Graduate School of Business Examinations SECTION A: COMPULSORY (ANSWER BOTH QUESTIONS) QUESTION ONE BIL Plc is considering an investment in an ice cream making machine costing K1.5million with a life span of 4 years. The expected annual units of ice cream is 250,000. The selling price is K10 per unit. The material required to make ice cream costs K4.1 per unit. The variable overhead costs are K1.6 per unit. Annual incremental fixed costs are expected to be K150,000. The expected disposal value of the machine is K100,000. The applicable inflation rate starting from the first year is 11% for selling price and 10% for variable costs. The minimum expected rate of return by the company investors is 12%. Corporate tax is 30% per year. Required i). Evaluate whether the company should take this project or not using NPV. ii). Evaluate whether the company should take this project or not using IRR. iii). Explain the concept of time value of money in finance. (13 marks) (7 marks) (5 marks) [Total: 25 marks]
Graduate School of Business Examinations SECTION A: COMPULSORY (ANSWER BOTH QUESTIONS) QUESTION ONE BIL Plc is considering an investment in an ice cream making machine costing K1.5million with a life span of 4 years. The expected annual units of ice cream is 250,000. The selling price is K10 per unit. The material required to make ice cream costs K4.1 per unit. The variable overhead costs are K1.6 per unit. Annual incremental fixed costs are expected to be K150,000. The expected disposal value of the machine is K100,000. The applicable inflation rate starting from the first year is 11% for selling price and 10% for variable costs. The minimum expected rate of return by the company investors is 12%. Corporate tax is 30% per year. Required i). Evaluate whether the company should take this project or not using NPV. ii). Evaluate whether the company should take this project or not using IRR. iii). Explain the concept of time value of money in finance. (13 marks) (7 marks) (5 marks) [Total: 25 marks]
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
![Graduate School of Business Examinations
SECTION A: COMPULSORY (ANSWER BOTH QUESTIONS)
QUESTION ONE
BIL Plc is considering an investment in an ice cream making machine costing K1.5million with a life span of
4 years. The expected annual units of ice cream is 250,000. The selling price is K10 per unit. The material
required to make ice cream costs K4.1 per unit. The variable overhead costs are K1.6 per unit. Annual
incremental fixed costs are expected to be K150,000. The expected disposal value of the machine is K100,000.
The applicable inflation rate starting from the first year is 11% for selling price and 10% for variable costs.
The minimum expected rate of return by the company investors is 12%. Corporate tax is 30% per year.
Required
i). Evaluate whether the company should take this project or not using NPV.
ii). Evaluate whether the company should take this project or not using IRR.
iii). Explain the concept of time value of money in finance.
(13 marks)
(7 marks)
(5 marks)
[Total: 25 marks]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F79899099-5455-4806-b439-058262d8827e%2F0694c90c-ebb7-4def-b51d-8ab3c6c5bfa8%2Fmrj2tmj_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Graduate School of Business Examinations
SECTION A: COMPULSORY (ANSWER BOTH QUESTIONS)
QUESTION ONE
BIL Plc is considering an investment in an ice cream making machine costing K1.5million with a life span of
4 years. The expected annual units of ice cream is 250,000. The selling price is K10 per unit. The material
required to make ice cream costs K4.1 per unit. The variable overhead costs are K1.6 per unit. Annual
incremental fixed costs are expected to be K150,000. The expected disposal value of the machine is K100,000.
The applicable inflation rate starting from the first year is 11% for selling price and 10% for variable costs.
The minimum expected rate of return by the company investors is 12%. Corporate tax is 30% per year.
Required
i). Evaluate whether the company should take this project or not using NPV.
ii). Evaluate whether the company should take this project or not using IRR.
iii). Explain the concept of time value of money in finance.
(13 marks)
(7 marks)
(5 marks)
[Total: 25 marks]
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