- 15 Marks
MA – Mar 2024 – L2 – Q4a – Decision making techniques
This question evaluates two investment proposals using the payback period method and addresses factors affecting the reliability of cash flows.
Question
The following mutually exclusive investment opportunities are being proposed to Kwame, who wants reliable cash receipts on an annual basis:
Proposal A:
Purchase of a commercial vehicle at the cost of GH¢90,000 that will generate weekly sales of GH¢800. The owner will incur the following annual expenses on the vehicle:
| Expenses | GH¢ |
|---|---|
| Insurance | 1,200 |
| Tyres | 10,400 |
| Roadworthy | 1,400 |
| Routine maintenance | 9,000 |
Note: Assume 52 weeks in a year.
Proposal B:
The repair of an unoccupied two-bedroom flat at the cost of GH¢90,000. The flat was bought by Kwame for GH¢650,000 three years ago. The monthly rental will be GH¢1,450 subject to 8% rent tax. The owner will also pay property tax of GH¢1,200 per year.
Required:
i) Advise Kwame which of the proposals is acceptable using the payback period method of investment appraisal. (8 marks)
ii) Explain TWO (2) factors that can affect the reliability of the cash flow of the transport business. (2 marks)
iii) State TWO (2) qualitative factors that may influence the decision to opt for proposal B. (2 marks)
iv) Explain TWO (2) reasons the NPV may be a better appraisal technique than the payback period. (3 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Cash Flow, Investment Appraisal, Payback Period, Rental Business, Transport Business
- Level: Level 2
- Topic: Decision making techniques
- Series: MAR 2024