CVD Ghana Ltd, which is into the production and sale of COVID 19 vaccine in Ghana and abroad, plans to buy a new machine to expand the scope of its operations due to increased demand in both the local and the International markets.

The cost of the machine is GH¢ 24,000,000 and has a useful life of five years. The machine will require additional investment in working capital of GH¢ 2,700,000 at the beginning of the first year of operations. At the end of year five, the machine will be sold for scrap, with the scrap value expected to be 5% of the machine’s initial purchase cost. The company has no intention to replace the machine. Production and sales from the new machine are expected to be 1,000,000 packs per year.

The selling price per pack and variable cost per pack are as follows:

It is also estimated that incremental fixed cost arising from the machine’s operations will be GH¢4,800,000 per year. CVD Ghana Ltd has an after-tax cost of capital of 20%, which it uses as a discount rate in its investment appraisal. The company pays corporate tax at an annual rate of 25% per year. Capital allowance should be ignored.

Required:
i) Compute the Net Present Value of this project and advice CVD Ghana Ltd whether the investment is financially viable. (8 marks)

ii) Calculate the Internal Rate of Return of Investing in the machine and advice whether it is financially viable. (5 marks)

iii) Explain the meaning of the term “sensitivity analysis” in the context of investment.  (2 marks)

Sabir Company is considering whether to invest in a project whose details are as follows.
The project will involve the purchase of equipment costing GH¢2,000,000. The equipment will be used to produce a range of products for which the following estimates have been made.

Incremental fixed costs are GH¢1,200,000 per annum. The sales prices allow for expected price increases over the period. However, cost estimates are based on current costs, and do not allow for expected inflation in costs. Inflation is expected to be 3% per year for variable costs and 4% per year for fixed costs. The incremental fixed costs are all cash expenditure items. Tax on profits is at the rate of 30%, and tax is payable in the same year in which the liability arises.

Sabir Company uses a four-year project appraisal period, but it is expected that the equipment will continue to be operational and in use for several years after the end of the first four-year period.

The company’s cost of capital for investment appraisal purposes is 10%. Capital projects are expected to pay back within two years on a non-discounted basis and within three years on a discounted basis. Tax allowable depreciation will be available on the equipment at the rate of 25% per year on a reducing balance basis. Any balancing allowance or balancing charge is not attributed to a project unless the asset is actually disposed of at the end of the project period.

Required:
a) Calculate the net present value (NPV) of the project. (11 marks)

The current financial year of General Kapito Ltd, a sports apparel company based in Ghana, will be ending in two months’ time. The directors of the company will be meeting next week to approve capital projects that will be implemented in the coming financial year. A major concern for the coming year is the availability of finance to meet investment requirements.

The cost of raising new capital in Ghana’s capital market has risen so high that it is not cost-effective to raise small blocks of capital. Consequently, the directors of the company have decided to finance new projects in the coming year with retained earnings and not raise new external capital from the capital market to bridge any financing gap. The maximum amount of retained earnings that will be available for financing new capital projects in the coming year is GH¢62 million.

There are six independent projects that will be presented before the board of directors for approval in their upcoming meeting. Five of the projects have been appraised already (see a summary of the projects in the table below).

Project-05 refers to a 5-year contract with a local football club for the manufacture and supply of a special football boot for playing under rainy conditions. It is estimated that this project will require an investment of GH¢34 million in plant and equipment at the start of the first year. The estimated cost of required plant and equipment might change as there are speculations about probable change in technology in the coming year. That notwithstanding, this project is expected to return an after-tax net operating cash flow of GH¢13.5 million every year over the coming five years. The estimated after-tax salvage value of the plant and equipment is GH¢10 million at the end of the fifth year.

The company’s required rate of return is 25%.

Required:
a) Compute the NPV and IRR of Project-05.                                                                                                                   (10 marks)

b) Assess the sensitivity of the outcome of Project-05 to variations in the cost of plant and equipment. Interpret your result. (5 marks)

c) Assuming the projects are divisible, recommend the portfolio of projects that should be funded in the coming year.  (5 marks)

ASANTA Ghana Ltd is considering investing in the following projects which are considered mutually exclusive:

ASANTA Ghana Ltd uses the straight line method of depreciation. However, tax-allowable depreciation is 30% on straight line basis. The cost of capital for the company is 20% per annum.

(Note: In each case, advise the Company on which of the projects to implement or undertake.)

Required:
i) Calculate the Accounting Rate of Return for each project.                                                                         (4 marks)

ii) Calculate the Net Present Value (NPV) for each project.                                                                           (4 marks)

iii) Compute the Internal Rate of Return (IRR) for each project.                                                                   (4 marks)

Sevista Ltd is evaluating the purchase of a new machine to produce product SEP, which has a short product life-cycle due to rapidly changing technology. The machine is expected to cost GH¢1 million. Production and sales of product SEP are forecasted to be as follows:

The selling price of product SEP (in current price terms) will be GH¢20 per unit, while the variable cost of the product (in current price terms) will be GH¢12 per unit. Selling price inflation is expected to be 4% per year and variable cost inflation is expected to be 5% per year. No increase in existing fixed costs is expected since Sevista Ltd has spare capacity in both space and labour terms. Producing and selling product SEP will call for increased investment in working capital.

Analysis of historical levels of working capital within Sevista Ltd indicates that at the start of each year, investment in working capital for product SEP will need to be 7% of sales revenue for that year. Sevista Ltd pays tax of 25% per year in the year in which the taxable profit occurs. The new machine is expected to have no scrap value at the end of the four-year period. Sevista Ltd uses a nominal (money terms) after-tax cost of capital of 12% for investment appraisal purposes.

Required:
i) Determine the net present value of the proposed investment in product SEP.                                                             (13 marks)

ii) Advise whether the project should be undertaken.                                                                                                       (2 marks)

Okechukwu Ltd is financed by three types of capital:
i) 1 million 50p ordinary shares each having current market value of GH¢5.20 cum div. The current dividend, which is due to be paid shortly, is 20p per share. The dividend has grown steadily in the past at a compound annual rate of 15% and is generally expected to continue doing so indefinitely.
ii) 200,000 GH¢1 irredeemable 8% preference shares, each having a current market value of 50p ex. Div.
iii) GH¢2 million 10% debentures, redeemable in 20 years at a price of 110. The current market value is 80 ex int.

Okechukwu is considering a new project having the same risk characteristics as existing projects, which would require an immediate outlay of GH¢150,000 and would produce annual net cash inflow of GH¢30,000 indefinitely.

Required:
Evaluate the viability of the new project using appropriate computations.                                                                     (15 marks)

DÉCOR Ltd is analyzing the purchase of a new machine to produce product Z. The machine is expected to cost GH¢2,000,000. Production and sales of product Z is forecast as follows:

The current selling price is GH¢30 per unit and is expected to increase by 5% a year. The current variable cost is GH¢18 per unit and is expected to increase by 6% per year. Fixed cost will remain the same but increase in working capital is required. Analysis of historical data of the levels of working capital of product Z indicates that, at the start of each year investment in working capital will need to be 10% of sales revenue of that year.

The company pays tax at 25% per year in the year in which taxable profit occurs. The tax liability is reduced by the capital allowance on the machinery and DÉCOR Ltd can claim on straight line basis over the four year life of the proposed investment (capital allowance rate of 25% per anum). The new machine will have zero scrap value at the end of the four years. The cost of capital is at 15% per year.
Required:
Calculate the Net Present Value of the proposed investment and advice whether the proposed investment should be undertaken.                                                                                                                                                                    (11 marks)

Sakyiama Poultry Farms is considering purchasing a new incubator that will improve its incubation efficiency to 90% as against the current 50%. The incubator, which is to be purchased immediately will cost GH¢120,000. The incubator has a useful life of 4 years, after which it would be sold for scrap at GH¢10,000. The current contribution of GH¢3 per day old chick will not change. The number of day old chicks sold at 12,000 units per annum will increase by 80%. Fixed cost will be GH¢20,000 per annum. Sakyiama Farms have after tax cost of capital of 12.5% and pays tax in the year in which profit is made at a rate of 15% per annum. The farm is also entitled to capital allowance at 25% on reducing balance.

Required:
i) Calculate the Net Present Value (NPV) and the viability of the investment.                                                               (7 marks)

ii) Calculate the Internal Rate of Returns (IRR).                                                                                                              (8 marks)

ABC Ltd is considering five projects for the coming financial year. Four of the projects have undergone financial appraisal (see the table below).

Project PA205 entails an immediate capital investment of GH¢150,000 and will produce the following annual net cash flows in real terms:

Expected general rate of inflation is 15% and the company’s money required rate of return is 25%.

Required:
a) Appraise Project PA205 using the NPV criteria.                                                                                                       (4 marks)

b) Assess the sensitivity of Project PA205 to the discount rate.                                                                                    (4 marks)

a) Describe FOUR (4) ways in which the investment appraisal approach of a Municipal Assembly will differ from a mining company.                                                                                                                                                                      (4 marks)

b) God is King Ltd has been printing all its magazines from Dubai due to the comparative cost advantage. The company is considering establishing its own printing department, and the R&D team have identified a printing machine which will meet the quality and cost specifications of God is King Ltd.

The machine also has the capacity to print to meet the market needs of the company. The machine, which has a useful life of 5 years, will cost GHS800,000 and immediate installation cost will be GHS50,000. Fixed cost for maintaining the machine will be 170,000 per annum over the machines useful life and additional working capital of 30,000 will be introduced in year 2. The use of this machine will generate a contribution of GHS 500,000 per annum for five (5) years. Corporate income tax rate, payable in areas, is 25% and the companies after tax cost of capital is 20%. No capital allowance is permitted.

Required:
Calculate the NPV for the project and advise management on whether to accept or reject the project.                          (10 marks)