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QUESTION 1 (24 marks) Forever Green (Pty) Ltd (hereafter referred to as Forever Green) is corn-farming entity Forever Green has been farming and selling corn
QUESTION 1 (24 marks) Forever Green (Pty) Ltd (hereafter referred to as Forever Green) is corn-farming entity Forever Green has been farming and selling corn for over three decades The customer base of Forever Green includes Afncan, European and American countries Forever Green intends to expand its product line into either the farming of sugar cane or potatoes The following information relating sugar cane and potato farming options is made available to you Sugar cane farming option The inexpenenced managerial accountant has calculated the NPV on the sugar cane option as follows ear 1 Year 2 Year 3 Capital Sales Operating exp Administrative exp Depreciation Deferred Tax 500 000 600 000 (200 000) (100 000) (100 000) (50 000) 650 000 900 000 (297 000) (120 000) (100 000) (58 000) 325 000 1 300 000 (310 000) (150 000) (100 000) (59 000) 681 000 Net present value calculated at a tax rate of 28% = R1 030 903 The capital amount represents the initial amount that will be required before the commencement of sugar cane farming Potato farming option The initial capital required before the commencement of the potato farming is R500 00 In year one revenue is estimated at R700 000 with the expected increase of 7% in the second year and 9% in the third year on the second year amount Operating and Administrative expenses are estimated at R350 000 and R250 000 respectively for year one Operating and Administrative expenses will increase by 10% annually from year two Depreciation on the assets to be used in the farming of potatoes is estimated at R100 000 per annum The deferred tax is estimated at R40 000, R55 000 and R60 000 for year-one, two and three respectively The weighted average cost of capital is 20% [TURN OVER) MBL914N JANUARY FEBRUARY 2014 Required: 1 Criticise the work performed by the managerial accountant in calculating the Net Present Value for the sugar cane farming option (20) 2 Perform a free cash flow on both the sugar cane and potato farming options and advice management which option will be best to venture into (16 marks) QUESTION 1 (24 marks) Forever Green (Pty) Ltd (hereafter referred to as Forever Green) is corn-farming entity Forever Green has been farming and selling corn for over three decades The customer base of Forever Green includes Afncan, European and American countries Forever Green intends to expand its product line into either the farming of sugar cane or potatoes The following information relating sugar cane and potato farming options is made available to you Sugar cane farming option The inexpenenced managerial accountant has calculated the NPV on the sugar cane option as follows ear 1 Year 2 Year 3 Capital Sales Operating exp Administrative exp Depreciation Deferred Tax 500 000 600 000 (200 000) (100 000) (100 000) (50 000) 650 000 900 000 (297 000) (120 000) (100 000) (58 000) 325 000 1 300 000 (310 000) (150 000) (100 000) (59 000) 681 000 Net present value calculated at a tax rate of 28% = R1 030 903 The capital amount represents the initial amount that will be required before the commencement of sugar cane farming Potato farming option The initial capital required before the commencement of the potato farming is R500 00 In year one revenue is estimated at R700 000 with the expected increase of 7% in the second year and 9% in the third year on the second year amount Operating and Administrative expenses are estimated at R350 000 and R250 000 respectively for year one Operating and Administrative expenses will increase by 10% annually from year two Depreciation on the assets to be used in the farming of potatoes is estimated at R100 000 per annum The deferred tax is estimated at R40 000, R55 000 and R60 000 for year-one, two and three respectively The weighted average cost of capital is 20% [TURN OVER) MBL914N JANUARY FEBRUARY 2014 Required: 1 Criticise the work performed by the managerial accountant in calculating the Net Present Value for the sugar cane farming option (20) 2 Perform a free cash flow on both the sugar cane and potato farming options and advice management which option will be best to venture into (16 marks)
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