Question Tag: Cash Flow Analysis

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

Gugi Plc. is a highly successful manufacturing company operating in Nigeria. In addition to sales within Nigeria, the company also exports to a foreign country (with currency F$) along the ECOWAS sub-region. The export sales generate annual net cash inflow of ₦50,000,000. Gugi Plc. is now considering whether to establish a factory in the foreign country and stop exporting from Nigeria to the country. The project is expected to cost F$1 billion, including F$200million for working capital.

A suitable existing factory has been located, and production could commence immediately. A payment of F$950million would be required immediately, with the remainder payable at the end of year one. The following additional information is available:

  • Annual production and sales in units: 110,000
  • Unit selling price: F$5,000
  • Unit variable cost: F$2,000
  • Unit royalty payable to Gugi Plc: ₦300
  • Incremental annual cash fixed costs: F$50million

Assume that the above cash items will remain constant throughout the expected life of the project of 4 years. At the end of year 4, it is estimated that the net realisable value of the non-current assets will be F$1.40billion.

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

If the new factory is set up and export to the foreign country is stopped, it is expected that new export markets of a similar worth in North Africa could replace the existing exports.

Production in Nigeria is at full capacity, and there are no plans for further capacity expansion.

Tax on the company’s profits is at a rate of 40% in both countries, payable one year in arrears. A double taxation agreement exists between Nigeria and the foreign country, and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the foreign country to Nigeria.

Tax allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital for the project is 13%.

Annual inflation rates in Nigeria and the foreign country are currently 5.6% and 10%, respectively. These rates are expected to remain constant in the foreseeable future. The current spot exchange rate is F$1.60 = N1. You may assume that the exchange rate reflects the purchasing power parity theorem.

Required:
a. Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:
i. Show all workings and calculations to the nearest million.
ii. State all reasonable assumptions. (18 Marks)

b. State TWO further information and analysis that might be useful in the evaluation of this project?

(2 Marks)

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  • 20 Marks

CR – May 2016 – L3 – Q2 – Introduction to Corporate Reporting

Analyze Ehis Marvel Plc's financial performance and assess clothing and food sales divisions' contributions.

Ehis Marvel, a public company, is a high street retailer that sells clothing and food. The managing director is very disappointed with the current year’s result. The company expanded its operations and commissioned a famous designer to restyle its clothing products. This has led to increased sales in both retail lines, yet overall profits are down.

Extract from the Income Statement for the two years to March 31, 2016, are shown:

Ehis Marvel Plc – Statement of cash flow for the year to March 31, 2016

(ii) The share price of Ehis Marvel Plc averaged N6.00 during the year to March 31, 2015, but was only N3.00 at March 31, 2016.

Required:
Write a report analysing the financials of Ehis Marvel Plc, utilising the above ratios and the information in the statement of cash flows for the two years ended March 31, 2016. Your report should refer to the relative performance of the clothing and food sales and be supported by any further ratios you consider appropriate.

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  • 20 Marks

FM – Nov 2020 – L3 – Q6 – Dividend Policy

Evaluates the dividend payout and investment appraisal for Binko Industrial Services based on Modigliani and Miller's dividend policy, considering four potential projects.

Binko Industrial Services plc is an all-equity financed and Stock Exchange-listed company. Recently, there have been changes at the board level, prompting a shift from conservative profit distribution to seeking new investment opportunities. In the financial year just ended, the company reported a profit of ₦50 million, similar to previous years. The company’s cost of equity is 15% per annum, and four investment projects have been identified, each with the same risk class as existing projects.

Required:

a. Calculate the dividend Binko Industrial Services plc should pay to shareholders in the financial year just ended, based on Modigliani and Miller’s 1961 proposition, ignoring taxation. (5 Marks)

b. Prepare notes for the board meeting, explaining Modigliani and Miller’s dividend policy proposition and reasons why the company may decide against the calculated dividend in (a). Your comments should address Binko’s circumstances. Work to the nearest ₦1,000. (15 Marks)

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  • 20 Marks

BMF – Nov 2020 – L1 – SB – Q5 – Investment Decisions

Evaluate the investment project using IRR and advise management on the project feasibility.

Uhuru Nigeria Limited wants to buy a new item of equipment which will be used to improve service delivery to its customers. Using the internal rate of return (IRR) method of investment appraisal, you are required to evaluate the project and advise the management of the company. Estimated cash flows from the project are as provided below:

Year Cash Flow (N)
0 (400,000)
1 140,000
2 150,000
3 170,000
4 190,000

The expected minimum required rate of return of the company is fixed at 25%.

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  • 30 Marks

PM – Nov 2015 – L2 – Q1 – Decision-Making Techniques

Comparison of two machine purchase options - ZIGMA 5000 and DELPHA 7000 using profitability statement, cash flows, payback period and NPV.

The Board of Directors of Danda Company Limited is proposing the purchase of either of two machines that have been proved adequate for the production of an engineering product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in the first year would be affected by installation challenges and inadequate understanding of the operating instructions of the machines.

Information available from the production profile of the two machines are as shown below:

ZIGMA 5000:

Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:

Cost of plant is N18,300,000 while the life span is 6 years.

Other information relevant to the company’s operations and administration are:

(i) Selling price per unit is N300.

(ii) Variable cost per unit is N150.

(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.

(iv) Company depreciation policy is straight line basis.

(v) The budgeted production capacity is 100,000 units.

(vi) No opening or closing inventory is envisaged.

(vii) All sales are for cash.

(viii) All costs are for cash.

Required:

a. Prepare the SIX year profitability statement for the two machines. (6 Marks)

b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)

c. What is the payback period for the two machines? (7 Marks)

d. Determine the Net Present Value (NPV) of the two machines if the acceptable discount rate for the company is 15%. (7 Marks)

e. Which of the two machines should the company acquire? (4 Marks)

 

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  • 20 Marks

BMF – Mar July 2020 – L1 – SB – Q5 – Basics of Business Finance and Financial Markets

Calculating NPV and present value of cash flows for Favour Limited.

(a) Favour Limited is considering a project which will cost N2,000,000 now and generate the following cash flows:

Years Cash Flow (₦)
1-4 500,000 each year
5-8 300,000 each year
9-15 200,000 each year

The company’s cost of capital is 20%.

Required:
What is the NPV of the project?

(b) What is the present value of constant annual cash flows of ₦120,000 at 15% if the cash flow starts:

i. In year 1?
ii. In year 6?
iii. Immediately? (9 marks)

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  • 5 Marks

CR – May 2016 – L3 – Q5b – Analysis and interpretation of financial statements

Evaluate significance of various accounting items

Evaluate with examples, the significance of each of the following to an analyst seeking to estimate the effect on future cash flows or liquidity of a company:
i) a commitment and a contingent liability. (2 marks)
ii) income in advance and a deposit (1.5 marks)
iii) an accrual and a provision (1.5 marks)

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  • 15 Marks

CR – May 2016 – L3 – Q5a – Analysis and interpretation of financial statements

Analyze performance and position of a supermarket chain, addressing concerns about potential financial statement manipulationEvaluate significance of various accounting items.

Mion Ltd is a listed company in Ghana and operates many super markets in Ghana. During the year 2014, there was speculation in the financial press that the entity was likely to be a takeover target for larger companies in Ghana. A recent newspaper publication has suggested that the directors are unlikely to resist a takeover. The seven member board are all nearing retirement and all own significant minority shareholdings in the business.

You have been approached by a private shareholder in Mion Ltd. She is concerned that the directors have conflict of interests and that financial statements for 2014 may have been manipulated. The income statement and summarized statement of changes in equity of Mion together with comparatives for the year ended 31st December 2014 and a statement of financial position as at that date are given below:

INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2014

The following additional information is relevant:

i) Non-current asset turnover (including both tangible and intangible non-current asset): 1.93 ii) Mion Ltd’s directors have undertaken a reassessment of useful lives of non-current tangible assets during the year. In most cases they estimate that the useful lives have increased and the depreciation charges in 2014 have been adjusted accordingly. iii) Six new stores have been opened during 2014, bringing the total to 42. iv) Three key ratios for the supermarket sector (based on the latest available financial statement of 12 listed entities in the sector) are as follows:

  • Annual sales per store: GH¢27.6m
  • Gross Profit margin: 5.9%
  • Net profit margin: 3.9%

Required:
Prepare a report and address to the investor, analyzing the performance and position of Mion Ltd based on the financial statements and supplementary information provided above. The report should also include comparisons with key sector ratios, and it should address the investor’s concerns about the possible manipulation of the 2014 financial statements. (15 marks)

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  • 20 Marks

CR – Mar 2024 – Q5 – Analysis and interpretation of financial statements

Analyze and compare cash flow statements of two companies to recommend an investment choice between them.

You are the Financial Consultant of Nkoso Funds, a pension fund in Ghana. Your company has identified two companies which you have been asked to evaluate as possible investments. The two companies, Trokaa Plc (Trokaa Plc) and Krokro Plc (Krokro Plc), are both publicly held and similar in size. Assume that all other publicly available information, including all climate, sustainability, and governance disclosures, have already been analysed and the decision concerning which company’s shares to acquire depends on their cash flow data given below:

Statement of cash flows for the years ended December 31, 2023 and 2022 Trokaa Plc Krokro Plc

Required:
a) Conduct a horizontal analysis for each of the two companies. (6 marks)

b) Write a report to the investment manager of Nkoso Funds discussing the relative strengths and weaknesses of each of the two companies. Conclude your report by recommending one company’s share as an investment avenue. (14 marks)

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  • 10 Marks

MA – Nov 2017 – L2 – Q1a – Discounted cash flow

Calculate the net present value of a new software game investment project and provide commentary on the findings.

a) Agyasco Ltd, a software company has developed a new game “Lando” which it plans to launch in the near future. Sales volumes, production volumes and selling prices for “Lando” over its four-year life are expected to be as follows:

Financial information on “Lando” for the first year of production is as follows: Direct material cost GH¢5.4 per game Other variable production cost GH¢6.00 per game Fixed costs GH¢4.00 per game.

Advertising costs to simulate demand are expected to be GH¢650,000 in the first year of production and GH¢100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Fixed costs represent incremental cash fixed production overheads. “Lando” will be produced on a new production machine costing GH¢800,000. Although this production machine is expected to have a useful life of up to 10 years, Government legislation allows Agyasco Ltd to claim the capital cost of the machine against the manufacture of a single product. Capital allowances will therefore be claimed on a straight-line basis over four years.

Agyasco Ltd pays tax on profit at a rate of 30% per annum and tax liabilities are settled in the year in which they arise. Agyasco Ltd uses an after-tax discount rate of 10% when appraising new capital investments. Ignore inflation.

Required: Calculate the net present value of the proposed investment and comment on your findings.

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  • 20 Marks

FM – Nov 2016 – L3 – SB – Q4 – Investment Appraisal Techniques

Evaluate Gugi Plc.'s proposed investment in a foreign factory, considering costs, revenues, tax, and exchange rate impacts.

Gugi Plc. is a highly successful manufacturing company operating in Nigeria. In addition to sales within Nigeria, the company also exports to a foreign country (with currency F$) along the ECOWAS sub-region. The export sales generate annual net cash inflow of ₦50,000,000. Gugi Plc. is now considering whether to establish a factory in the foreign country and stop exporting from Nigeria to the country. The project is expected to cost F$1 billion, including F$200million for working capital.

A suitable existing factory has been located, and production could commence immediately. A payment of F$950million would be required immediately, with the remainder payable at the end of year one. The following additional information is available:

  • Annual production and sales in units: 110,000
  • Unit selling price: F$5,000
  • Unit variable cost: F$2,000
  • Unit royalty payable to Gugi Plc: ₦300
  • Incremental annual cash fixed costs: F$50million

Assume that the above cash items will remain constant throughout the expected life of the project of 4 years. At the end of year 4, it is estimated that the net realisable value of the non-current assets will be F$1.40billion.

It is the policy of the company to remit the maximum funds possible to the parent (i.e., Gugi Plc.) at the end of each year. Assume that there are no legal complications to prevent this.

If the new factory is set up and export to the foreign country is stopped, it is expected that new export markets of a similar worth in North Africa could replace the existing exports.

Production in Nigeria is at full capacity, and there are no plans for further capacity expansion.

Tax on the company’s profits is at a rate of 40% in both countries, payable one year in arrears. A double taxation agreement exists between Nigeria and the foreign country, and no double taxation is expected to arise. No withholding tax is levied on royalties payable from the foreign country to Nigeria.

Tax allowable “depreciation” is at a rate of 25% on a straight-line basis on all non-current assets.

The Directors of Gugi Plc. believe that the appropriate risk-adjusted cost of capital for the project is 13%.

Annual inflation rates in Nigeria and the foreign country are currently 5.6% and 10%, respectively. These rates are expected to remain constant in the foreseeable future. The current spot exchange rate is F$1.60 = N1. You may assume that the exchange rate reflects the purchasing power parity theorem.

Required:
a. Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:
i. Show all workings and calculations to the nearest million.
ii. State all reasonable assumptions. (18 Marks)

b. State TWO further information and analysis that might be useful in the evaluation of this project?

(2 Marks)

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  • 20 Marks

CR – May 2016 – L3 – Q2 – Introduction to Corporate Reporting

Analyze Ehis Marvel Plc's financial performance and assess clothing and food sales divisions' contributions.

Ehis Marvel, a public company, is a high street retailer that sells clothing and food. The managing director is very disappointed with the current year’s result. The company expanded its operations and commissioned a famous designer to restyle its clothing products. This has led to increased sales in both retail lines, yet overall profits are down.

Extract from the Income Statement for the two years to March 31, 2016, are shown:

Ehis Marvel Plc – Statement of cash flow for the year to March 31, 2016

(ii) The share price of Ehis Marvel Plc averaged N6.00 during the year to March 31, 2015, but was only N3.00 at March 31, 2016.

Required:
Write a report analysing the financials of Ehis Marvel Plc, utilising the above ratios and the information in the statement of cash flows for the two years ended March 31, 2016. Your report should refer to the relative performance of the clothing and food sales and be supported by any further ratios you consider appropriate.

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  • 20 Marks

FM – Nov 2020 – L3 – Q6 – Dividend Policy

Evaluates the dividend payout and investment appraisal for Binko Industrial Services based on Modigliani and Miller's dividend policy, considering four potential projects.

Binko Industrial Services plc is an all-equity financed and Stock Exchange-listed company. Recently, there have been changes at the board level, prompting a shift from conservative profit distribution to seeking new investment opportunities. In the financial year just ended, the company reported a profit of ₦50 million, similar to previous years. The company’s cost of equity is 15% per annum, and four investment projects have been identified, each with the same risk class as existing projects.

Required:

a. Calculate the dividend Binko Industrial Services plc should pay to shareholders in the financial year just ended, based on Modigliani and Miller’s 1961 proposition, ignoring taxation. (5 Marks)

b. Prepare notes for the board meeting, explaining Modigliani and Miller’s dividend policy proposition and reasons why the company may decide against the calculated dividend in (a). Your comments should address Binko’s circumstances. Work to the nearest ₦1,000. (15 Marks)

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  • 20 Marks

BMF – Nov 2020 – L1 – SB – Q5 – Investment Decisions

Evaluate the investment project using IRR and advise management on the project feasibility.

Uhuru Nigeria Limited wants to buy a new item of equipment which will be used to improve service delivery to its customers. Using the internal rate of return (IRR) method of investment appraisal, you are required to evaluate the project and advise the management of the company. Estimated cash flows from the project are as provided below:

Year Cash Flow (N)
0 (400,000)
1 140,000
2 150,000
3 170,000
4 190,000

The expected minimum required rate of return of the company is fixed at 25%.

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  • 30 Marks

PM – Nov 2015 – L2 – Q1 – Decision-Making Techniques

Comparison of two machine purchase options - ZIGMA 5000 and DELPHA 7000 using profitability statement, cash flows, payback period and NPV.

The Board of Directors of Danda Company Limited is proposing the purchase of either of two machines that have been proved adequate for the production of an engineering product “Gee”. The two machines are: ZIGMA 5,000 and DELPHA 7,000. Production in the first year would be affected by installation challenges and inadequate understanding of the operating instructions of the machines.

Information available from the production profile of the two machines are as shown below:

ZIGMA 5000:

Cost of machine is N16,500,000 while the life span is 6 years.

DELPHA 7000:

Cost of plant is N18,300,000 while the life span is 6 years.

Other information relevant to the company’s operations and administration are:

(i) Selling price per unit is N300.

(ii) Variable cost per unit is N150.

(iii) Annual fixed overhead exclusive of depreciation is N1,200,000.

(iv) Company depreciation policy is straight line basis.

(v) The budgeted production capacity is 100,000 units.

(vi) No opening or closing inventory is envisaged.

(vii) All sales are for cash.

(viii) All costs are for cash.

Required:

a. Prepare the SIX year profitability statement for the two machines. (6 Marks)

b. Prepare the SIX year cash flow statement for the two machines. (6 Marks)

c. What is the payback period for the two machines? (7 Marks)

d. Determine the Net Present Value (NPV) of the two machines if the acceptable discount rate for the company is 15%. (7 Marks)

e. Which of the two machines should the company acquire? (4 Marks)

 

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  • 20 Marks

BMF – Mar July 2020 – L1 – SB – Q5 – Basics of Business Finance and Financial Markets

Calculating NPV and present value of cash flows for Favour Limited.

(a) Favour Limited is considering a project which will cost N2,000,000 now and generate the following cash flows:

Years Cash Flow (₦)
1-4 500,000 each year
5-8 300,000 each year
9-15 200,000 each year

The company’s cost of capital is 20%.

Required:
What is the NPV of the project?

(b) What is the present value of constant annual cash flows of ₦120,000 at 15% if the cash flow starts:

i. In year 1?
ii. In year 6?
iii. Immediately? (9 marks)

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  • 5 Marks

CR – May 2016 – L3 – Q5b – Analysis and interpretation of financial statements

Evaluate significance of various accounting items

Evaluate with examples, the significance of each of the following to an analyst seeking to estimate the effect on future cash flows or liquidity of a company:
i) a commitment and a contingent liability. (2 marks)
ii) income in advance and a deposit (1.5 marks)
iii) an accrual and a provision (1.5 marks)

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  • 15 Marks

CR – May 2016 – L3 – Q5a – Analysis and interpretation of financial statements

Analyze performance and position of a supermarket chain, addressing concerns about potential financial statement manipulationEvaluate significance of various accounting items.

Mion Ltd is a listed company in Ghana and operates many super markets in Ghana. During the year 2014, there was speculation in the financial press that the entity was likely to be a takeover target for larger companies in Ghana. A recent newspaper publication has suggested that the directors are unlikely to resist a takeover. The seven member board are all nearing retirement and all own significant minority shareholdings in the business.

You have been approached by a private shareholder in Mion Ltd. She is concerned that the directors have conflict of interests and that financial statements for 2014 may have been manipulated. The income statement and summarized statement of changes in equity of Mion together with comparatives for the year ended 31st December 2014 and a statement of financial position as at that date are given below:

INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2014

The following additional information is relevant:

i) Non-current asset turnover (including both tangible and intangible non-current asset): 1.93 ii) Mion Ltd’s directors have undertaken a reassessment of useful lives of non-current tangible assets during the year. In most cases they estimate that the useful lives have increased and the depreciation charges in 2014 have been adjusted accordingly. iii) Six new stores have been opened during 2014, bringing the total to 42. iv) Three key ratios for the supermarket sector (based on the latest available financial statement of 12 listed entities in the sector) are as follows:

  • Annual sales per store: GH¢27.6m
  • Gross Profit margin: 5.9%
  • Net profit margin: 3.9%

Required:
Prepare a report and address to the investor, analyzing the performance and position of Mion Ltd based on the financial statements and supplementary information provided above. The report should also include comparisons with key sector ratios, and it should address the investor’s concerns about the possible manipulation of the 2014 financial statements. (15 marks)

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  • 20 Marks

CR – Mar 2024 – Q5 – Analysis and interpretation of financial statements

Analyze and compare cash flow statements of two companies to recommend an investment choice between them.

You are the Financial Consultant of Nkoso Funds, a pension fund in Ghana. Your company has identified two companies which you have been asked to evaluate as possible investments. The two companies, Trokaa Plc (Trokaa Plc) and Krokro Plc (Krokro Plc), are both publicly held and similar in size. Assume that all other publicly available information, including all climate, sustainability, and governance disclosures, have already been analysed and the decision concerning which company’s shares to acquire depends on their cash flow data given below:

Statement of cash flows for the years ended December 31, 2023 and 2022 Trokaa Plc Krokro Plc

Required:
a) Conduct a horizontal analysis for each of the two companies. (6 marks)

b) Write a report to the investment manager of Nkoso Funds discussing the relative strengths and weaknesses of each of the two companies. Conclude your report by recommending one company’s share as an investment avenue. (14 marks)

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  • 10 Marks

MA – Nov 2017 – L2 – Q1a – Discounted cash flow

Calculate the net present value of a new software game investment project and provide commentary on the findings.

a) Agyasco Ltd, a software company has developed a new game “Lando” which it plans to launch in the near future. Sales volumes, production volumes and selling prices for “Lando” over its four-year life are expected to be as follows:

Financial information on “Lando” for the first year of production is as follows: Direct material cost GH¢5.4 per game Other variable production cost GH¢6.00 per game Fixed costs GH¢4.00 per game.

Advertising costs to simulate demand are expected to be GH¢650,000 in the first year of production and GH¢100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Fixed costs represent incremental cash fixed production overheads. “Lando” will be produced on a new production machine costing GH¢800,000. Although this production machine is expected to have a useful life of up to 10 years, Government legislation allows Agyasco Ltd to claim the capital cost of the machine against the manufacture of a single product. Capital allowances will therefore be claimed on a straight-line basis over four years.

Agyasco Ltd pays tax on profit at a rate of 30% per annum and tax liabilities are settled in the year in which they arise. Agyasco Ltd uses an after-tax discount rate of 10% when appraising new capital investments. Ignore inflation.

Required: Calculate the net present value of the proposed investment and comment on your findings.

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