replaced have different operational efficiencies than the previous assetIt ignores environmental damage(2 marks)Q15. Capital confine is the restriction on organizations ability to invest in all projects due to light funds. Select the relevant statements whether they are true or false. (HA)Hard Capital Rationing is the limit on the centre of finance purchasable imposed by the lending institutions TRUE FALSESoft Capital Rationing is the limit on the amount of finance available imposed by the lending institutions TRUE FALSEProfitability tycoon is a radical applicable to severable projects lone(prenominal) TR UE FALSETrial Error method is the solution applicable to divisible projects only TRUE FALSE(2 marks)Q16. Riddle Co. is appraising three investiture projects but is experiencing a capital rationing in Year 0. No capital rationing is expected in future, but all the projects are principal(prenominal) for the company and cannot be delayed a decision needs to be taken. Riddle Co. cost of capital is 6%. Which order should the projects to be ranked?The following information is available (MCQ)Project The outlay in year 0 ($) Present Value ($) displace Present Value ($)Jeremy 115,000 121,900 12,190James 43,000 45,580 13,674Richard 75,000 79,500 47,700Jeremy, Richard, JamesJames, Jeremy, RichardRichard, James, JeremyJeremy, James, Richard (2 marks)Q17. What is an indivisible project?It is the ratio of the NPV of a project to its investment costIt is the project that must be undertaken completely or not at allIt is the project that must be undertaken completely or partiallyIt is the proj ect restriction due to insufficient funds(2 marks)The following information relates to Q18 Q19.Schneider Co. is facing a capital constraint of $150m immediately available for investment. The investments in possible projects are Project Initial Cost ($m) NPV ($m)W 30 7X 70 12Y 60 12Z 40 16Q18. If the projects are divisible, what is the NPV generated from the optimum investment programme? (FIB)35115524765 00 $ Million(2 marks)Q19. If the projects are indivisible, what is the NPV generated from the optimum investment programme? (MCQ)$19m$24m$28m$35m(2 marks)Q20. Place the calculation steps of Profitability index in the correct order. (PD)Monitor the investment made in the project 1Calculate profitability index of each project 2Allocate the funds 3Rank the project 4(2 marks)SPECIFICINVESTMENT DECISIONS (ANSWERS)Q1. AAvoiding tax exhaustion is a benefit for lessee rather than the purchaser. Tax exhaustion is when a business has negative taxable income so cannot benefit from tax saving.Ex ploiting a low cost of capital is a benefit for the purchaserAttracting lease customers is a benefit to a lessorPotential future scrap is a benefit for the purchaser as the lessee is not entitled to future scrap proceedsQ2. $-50,289Years Cash flows ($) Discount cipher (8%) Present value ($)0 2 Rentals (23,000) 1 + 1.783 (64,009)2 4 Tax relief 5,750 3.312 0.926 13,720NPV (50,289)Q3. CIt is a rental agreement OPERATING Maintenance Servicing cost of Lessee FINANCEAgreement for the useful life of the asset FINANCEIncluded in the balance sheet of the Lessor OPERATINGQ4. Year 0 1 2 3Investment / Scrap value (400,000) 30,000Maintenance (12,000) (12,000) (12,000)Net Cash flow (400,000) (12,000) (12,000) 18,000DF 5% 1 0.952 0.907 0.864Present value (400,000) (11,424) (10,884) 15,552Q5. All cash flows are relevant for Buy optionQ6. DYear 2017 2018 2019 2020 2021 2022Investment / Scrap value (360,000) 20,000 Tax save 27,000 20.250 15,188 11,391 28,172Workings2017 (360,000 25%) = 90,000 30% = 27,0002018 (90,000 0.75) = 67,500 30% = 20,2502019 (67,500 0.75) = 50,625 30% = 15,1882020 (50,625 0.75) = 37,969 30% = 11,391Balancing Allowance (113,906 20,000) = $ 28,172Q7. APresent value of leasing costs PV = Annuity factor at 11% for 10 years $10,000 = 5.889 $10,000 = $58,890 If the machine was purchased now, it would cost $55,000. The purchase is thence the least-cost financing option, hence choosing the purchase option.Q8. $ 267,866$67,000 3.998 (annuity factor for 6 years) = $ 267,866Q9. BYear 0 1 2 3Lease rentals (95,000) (95,000) (95,000) Maintenance (10,000) (10,000) (10,000)Tax save 30% (LR) 28,500 28,500 28,500 (M) 3,000 3,000 3,000Net cash flow (66,500) (73,500) (73,500) (7000)Q10. CEquivalent annual cost is method of converting asset lives to be like with likeProfitability index is the method to overcome capital rationingAsset Replacement decision is correctProbability analysis is method under risk precariousnessQ11. BProject A = $4 4.111 (AF 6 years) = $0.973mProject B = $5 4.564 (AF 7 years) = $1.096mProject C = $6 2.402 (AF 3 years) = $2.498mQ12. $4,647EAC = $10,437 2.246 (AF 3 years) = $4,647Q13. DYear 1 Year Cash flow ($) DF (4%) PV ($)0 (200,000) 1 (200,000)1 110,000 0.962 105,820NPV (94,180)EAC = 94,180 0.962 = 97,900Year 2 Year Cash flow ($) DF (4%) PV ($)0 (200,000) 1 (200,000)1 0.962 -2 (25,000) + 90,000 0.925 60,125NPV (139,875)EAC = 139,875 2.887 = 48,450Q14. Assets replaced have same cash inflows every year it ignores environmental damageReplacement made every time is like with likeAssets replaced have same cash inflows every year (limitation)Assumed that Machines replaced have same operational efficiencies like the previous assetIt ignores environmental damage, It ignores non-financial aspects (limitation)Q15.Hard Capital Rationing is the limit on the amount of finance available imposed by the lending institutions TRUE Soft Capital Rationing is the limit on the amount of finance available imposed by th e lending institutions FALSEProfitability index is a solution applicable to divisible projects only TRUE Trial Error method is the solution applicable to divisible projects onlyFALSESoft Capital Rationing is the limit on the amount of finance available imposed by the company itself.Trial Error method is the solution applicable to indivisible projects onlyQ16. D. Jeremy, James, RichardProject The outlay in year 0 ($) Present Value($) Net Present Value ($) Profitability abilityJeremy 115,000 121,900 12,190 0.1James 43,000 45,580 13,674 0.3Richard 75,000 79,500 47,700 0.6Jeremy = (12,190 121,900) = 0.1James = (13,674 45,580) = 0.3Richard = (47,700 79,500) = 0.6Q17. BIt is the ratio of the NPV of a project to its investment cost (Profitability index)It is the project that must be undertaken completely or not at all (Indivisible project)It is the project that must be undertaken completely or partially (Divisible project) It is the project restriction due to insufficient funds (Capi tal rationing)Q18. $38.4mProject Profitability Index Ranking Investment ($) NPV ($)W ( 7 30) = 0.23 2 30 0.23 7X ( 12 70) = 0.17 4 20 0.17 3.4Y ( 12 60) = 0.2 3 60 0.2 12Z ( 16 40) = 0.4 1 40 0.4 16Total 150 38.4Q19. DCombinationW + X Cost $100m NPV $19mW + Y + Z Cost $130m NPV $35mX + Y Cost $130m NPV $24mX + Z Cost $110m NPV $28mY + Z Cost $100m NPV $28mQ20. Monitor the investment made in the project 4Calculate profitability index of each project 1Allocate the funds 3Rank the project 2