Question Tag: Inflation

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FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

Question

Santrofi PLC is a publisher that wants to expand its market share in magazine publications. The company plans to launch two new products, Agbui and Loloi, at the start of January 2025, which it believes will each have a 4-year life span. The sales mix is assumed to be fixed. The information below is relevant:

Expected sales volumes (units) for Agbui:

Year	1	2	3	4
Volume	30,000	55,000	50,000	15,000

The first year’s selling price and direct material costs for each Agbui unit will be GH¢31 and GH¢12, respectively. On the other hand, the company expects to sell 25% more Loloi units than Agbui. Both selling price and direct material cost of Loloi are expected to be 25% less than Agbui’s.
Incremental fixed production costs are expected to be GH¢500,000 in the first year of operation, apportioned based on revenue. Advertising costs will be GH¢250,000 in the first year of operation and then GH¢125,000 per year for the following two years.
To produce the two products, an investment of GH¢1 million in machinery and GH¢500,000 in working capital will be needed, payable at the start of the period. Santrofi PLC expects to recover GH¢600,000 from the sale of machinery at the end of the project life. Investment in machinery attracts a 100% first-year tax-allowable depreciation. The company has sufficient profit to take full advantage of the allowance in Year 1. For the purpose of reporting accounting profit, the company depreciates machinery on a four-year straight-line basis.
Revenue and costs are expected to be affected by inflation after the first year as follows:
- Selling price: 3% a year
- Direct material cost: 3% a year
- Fixed production cost: 5% a year
The company’s real discount rate is 10% for investment appraisal. Average inflation is deemed to be 3%. The applicable corporate tax rate is 25%.

Required:
Calculate the Net Present Value (NPV) of the proposed investment in the two products and advise the company on its investment appraisal.

Answer

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Tags: Corporate Tax, Discounted Cash Flow, Inflation, Investment Appraisal, Machinery Investment, Net Present Value
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: Nov 2024

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

Question

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 export from Nigeria to the country. The project is expected to cost F$1 billion, including F$200 million for working capital.

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

Details	Figures
Annual production and sales	110,000 units
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$50 million

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 realizable value of the non-current assets will be F$1.40 billion.

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 of 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 = ₦1. 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:

Show all workings and calculations to the nearest million.
State all reasonable assumptions. (18 Marks)

(b) State two further information and analysis that might be useful in evaluating this project. (2 Marks)

Answer

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Tags: Cost of Capital, Exchange Rate, Foreign Investment, Inflation, Net Present Value
Level: Level 3

Topic: International financial management

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

Question

The following draft appraisal of a proposed investment project has been prepared for the Finance Director of Keke Plc (KP) by a trainee accountant. The project is consistent with the current business operations of KP.

Year	1	2	3	4	5
Sales (units/yr)	250,000	400,000	500,000	250,000
Contribution (₦000)	13,300	21,280	26,600	13,300	–
Fixed costs (₦000)	(5,300)	(5,618)	(5,955)	(6,312)	–
Depreciation (₦000)	(4,375)	(4,375)	(4,375)	(4,375)	–
Interest payments (₦000)	(2,000)	(2,000)	(2,000)	(2,000)	–
Taxable profit (₦000)	1,625	9,287	14,270	613
Taxation (₦000)	–	(488)	(2,786)	(4,281)	(184)
Profit after tax (₦000)	1,625	8,799	11,484	(3,668)	(184)
Scrap value (₦000)	–	–	–	2,500	–
After-tax cash flows (₦000)	1,625	8,799	11,484	(1,168)	(184)
Discount at 10%	0.909	0.826	0.751	0.683	0.621
Present values (₦000)	1,477	7,268	8,624	(798)	(114)

Net present value = (16,457,000 – 20,000,000) = ₦3,543,000, so reject the project.

Additional Information:

The initial investment is ₦20 million.
Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year.
Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year.
Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year.
₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by annual charges to the project.
Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year.
Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year.
The scrap value of machinery at the end of the four-year project is ₦2,500,000.
The real weighted average cost of capital of Keke is 7% per year.
The general rate of inflation is expected to be 4.7% per year.

Required:

a. Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
(4 Marks)

b. Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability.
(12 Marks)

c. Discuss the problems faced when undertaking investment appraisal in the following areas and comment on how these problems can be overcome:
i. An investment project has several internal rates of return;
ii. The business risk of an investment project is significantly different from the business risk of current operations.
(4 Marks)

(Total: 20 Marks)

Answer

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Tags: Business risk, Depreciation, Discount rate, Fixed Costs, Inflation, Internal Rate of Return (IRR), Investment Appraisal, Net Present Value (NPV)
Level: Level 3

Topic: Investment Appraisal Techniques
Series: MAY 2024

BMF – May 2018 – L1 – SB – Q3b – The Business Environment

Discusses implications of a fall in the value of a nation’s currency.

Question

State the implications of a fall in the value of a nation’s currency.

Answer

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Tags: Currency Value, Economic Impact, Inflation, Trade Balance
Level: Level 1

Topic: The Business Environment
Series: MAY 2018

BMF – May 2021 – L1 – SB – Q1c – The Business Environment

State ten possible economic impacts of the removal of fuel subsidy in Nigeria.

Question

Governments of nations sometimes use economic policies to achieve political, social, or economic objectives. As an integral part of the Nigerian government’s medium-term fiscal framework, there is a proposal to remove fuel subsidy in 2021. According to economic theory, state TEN possible economic impacts of the removal of fuel subsidy in Nigeria.

Answer

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Tags: Economic Impact, Fuel Subsidy, Government Policy, Inflation
Level: Level 1

Topic: The Business Environment
Series: MAY 2021

AFM – Nov 2017 – L3 – Q1a – Role and Responsibility towards Stakeholders

Explains two reasons why interest rates rise in periods of inflation and discuss the implications of high or fluctuating interest rates on business financing and asset-holding decisions.

Question

Under conditions of inflation, it is common for interest rates to rise possibly at a rate different from those applicable to goods and services.

Required:
i) Explain TWO possible reasons for this phenomenon.

(3 marks)

ii)

Discuss the implications of high or fluctuating interest rates for:

Business financing; and (3 marks)
Assets-holding decisions. (3 marks)

(Give examples of the types of actions that a company might take)

Answer

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Tags: Asset Holding Decisions, Business Financing, Financial planning, Inflation, Interest rates, Liquidity
Level: Level 3

Topic: Role and Responsibility towards Stakeholders
Series: NOV 2017

CR – May 2018 – L3 – Q4b – Presentation of financial statements

Explain three problems that arise when using ratios to compare the performance of two companies.

Question

Fordland Ltd and Fiatland Ltd are two companies in the garment industry. The following are financial ratios computed by the Research Department of ICAG as part of analyzing companies’ performance industry by industry.

Required:
Explain THREE problems that are inherent when ratios are used to compare the performance of two companies, even in the same industry.

Answer

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Tags: Accounting Policies, Financial Statements, Industry comparison, Inflation, Performance Comparison, Ratio Analysis
Level: Level 3

Topic: Presentation of financial statements
Series: MAY 2018

BMIS – Dec 2023 – L1 – Q2b – The external environment

Outlines five effects that inflation can have on an economy.

Question

The global economic challenges have largely been fueled by demand-pull inflation or cost-push inflation. Many governments have initiated measures to mitigate the associated effects.

Required:

Outline FIVE (5) effects inflation have on an economy.

Answer

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Tags: Economic Impact, Inflation, Macroeconomics
Level: Level 1

Topic: The external environment
Series: DEC 2023

FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

Question

Expected sales volumes (units) for Agbui:

Year	1	2	3	4
Volume	30,000	55,000	50,000	15,000

The first year’s selling price and direct material costs for each Agbui unit will be GH¢31 and GH¢12, respectively. On the other hand, the company expects to sell 25% more Loloi units than Agbui. Both selling price and direct material cost of Loloi are expected to be 25% less than Agbui’s.
Incremental fixed production costs are expected to be GH¢500,000 in the first year of operation, apportioned based on revenue. Advertising costs will be GH¢250,000 in the first year of operation and then GH¢125,000 per year for the following two years.
To produce the two products, an investment of GH¢1 million in machinery and GH¢500,000 in working capital will be needed, payable at the start of the period. Santrofi PLC expects to recover GH¢600,000 from the sale of machinery at the end of the project life. Investment in machinery attracts a 100% first-year tax-allowable depreciation. The company has sufficient profit to take full advantage of the allowance in Year 1. For the purpose of reporting accounting profit, the company depreciates machinery on a four-year straight-line basis.
Revenue and costs are expected to be affected by inflation after the first year as follows:
- Selling price: 3% a year
- Direct material cost: 3% a year
- Fixed production cost: 5% a year
The company’s real discount rate is 10% for investment appraisal. Average inflation is deemed to be 3%. The applicable corporate tax rate is 25%.

Required:
Calculate the Net Present Value (NPV) of the proposed investment in the two products and advise the company on its investment appraisal.

Answer

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Tags: Corporate Tax, Discounted Cash Flow, Inflation, Investment Appraisal, Machinery Investment, Net Present Value
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: Nov 2024

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

Question

Details	Figures
Annual production and sales	110,000 units
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$50 million

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.

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 of the project is 13%.

Required:

(a) Evaluate the proposed investment from the viewpoint of Gugi Plc.
Notes:

Show all workings and calculations to the nearest million.
State all reasonable assumptions. (18 Marks)

(b) State two further information and analysis that might be useful in evaluating this project. (2 Marks)

Answer

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Tags: Cost of Capital, Exchange Rate, Foreign Investment, Inflation, Net Present Value
Level: Level 3

Topic: International financial management

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

Question

Year	1	2	3	4	5
Sales (units/yr)	250,000	400,000	500,000	250,000
Contribution (₦000)	13,300	21,280	26,600	13,300	–
Fixed costs (₦000)	(5,300)	(5,618)	(5,955)	(6,312)	–
Depreciation (₦000)	(4,375)	(4,375)	(4,375)	(4,375)	–
Interest payments (₦000)	(2,000)	(2,000)	(2,000)	(2,000)	–
Taxable profit (₦000)	1,625	9,287	14,270	613
Taxation (₦000)	–	(488)	(2,786)	(4,281)	(184)
Profit after tax (₦000)	1,625	8,799	11,484	(3,668)	(184)
Scrap value (₦000)	–	–	–	2,500	–
After-tax cash flows (₦000)	1,625	8,799	11,484	(1,168)	(184)
Discount at 10%	0.909	0.826	0.751	0.683	0.621
Present values (₦000)	1,477	7,268	8,624	(798)	(114)

Net present value = (16,457,000 – 20,000,000) = ₦3,543,000, so reject the project.

Additional Information:

The initial investment is ₦20 million.
Selling price: ₦120/unit (current price terms), selling price inflation is 5% per year.
Variable cost: ₦70/unit (current price terms), variable cost inflation is 4% per year.
Fixed overhead costs: ₦5,000,000/year (current price terms), fixed cost inflation is 6% per year.
₦2,000,000/year of the fixed costs are development costs that have already been incurred and are being recovered by annual charges to the project.
Investment financing is by a ₦20 million loan at a fixed interest rate of 10% per year.
Keke Plc can claim 25% reducing balance tax allowable depreciation on this investment and pays taxation one year in arrears at a rate of 30% per year.
The scrap value of machinery at the end of the four-year project is ₦2,500,000.
The real weighted average cost of capital of Keke is 7% per year.
The general rate of inflation is expected to be 4.7% per year.

Required:

a. Identify and comment on any errors in the investment appraisal prepared by the trainee accountant.
(4 Marks)

b. Prepare a revised calculation of the net present value of the proposed investment project and comment on the project’s acceptability.
(12 Marks)

(Total: 20 Marks)

Answer

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Tags: Business risk, Depreciation, Discount rate, Fixed Costs, Inflation, Internal Rate of Return (IRR), Investment Appraisal, Net Present Value (NPV)
Level: Level 3

Topic: Investment Appraisal Techniques
Series: MAY 2024

BMF – May 2018 – L1 – SB – Q3b – The Business Environment

Discusses implications of a fall in the value of a nation’s currency.

Question

State the implications of a fall in the value of a nation’s currency.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Currency Value, Economic Impact, Inflation, Trade Balance
Level: Level 1

Topic: The Business Environment
Series: MAY 2018

BMF – May 2021 – L1 – SB – Q1c – The Business Environment

State ten possible economic impacts of the removal of fuel subsidy in Nigeria.

Question

Answer

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Tags: Economic Impact, Fuel Subsidy, Government Policy, Inflation
Level: Level 1

Topic: The Business Environment
Series: MAY 2021

AFM – Nov 2017 – L3 – Q1a – Role and Responsibility towards Stakeholders

Explains two reasons why interest rates rise in periods of inflation and discuss the implications of high or fluctuating interest rates on business financing and asset-holding decisions.

Question

Under conditions of inflation, it is common for interest rates to rise possibly at a rate different from those applicable to goods and services.

Required:
i) Explain TWO possible reasons for this phenomenon.

(3 marks)

ii)

Discuss the implications of high or fluctuating interest rates for:

Business financing; and (3 marks)
Assets-holding decisions. (3 marks)

(Give examples of the types of actions that a company might take)

Answer

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Tags: Asset Holding Decisions, Business Financing, Financial planning, Inflation, Interest rates, Liquidity
Level: Level 3

Topic: Role and Responsibility towards Stakeholders
Series: NOV 2017

CR – May 2018 – L3 – Q4b – Presentation of financial statements

Explain three problems that arise when using ratios to compare the performance of two companies.

Question

Answer

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Tags: Accounting Policies, Financial Statements, Industry comparison, Inflation, Performance Comparison, Ratio Analysis
Level: Level 3

Topic: Presentation of financial statements
Series: MAY 2018

BMIS – Dec 2023 – L1 – Q2b – The external environment

Outlines five effects that inflation can have on an economy.

Question

The global economic challenges have largely been fueled by demand-pull inflation or cost-push inflation. Many governments have initiated measures to mitigate the associated effects.

Required:

Outline FIVE (5) effects inflation have on an economy.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Economic Impact, Inflation, Macroeconomics
Level: Level 1

Topic: The external environment
Series: DEC 2023

Question Tag: Inflation

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FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

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FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

You're reporting an error for "FM – Nov 2016 – L3 – Q4 – International Financial Management"

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

You're reporting an error for "FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques"

BMF – May 2018 – L1 – SB – Q3b – The Business Environment

Discusses implications of a fall in the value of a nation’s currency.

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BMF – May 2021 – L1 – SB – Q1c – The Business Environment

State ten possible economic impacts of the removal of fuel subsidy in Nigeria.

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AFM – Nov 2017 – L3 – Q1a – Role and Responsibility towards Stakeholders

Explains two reasons why interest rates rise in periods of inflation and discuss the implications of high or fluctuating interest rates on business financing and asset-holding decisions.

You're reporting an error for "AFM – Nov 2017 – L3 – Q1a – Role and Responsibility towards Stakeholders"

CR – May 2018 – L3 – Q4b – Presentation of financial statements

Explain three problems that arise when using ratios to compare the performance of two companies.

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BMIS – Dec 2023 – L1 – Q2b – The external environment

Outlines five effects that inflation can have on an economy.

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FM – Nov 2024 – L2 – Q2 – Investment Appraisal

Calculate the NPV of launching two new products, Agbui and Loloi, and advise on the investment decision.

You're reporting an error for "FM – Nov 2024 – L2 – Q2 – Investment Appraisal"

FM – Nov 2016 – L3 – Q4 – International Financial Management

Evaluate a foreign investment decision for Gugi Plc, including cash flow, tax, and exchange rate considerations.

You're reporting an error for "FM – Nov 2016 – L3 – Q4 – International Financial Management"

FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques

Evaluate a proposed investment for Keke Plc, identify errors in the initial appraisal, recalculate NPV, and discuss IRR and business risk issues.

You're reporting an error for "FM – May 2024 – L3 – SB – Q2 – Investment Appraisal Techniques"

BMF – May 2018 – L1 – SB – Q3b – The Business Environment

Discusses implications of a fall in the value of a nation’s currency.

You're reporting an error for "BMF – May 2018 – L1 – SB – Q3b – The Business Environment"

BMF – May 2021 – L1 – SB – Q1c – The Business Environment

State ten possible economic impacts of the removal of fuel subsidy in Nigeria.

You're reporting an error for "BMF – May 2021 – L1 – SB – Q1c – The Business Environment"

AFM – Nov 2017 – L3 – Q1a – Role and Responsibility towards Stakeholders

Explains two reasons why interest rates rise in periods of inflation and discuss the implications of high or fluctuating interest rates on business financing and asset-holding decisions.

You're reporting an error for "AFM – Nov 2017 – L3 – Q1a – Role and Responsibility towards Stakeholders"

CR – May 2018 – L3 – Q4b – Presentation of financial statements

Explain three problems that arise when using ratios to compare the performance of two companies.

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BMIS – Dec 2023 – L1 – Q2b – The external environment

Outlines five effects that inflation can have on an economy.

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