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FORTUNEMUNHUMUTAPA SCHOOL OF COMMERCE
INDIVIDUAL ASSIGNMENT
MODULE FINANCIAL MANAGEMENT
MODULE CODE AC419
QUESTION ONE
The management of Zimsproc Limited have found that for the following year
the company has only $100 000 available for investment. The company’s cost
of capital is 20%. They are currently considering four independent and
divisible projects.
Project Investment required NPV at 20%
A $100 000 $48 000
B 20 000 16 000
C 30 000 18 000
D 45 000 21 000
Required:
Advise Zimsproc Limited.
(8 marks)
QUESTION TWO
Headmount Limited specialises in the production of wooden sports equipment.
The company has recently developed a new machine for automatically
producing wooden cricket bats. The machine costs $1 500 000 to develop and
install. Production is to commence at the beginning of next week. It is planned
to depreciate the $1 500 000 cost evenly over four years, after which time
production of wooden cricket bats will cease. Production and sales will amount
1
to 30 000 bats each year. Annual revenues and operating costs at current prices,
are estimated as follows:
$
Sales ($9 600 each) 2 880 000
Variable manufacturing costs 2 000 000
This morning, a salesperson has called and described to the directors of
Headmount Ltd a new machine, ideally suited to the production of wooden
cricket bats. This item of equipment is distinctly superior to Headmount’s own
machine, reducing variable costs by 30% and producing an identical product.
The cost of the machine, which is also capable of producing 30 000 cricket bats
per annum is $1 900 000.
Assume the following:
Annual revenues and operating costs arise at the year end.
The general rate of inflation is 10% per annum.
The company’s money cost of capital is 21%.
The existing machine could be sold for $120 000 immediately.
If purchased, the new machine could be installed immediately.
Either machine would have a zero residual value at the end of four
years.
Required
i Calculations of the net present value of the two options, using the real cost of
capital.
ii Advice to the management as to which course should be followed, and an
explanation of the significance of your calculations in (i).
Ignore taxation.
(12 marks)