Question 2) Short-Term decision making and C-V-P analysis
Weighting of the question 2 in portfolio part 1 is 25%
Able Plus Inc. manufactures and sells wheelchairs. The company sales figures were at £690,000 the last quarter. The investment cost in plant and machinery were at £245,000. The company was able to sell each wheelchair at the cost of £20, out of which about £12 could be attributed to variable expenses.
1) Compute the Contribution margin and Contribution margin ratio (4 marks)?
2) Estimate the quarterly break-even point in units sold and in sales pound (4 marks)?
3) How many units would have to be sold each quarter to earn a target profit of £100,000? (2 marks)
4) Compute the company’s margin of safety in both pound and percentage terms? (4 marks)
5) If the sales increase by £60,000 in the next quarter and there is no change in fixed expenses, by how much % age do you expect quarterly profits to increase? (3 marks)
6) Draw a CVP graph for volume range of 0 units to 60,000 units with an increment of 10,000 units. Indicate the break-even point and profit and loss areas (8 marks)
Question 3) Capital Investment Appraisal
Weighting of the question 3 in portfolio 1 is 35%
Flawless Gravel Ltd. is considering a new capital investment to last for 5 years and the financial manager is faced with three alternatives; project L, M and N. The initial outlay at Year 0, along with the expected cash flow at the end of each financial year are provided below. All projects are expected to have no scrap value but no cost of abandonment either. Using various investment appraisal techniques, you are asked to help the financial manager in making her decision on which project to undertake. State your preference for each project in line with the advantages and disadvantages of each of the method used. Use appropriate in-text citation and referencing to justify your points.
Project Investment Outlay at Year 0
End of Year 1 Cash Flow
End of Year 2 Cash Flow
End of Year 3 Cash Flow
End of Year 4 Cash Flow
End of Year 5 Cash Flow
1) Rank projects using Payback period method (5 marks).
2) Considering company maximum acceptable Payback Period to be 3 years. Which of the 3 project/projects is worth considering for investment based on the payback period method? (3 marks).
3) Rank projects using Discounted Payback Period method. Consider discount rate of 15% (5 marks).
4) Considering company maximum acceptable Payback Period to be 3 years. Which of the 3 project/projects is worth considering for investment based on the discounted payback period method? (3 marks).
5) Rank projects using Net Present Value method. Consider discount rate of 15% (5 marks).
6) Which of the 3 project/projects is worth considering for investment based on the NPV method? (3 marks).
7) Rank projects using Internal rate of return (IRR) method (5 marks).
8) If the company’s required rate of return is at 20%. Which of the 3 project/projects is/are worth considering for investment based on the IRR method? (3 marks).
9) Provide an overall conclusion of the most appropriate method you would consider for evaluating the three projects and Why? Justify your recommendations? (3 marks).