7950final_mafa_nov05.pdf - PAPER \u2013 2 MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS Question No 1 is compulsory Answer any four questions from the rest

7950final_mafa_nov05.pdf - PAPER – 2 MANAGEMENT...

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PAPER – 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS Question No. 1 is compulsory. Answer any four questions from the rest. Figures in the margin indicate marks allotted to each question. Working notes should form part of the answer. Question 1 (a) Engineers Ltd. is in the business of manufacturing nut bolts. Some more product lines are being planned to be added to the existing system. The machinery required may be bought or may be taken on lease. The cost of machine is Rs. 20,00,000 having a useful life of 5 years with the salvage value of Rs. 4,00,000 (consider short term capital loss/gain for the Income tax). The full purchase value of machine can be financed by bank loan at the rate of 20% interest repayable in five equal instalments falling due at the end of each year. Alternatively, the machine can be procured on a 5 years lease, year- end lease rentals being Rs. 6,00,000 per annum. The Company follows the written down value method of depreciation at the rate of 25 per cent. Company’s tax rate is 35 per cent and cost of capital is 14 per cent. (i) Advise the company which option it should choose – lease or borrow. (ii) Assess the proposal from the lessor’s point of view examining whether leasing the machine is financially viable at 14 per cent cost of capital. Detailed working notes should be given. (b) Determine the risk adjusted net present value of the following projects: X Y Z Net cash outlays (Rs.) 2,10,000 1,20,000 1,00,000 Project life 5 years 5 years 5 years Annual Cash inflow (Rs.) 70,000 42,000 30,000 Coefficient of variation 1.2 0.8 0.4 The Company selects the risk-adjusted rate of discount on the basis of the coefficient of variation: Coefficient of Variation Risk-Adjusted Rate of Return P.V. Factor 1 to 5 years At risk adjusted rate of discount 0.0 10% 3.791 0.4 12% 3.605 0.8 14% 3.433 1.2 16% 3.274 1.6 18% 3.127 2.0 22% 2.864 More than 2.0 25% 2.689 (14 + 6 = 20 Marks)
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FINAL EXAMINATION : NOVEMBER, 2005 20 Answer (a) Discounting Factor: Cost of finance 20% - Tax 35% = 13%. (i) PV of cash outflows under leasing alternative Year-end Lease rent after taxes P.A. PVIFA at 13% Total P.V. 1 - 5 Rs. 3,90,000 3.517 Rs. 13,71,630 PV of cash outflows under buying alternative Year end Loan Instalment Tax advantage on Interest Tax advantage on Depreciation Net Cash Outflow PVIF at 13% Total PV 1 6,68,673 1,40,000 1,75,000 3,53,673 0.885 3,13,001 2 6,68,673 1,21,193 1,31,250 4,16,230 0.783 3,25,908 3 6,68,673 98,624 98,438 4,71,611 0.693 3,26,826 4 6,68,673 71,542 73,828 5,23,303 0.613 3,20,785 5 6,68,673 38,819 55,371 5,74,483 0.543 3,11,944 Total PV outflows 15,98,464 Less: PV of Salvage Value (Rs. 4,00,000 *0.543) 2,17,200 13,81,264 Less: PV of tax saving on short term capital loss (4,74,609 – 4,00,000) * 35% * .543 14,179 NPV of Cash outflow 13,67,085 Working Notes: (1) Schedule of Debt Payment Year- end Opening balance Interest @ 20% Repayment Closing Balance Principal Amount 1 20,00,000 4,00,000 6,68,673 17,31,327 2,68,673 2 17,31,327 3,46,265 6,68,673 14,08,919 3,22,408 3 14,08,919 2,81,784 6,68,673 10,22,030 3,86,889 4 10,22,030 2,04,406 6,68,673 5,57,763 4,64,267 5 5,57,763 1,10,910* 6,68,673 0 5,57,763 *Balancing Figure
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PAPER – 2 : MANAGEMENT ACCOUNTING AND FINANCIAL ANALYSIS 21 (2) Schedule of Depreciation Year Opening WDV Depreciation Closing WDV 1 20,00,000 5,00,000 15,00,000 2 15,00,000 3,75,000 11,25,000 3 11,25,000 2,81,250 8,43,750 4 8,43,750 2,10,938 6,32,812 5 6,32,812 1,58,203 4,74,609 (3) EMI = Rs.20,00,000 / Annuity for 5 years @ 20% = i.e. Rs.20,00,000 / 2.991 = Rs. 6,68,673.
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