a) Rahim Ltd requires a machine for 5 years. There are two alternatives, either to take it on lease or buy basis. The company is reluctant to invest initial amount for the project and approaches their bankers. The Bankers are ready to finance 100% of its initial required amount at 15% rate of interest for any of the alternatives.

Under lease option, upfront security deposit of GH¢5,000,000 is payable to the lessor which is equal to cost of machine. Out of which, 40% shall be adjusted equally against annual lease rent. At the end of life of the machine, expected scrap value will be at book value after providing depreciation at 20% on written down value basis.

Under the buying option, loan repayment is in equal annual installments of principal amount, which is equal to annual lease rent charges. However, in case of bank finance for lease option, repayment of principal amount equal to lease rent is adjusted every year, and the balance at the end of 5th year.

Assume income tax rate is 30%, interest is payable at the end of every year and discount rate at 15% p.a. The following discounting factors are given:

Required:
Recommend the most viable option on the basis of net present values.                                                                         (10 marks)

b) A Multinational Company (MNC) is planning to set up a subsidiary company in Ghana (where hitherto it was exporting) in view of growing demand for its product and competition from other MNCs. The initial project cost (consisting of Plant and Machinery including installation) is estimated to be GH¢500 million. The net working capital requirements are estimated at GH¢50 million. The company follows straight line method of depreciation. Presently, the company is exporting two million units every year at a unit price of GH¢ 80, its variable cost per unit being GH¢40.

The Chief Finance Officer has estimated the following operating cost and other data in respect of the proposed project:
i) Variable operating cost will be GH¢20 per unit of production.
ii) Additional cash fixed cost will be GH¢30 million p.a. and project’s share of allocated fixed cost will be GH¢3million p.a. based on the principle of ability to share;
iii) Production capacity of the proposed project in Ghana will be 5 million units;
iv) Expected useful life of the proposed plant is five years with no salvage value;
v) Existing working capital investment for production & sale of two million units through exports was GH¢15 million;
vi) Exports of the product in the coming year will decrease to 1.5 million units in case the company does not open subsidiary company in Ghana. This would be as a result of competing MNC’s that are in the process of setting up their subsidiaries in Ghana;
vii) Applicable Corporate Income Tax rate is 35%, and
viii) Required rate of return for such project is 12%.
ix) Assume that there will be no variations in the exchange rate of the two currencies and all profits will be repatriated, as there will be no withholding tax.

Required:
Calculate Net Present Value (NPV) of the proposed project in Ghana and advise Management.                                    (10 marks)

Rock Minerals Ltd (Rock) is a minerals mining company based in Ghana. Rock is considering an investment opportunity in South Africa, which involves developing and operating a gold mine and later transferring the mine to the South African government.

Last year, the directors commissioned a special committee to assess investments and regulatory requirements relating to the project. Based on the committee’s report, the directors estimate that it will take two years to develop the mine. Development of the mine entails an immediate outlay of ZAR1.2 million in regulatory requirement expenditures, an investment of ZAR20
million in plants and equipment in the first year and ZAR15 million for development expenditure in the second year. The directors also estimate that Rock will invest ZAR2 million in net working capital at the beginning of the third year. The investment in net working capital is expected to be increased to ZAR3 million at the beginning of the fifth year.

Commercial production and sales are expected to begin in the third year. Below are estimated operating cash flows before tax in the first three years of commercial production:

At the end of the fifth year, Rock will transfer ownership and control of the mine to the South African government for an after-tax consideration of ZAR100 million. The special committee also reports that income tax rate for mining operations is 30% and capital expenditure in relation to acquisition of property, plant and equipment and development expenditure qualify for capital allowance at the rate of 20% per annum on straight line basis. Capital allowance is granted at the end of each year of commercial production. On repatriation of profit, the committee reports that the South African government does not restrict repatriation of profit and there are no profit repatriation taxes. Rock would repatriate cash returns as they become available.

Rock plans to finance this project using existing capital. Rock’s after-tax cost of capital is 25% in Ghana. Annual rate of inflation is expected to be 11% in Ghana and 5% in South Africa in the coming years. Currently, the rate of exchange between the Ghanaian cedi (GH¢) and the South African rand (ZAR) is GH¢0.3822 = ZAR1.

Required:
a) Evaluate the project on financial grounds using the net present value (NPV) approach, and recommend whether the investment proposal should be accepted for implementation or not.                                                                           (12 marks)

b) Suppose the South African government changes its policy on profit repatriation and legislates that profit cannot be repatriated until termination or exit.
i) If Rock can invest blocked funds in South Africa for 12% annual rate of return, by how much would the project’s NPV differ from your results in sub-question (a) above?                                                                                                                     (5 marks)

ii) Suggest THREE (3) ways through which Rock can deal with the risk of blocked funds.                                            (3 marks)

The Board of Peartek Ltd is considering the company’s capital investment options for the coming year, and also evaluating the following potential investments:

Investment A
This investment is similar to its current investments and requires an investment of GH¢60,000 now, GH¢40,000 for new capital equipment and GH¢20,000 for increases in working capital. This will be financed from Shareholders Funds. Sales next year would be 10,000 units, variable costs would be GH¢6 and the product would be sold for GH¢10. But due to entry of new competitors and technological improvements, the sales price would decline by 20% per annum thereafter, sales volume would fall by 10% and variable costs would fall by 20% per annum. Overheads attributed to the project would be GH¢15,000 per annum.

In year three the project would be wound up, working capital investment would be recovered and capital equipment sold off for 25% of its purchase costs the following year. Fixed costs include an annual charge of GH¢4,000 for depreciation.

Investment B
This is a long–term project in a totally new area, involving an immediate outlay of GH¢90,000, which they intend to borrow from their lenders at 6%. They expect net profits of GH¢12,000 next year, rising thereafter by 3% per annum in perpetuity.

Investment C
This is another long-term investment in a totally new area, involving an immediate outlay of GH¢25,000 which they intend financing by retained profits.
Expected annual net cash profits are as follows:
Years 1 to 4   : GH¢3,000
Years 5 to 7   : GH¢5,000
Year 8 onwards forever : GH¢7,000

The company discounts all projects lasting ten years duration or less at a cost of capital of 10% and all other projects at a cost of 13%. You may ignore taxation.

Required:
As a financial management analyst, you have been asked to advise the board of Peartek Ltd (in the form of a briefing report) which investment should be undertaken. In your report you are to make use of the NPV method, as the members of the board believe this is the best to use and have asked you to use it.                                                                                              (15 marks)

A company plans to invest GH¢7million in a new product. Net contribution over the next five years is expected to be GH¢4.2million per annum in real terms. Marketing expenditure of GH¢1.4m per annum will also be needed. Expenditure of GH¢1.3m per annum will be required to replace existing assets which will now be used on the project but are getting to the end of their useful lives. This expenditure will be incurred at the beginning of each year. Additional investment in working capital equivalent to 10% of contribution will need to be in place at the start of each year. Working capital will be released at the end of the project.

The following forecasts are made of the rates of inflation each year for the next five years:
Contribution              8%
Marketing                  3%
Assets                        4%
General prices        4.70%
The real cost of capital of the company is 6%. All cash flows are in real terms. Ignore tax.

Required:
Calculate the Net Present Value (NPV) of the project and appraise whether it is a worthwhile project.                         (12 marks)

Joebel Limited is a diversified company operating in different industries on the African Continent. The shares of the company are widely traded on the stock exchange and currently has a market of GH¢3.20 per share. The company’s dividend payment over the last five years are as follows:
Year                             Dividend Per Share (DPS)
.                                                (GH¢)
2015                                           0.35
2014                                           0.32
2013                                           0.30
2012                                           0.29
2011                                           0.28

The Board of Directors of Joebel Limited are currently considering two main investment opportunities: one in Oil and Gas sector and the other in the Hotel and Tourism Sector. Both projects have short lives and their associated cash flows are as follows;
Year             Oil & Gas                Hotel & Tourism
.                    GH¢’000                     GH¢’000
1                       85                                 180
2                     175                                 195
3                     160                                 150

The investment in Oil and Gas would cost GH¢400,000 while that in Hotel and Tourism would cost GH¢405,000.

The Management of the Company has identified the industry beta of Oil and Gas and Hotel and Tourism as 1.2 and 1.6 respectively. However, a research conducted by management revealed that Joebel Limited’s beta is 1.5. The average return on the companies listed on the stock exchange is 25% and the yield on Treasury bill is 20%.

Required:
i) Compute the Net Present Values (NPV) of both projects using the company’s weighted average cost of capital as a discount rate.                                                                                                                                                                                      (5 marks)

ii) Compute the NPV using a discount rate which take into account the risk associated with the individual projects.      (5 marks)

iii) Advise Management regarding the suitability and acceptability of the projects                                                             (1 mark)

Ahomka Fruity Ltd (Ahomka), a listed company based in Ghana, produces fresh pineapple juice packaged in bottles and cans. The company has been exporting to Nigeria for many years, earning an annual after-tax contribution of NGN5 million. The company wants to establish a wholly-owned subsidiary in Nigeria to produce and sell its pineapple juice products over there. If a subsidiary is established and operated in Nigeria, Ahomka will cease exporting pineapple juice products to Nigeria. However, Ahomka plans to sell some raw materials and services to the subsidiary for cash.
Acquiring a suitable premises, required plant and equipment, and installing the machinery will take the next two years to complete. Production and sales will commence in the third year and indefinitely.
Capital expenditure is estimated to be NGN10 million at the start of the first year and NGN5 million at the start of the second year. Ahomka will have to make working capital of NGN2 million available at the start of the third year, and this is expected to be increased to NGN2.5 million at the start of the fifth year.
The proposed Nigerian subsidiary will produce the following pre-tax operating cash flows at the end of each of the first three years of production and sales:

The tax rate in Nigeria is 30% and tax is paid in the same year the profit is earned. Capital allowance is granted on capital expenditure at the end of each year of production/sale at the rate of 30% on reducing balance basis.
After the first three years of production and sales, post-tax incremental net operating cash flows will grow at the rate of 4% every year to perpetuity.
Ahomka plans to finance the project entirely with loans raised from Ghana at an after-tax cost of 18%. The maximum post-tax operating cash flows possible will be remitted to the parent company at the end of each year to help pay off the loans. Nigeria does not restrict fund remittance to a parent company outside of Nigeria and there are no taxes on funds remittance.
The Naira- Ghana Cedi exchange rate is currently NGN55.40/GHS. Annual inflation is expected to be 18% in Ghana and 20% in Nigeria.

Required:              (Note: Professional marks will be awarded for presentation) 
(a) Perform a financial appraisal of the project using the net present value and the modified internal rate of return (MIRR) methods, and recommend whether Ahomka should proceed with the project.                                                                (10 marks)