Question $1$

Givers Industries Ltd is a listed resident manufacturing company under the government of

Ghana$$s flagship programme, $1$D$1$F$.$ The company manufactures a special product, the ULTRA

$5$D SCREEN, a major input for manufacturers of television sets across the continent. The ULTRA

$5$D Screen is more technically advanced than the currently available screens on the market, which

are mainly $3$D$.$ The ULTRA $5$D SCREEN will require substantial investment in plants and

machinery. The initial investment in the machinery used to manufacture the ULTRA $5$D SCREEN

is expected to cost GHS$9,000,000.$ Before purchasing the machinery, Givers Industries Ltd

incurred a cost of trial and testing on the viability of the machinery, equivalent to $1/18$th of the

cost$.$ The trial and testing cost is factored into the initial investment cost. Givers will be required

to invest in working capital immediately at the cost of GHS$1,250,000.$ The cost of setting up the

machinery to make it usable is estimated at GHS $250,000.$ No terminal or machinery scrap value

is expected at the end of four years when the ULTRA $5$D SCREEN production is planned to end.

The machinery used in manufacturing the ULTRA $5$D SCREEN is a class two $(2)$ depreciable

asset. Capital allowance is on the reducing balance and computed at the rate of $30\%.$

Sales in the first year are expected to be $125,000$ screens. Sales are expected to rise by $20\%$ and

$15\%$ in years $2$ and $3,$ and dip by $20\%$ in year $4$ due to potential competition from Chinese

manufacturers. The expected selling price for the first year of production is GHS$50$ per unit.

Subsequent yearly selling price increases with the annual rate of inflation. Due to increased

competition, management intends to maintain stable prices for the last two years of the project.

The variable cost per unit of ULTRA $5$D SCREEN is expected to be GHS$25$ for the first year and

increase by the inflation rate for the rest of the product$$s life. Selling and administrative expenses

comprise a base cost of GHS$10,000$ and a unit cost of GHS$15$ in year one, expected to increase in

line with the growth in sales units. Annual fixed operating expenses are expected to be

GHS$250,000$ in the first year. Further increases in fixed expenses are anticipated to be in line with

the annual inflation rates. The company is expected to pay a one$-$time insurance cost of

GHS$125,000$ in year three after adjusting for the effect of inflation.

The rate of inflation, as projected by the Statistical Service, is expected to be $6\%$ for the first two

years and $8\%$ for years $3$ and $4.$ The target payback and discounted payback periods are $3$ and $5$

years, respectively, for projects of this kind.

Other information:

You have been provided with the following information about how Givers Industries financed its

capital projects:

i$.$ The issued share capital of Givers Industries Ltd is GHS$50$million, and it comprises

$1,250,000$ ordinary shares. Givers Industries Ltd is a quoted company whose current share

price is GHS$20.$ The beta of Givers is estimated at $1\mathrm{.}3.$ It is worth noting that the return

on the GSE All share index over the project period is estimated at $18\%,$ while the

government of Ghana$$s four$-$year note trades at a rate of $8\%.$

ii$.$ Givers Industries Ltd has issued irredeemable preference shares for a value of GHS$15$

million. This consists of $500,000$ preference shares. The total annual dividend to preference

shareholders is $12\mathrm{.}5\%.$ The last traded price of a preference share was GHS$20.$

iii. Irredeemable, non$-$quoted long$-$term borrowings of Givers Industries Ltd were GHS$15$

million with an annual real interest rate of $25\%.$ The market value of its debt stock, which

is not redeemable, is currently valued at GHS$15,000,000.$ The company pays income tax at

the rate of $30\%.$

You are required to:

a$.$ Estimate the cost of capital for the proposed project in terms of market values. $[8$ marks$]$

b$.$ Using $($a$),$ evaluate the proposal and advise whether the investment is financially viable using

the following techniques:

i$.$ Net present value $[20$ marks$]$

ii$.$ Payback period and Discounted Payback $[6$ marks$]$

iii. Internal Rate of Return $($Assume a second rate of $5\%$ above the cost of capital$)[6$ marks$]$

c$.$ What is the critical role of a finance manager in any investment appraisal project? $[10$ marks$]$

$[$Total $=50$ marks$]$