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(ii) Comment briefly on the use of its own tree plantations as a source of raw materials by Our Timbers Ltd.
(3 marks)
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Production and sales from the new machine are expected to be 100,000 units per year. Each unit can be sold for $16 per unit and will incur variable costs of $11 per unit. Incremental fixed costs arising from the operation of the machine will be $160,000 per year.
Warden Co has an after-tax cost of capital of 11% which it uses as a discount rate in investment appraisal. The company pays profit tax one year in arrears at an annual rate of 30% per year. Capital allowances and inflation should be ignored.
Required:
(a) Calculate the net present value of investing in the new machine and advise whether the investment is financially acceptable. (7 marks)
(b) Calculate the internal rate of return of investing in the new machine and advise whether the investment is financially acceptable. (4 marks)
(c) (i) Explain briefly the meaning of the term ‘sensitivity analysis’ in the context of investment appraisal; (1 mark) (ii) Calculate the sensitivity of the investment in the new machine to a change in selling price and to a change in discount rate, and comment on your findings. (6 marks)
(d) Discuss the nature and causes of the problem of capital rationing in the context of investment appraisal, and explain how this problem can be overcome in reaching the optimal investment decision for a company. (7 marks)
Required:
(iii) A firm of consultants has offered to undertake a study on behalf of Envico Ltd which will provide perfect
information regarding seminar attendance during the forthcoming year.
Advise the management of Envico Ltd with regard to the maximum amount that they should pay to
consultants for perfect information regarding seminar attendance and comment briefly on the use of
perfect information in such decisions. (5 marks)
(ii) Briefly discuss TWO factors which could reduce the rate of return earned by the investment as per the
results in part (a). (4 marks)
(ii) Briefly explain the extent to which the application of sensitivity analysis might be useful in deciding
which refrigeration system to purchase and discuss the limitations inherent in its use. (3 marks)
(ii) Briefly outline the tax consequences for Henry if the types of protection identified in (i) were to be
provided for him by Happy Home Ltd compared to providing them for himself. You are not required to
discuss the corporation tax (CT) consequences for Happy Home Ltd. (4 marks)
(ii) Briefly discuss THREE disadvantages of using EVA？ in the measurement of financial performance.
(3 marks)
(ii) Briefly discuss FOUR non-financial factors which might influence the above decision. (4 marks)
(ii) Comment on the figures in the statement prepared in (a)(i) above. (4 marks)
(ii) Briefly explain the implications of Parr & Co’s audit opinion for your audit opinion on the consolidated
financial statements of Cleeves Co for the year ended 30 September 2006. (3 marks)
budgeting approaches.
However, academic studies (e.g. Beyond Budgeting – Hope & Fraser) argue that the annual budget model may be
seen as (i) having a number of inherent weaknesses and (ii) acting as a barrier to the effective implementation of
alternative models for use in the accomplishment of strategic change.
Required:
(a) Identify and comment on FIVE inherent weaknesses of the annual budget model irrespective of the budgeting
approach that is applied. (8 marks)
