Advanced You have been appointed as chief management accountant of a well-established company with a brief to improve the quality of information supplied for management decision-making. As a first task you have decided to examine the system used for providing information for capital invest¬ ment decisions. You find that discounted cash flow techniques are used but in a mechanical fashion with no apparent understanding of the figures produced. The most recent example of an invest¬ ment appraisal produced by the accounting depart¬ ment showed a positive net present value of £35 000 for a five-year life project when discounted at 14% which you are informed ‘was the rate charged on the bank loan raised to finance the investment’. You note that the appraisal did not include any consideration of the effects of inflation nor was there any form of risk analysis.

You are required to:

(a)explain the meaning of a positive net present value of £35 000; (4 marks)

overall firm risk see Pike and Neale (1999, Ch. 12) You should refer to Neale and Holmes (1991) for a more detailed explanation of post-completion audits.

profits to work out the tax payment. Taxable profits are calculated by adding back depreciation to accounting profits and then deducting capital allowances. Make sure that you include any balan¬ cing allowance or charge and disposal value in the DCF analysis if the asset is sold.

With inflation, you should discount nominal cash flows at the nominal discount rate. Most questions give the nominal discount rate (also called the money discount rate). You should then adjust the cash flows for inflation. If you are required to choose between alternative projects, check that they have equal lives. If not, use one of the methods described in this chapter.

(b) comment on the appropriateness or otherwise of the discounting rate used; (4 marks)

(c) state whether you agree with the treatment of inflation and, if not, explain how you would deal with inflation in investment appraisals;

(6 marks)

(d) explain what is meant by ‘risk analysis’ and describe ways this could be carried out in investment appraisals and what benefits (if any) this would bring. (6 marks)

(Total 20 marks) CIMA Stage 3 Management Accounting Techniques Pilot Paper