- 20 Marks
FM – March 2023 – L2 – Q4 – DCF: taxation and inflation | Introduction to Investment Appraisal
Explain the stages in the capital investment decision-making process, compute the discounted payback period and Return on Capital Employed for an investment proposal, and describe categories of financial markets with examples.
Question
a) Explain the stages in the Capital Investment decision-making process. (5 marks)
b) Dragon Ltd is evaluating an investment proposal to manufacture a product called “Chiputronic” and the information below has been provided by the Research and Development team:
- Initial Investment: GH¢4 million
- Selling Price (current price terms): GH¢40 per unit
- Expected Selling Price Inflation: 3% per annum
- Variable Operating Cost (current price terms): GH¢16 per unit
- Fixed Operating Cost (current price terms): GH¢340,000
- Expected Operating Cost Inflation: 4% per annum
| Year | Annual Demand (units) |
|---|---|
| 1 | 70,000 |
| 2 | 90,000 |
| 3 | 130,000 |
| 4 | 50,000 |
It is expected that whatever is produced will be sold with no stock left, and there will be no scrap value expected at the end of the four years. The discount rate used in the company is 15%.
Required:
i) Compute the discounted payback period. (5 marks)
ii) Calculate the Return on Capital Employed (Accounting Rate of Return) based on average investment. (5 marks)
c) Financial markets facilitate the interaction between those who need funds and those who have funds to invest.
Required:
Explain TWO (2) categories of financial markets and give TWO (2) examples of each. (5 marks)
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