Fundamentals Level Skills Module, Paper F$9$

Financial Management June $2013$ Answers

$1($a$)$ Net present value of investment in new machinery

Year $12345$

$$000$ $$000$ $$000$ $$000$ $$000$

Sales income $6,0846,3276,5806,844$

Variable cost $(2,374)(2,504)(2,642)(2,787)$

Contribution $3,7103,8233,9384,057$

Fixed costs $(263)(276)(289)(304)$

Cash flow $3,4473,5473,6493,753$

Taxation $(689)(709)(730)(751)$

CA tax benefits $250188141372$

After$-$tax cash flow $3,4473,1083,1283,164(379)$

Working capital $(24)(25)(26)(27)$

Scrap value $250$ Net cash flow $3,4233,0833,1023,387(379)$

Discount at $12\%08930797071206360567$

Present values $3,0572,4572,2092,154(215)$

$$000$

PV of future cash flows $9,662$

Initial investment $(5,000)$

Working capital $(500)$

NPV $4,162$

As the net present value of $$4161$ million is positive, the expansion can be recommended as financially acceptable.

Workings

Year $1234$

Selling price $($$$/$unit$)67600703047311676041$

Sales $($units$/$year$)9,0009,0009,0009,000$

Sales income $($$$000)6,0846,3276,5806,844$

Year $1234$

Variable cost $($$$/$unit$)26375278262935630971$

Sales $($units$/$year$)9,0009,0009,0009,000$

Variable cost $($$$000)2,3742,5042,6422,787$

Year $1234$

$$000$ $$000$ $$000$ $$000$

Capital allowance $1,2500937570311,8594$

Tax benefit $250188141372$

Year $1234$

$$000$ $$000$ $$000$ $$000$

Working capital $52350548115738760084$

Incremental $24252627$

$11$