FIN4284/FIN4274 MANAGEMENT ACCOUNTING

QUESTION 1 Borno Chemicals plc is considering buying some equipment to produce a chemical named XYZ. The new equipment's capital cost is estimated at RM90 000 and if its purchase is approved now, the equipment can be bought and commence production by the end of this year. RM60 000 has already been spent on research and development work. Estimates of revenues and costs arising from the operation of the equipment as follows: Year 1 Year Year Year Year 2 3 4 5 Sales price RM per unit (Selling |110 130 130 110 90 price) Sales volume (units) 800 1000 1200 1000 800 Variable costs (RM per unit) 60 60 50 40 50 Fixed costs (RMOOO) (depreciation 30 30 30 30 30 and allocated amount) If the equipment is bought, sales of some existing products will be lost and this will result in a loss of contribution of RM20 000 a year over its life. The accountant has informed you that the fixed costs include depreciation of RM20 000 a year on the new equipment. They also include an allocation of RM10 000 for fixed overheads. A separate study has indicated that if the new equipment were bought additional overheads excluding depreciation arising from producing the chemical would be RM7 000 a year. Production would require additional working capital of RM45 000. Discount rate is 10 percent. Ignore taxations. Required: a. Calculate the net present value, internal rate of return, accounting rate of return and payback period of the planned investment project. (20 marks)