Topic: Performance Evaluation

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  • 20 Marks

PM – May 2022 – L2 – SA – Q3 – Performance Evaluation

Evaluate Uzochuks' financial performance using ARR and EVA, and assess the NPV of a solar project.

Uzochuks Nigeria Limited is a company established four years ago to produce medical equipment. The income statement and statement of financial position for 2019 and 2020 are as follows:

(ii) Economic depreciation is assessed to be N50.5million in 2020. Economic depreciation includes any appropriate amortisation adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.
(iii) Tax is the cash paid in the current year (N16 million) and an adjustment of N2 million for deferred tax provisions. There was no deferred tax balance prior to 2020.
(iv) The provision for doubtful debts was N2.5million on the 2020 statement of financial position.
(v) Research and development is not capitalised in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. 2020 is the first year of this project.
(vi) The company had a non-capitalised leased assets of N18million in January 2020. These assets are not subjected to depreciation.
(vii) Cost of capital of Uzochuks:
Equity 18%
Debt (pre-tax) 6%
(viii) Capital structure of Uzochuks:
Equity 60%
Debt 40%
(ix) The company had the opportunity to invest in a solar project that will require the procurement of an equipment worth N3million in January 2020 and run for a period of 5 years with a salvage value of N0.50million, generating a stable net cash flow of N0.85 million. The applicable cost of capital is the associated weighted average cost of capital of the company.

Required:
a. i. Compute and evaluate the company’s performance using the average rate of return (ARR). (4 Marks)
ii. Compute and evaluate the company’s performance using the economic value added (EVA) parameter. (9 Marks)
b. Calculate the net present value (NPV) of a solar project that will require the procurement of equipment worth N3 million in January 2020, generating a stable net cash flow of N0.85 million annually for five years with a salvage value of N0.50 million. The applicable cost of capital is the associated weighted average cost of capital of the company. (7 Marks)

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  • 20 Marks

MA – Nov 2019 – L2 – Q1a – Performance analysis

Calculation of key financial ratios for GRAT Authority and evaluation of financial performance from 2017 to 2018.

GRAT Authority operates passenger railway services and is responsible for the maintenance of track signaling equipment, and other facilities such as stations. In recent years it has been criticized for providing poor services to the traveling public in terms of punctuality, safety, and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities, and track maintenance programs in an attempt to address these criticisms.

Summarized financial results for GRAT Authority for the last two years are given below:

Extracts of Statement of Profit or Loss account for the year ended 31 December

Statement of Financial Position as at 31 December

Required:

a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings.

i) Return on capital employed (ROCE)
ii) Net profit margin
iii) Asset turnover
iv) Current ratio

b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios.

c) Suggest THREE (3) non-financial indicators that could be useful in measuring the performance of a passenger railway service and explain why your chosen indicators are important.

d) Explain the term short-termism and suggest ways in which a long-term view can be encouraged.
(Total: 20 marks)

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  • 20 Marks

PM – May 2022 – L2 – SA – Q3 – Performance Evaluation

Evaluate Uzochuks' financial performance using ARR and EVA, and assess the NPV of a solar project.

Uzochuks Nigeria Limited is a company established four years ago to produce medical equipment. The income statement and statement of financial position for 2019 and 2020 are as follows:

(ii) Economic depreciation is assessed to be N50.5million in 2020. Economic depreciation includes any appropriate amortisation adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same.
(iii) Tax is the cash paid in the current year (N16 million) and an adjustment of N2 million for deferred tax provisions. There was no deferred tax balance prior to 2020.
(iv) The provision for doubtful debts was N2.5million on the 2020 statement of financial position.
(v) Research and development is not capitalised in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. 2020 is the first year of this project.
(vi) The company had a non-capitalised leased assets of N18million in January 2020. These assets are not subjected to depreciation.
(vii) Cost of capital of Uzochuks:
Equity 18%
Debt (pre-tax) 6%
(viii) Capital structure of Uzochuks:
Equity 60%
Debt 40%
(ix) The company had the opportunity to invest in a solar project that will require the procurement of an equipment worth N3million in January 2020 and run for a period of 5 years with a salvage value of N0.50million, generating a stable net cash flow of N0.85 million. The applicable cost of capital is the associated weighted average cost of capital of the company.

Required:
a. i. Compute and evaluate the company’s performance using the average rate of return (ARR). (4 Marks)
ii. Compute and evaluate the company’s performance using the economic value added (EVA) parameter. (9 Marks)
b. Calculate the net present value (NPV) of a solar project that will require the procurement of equipment worth N3 million in January 2020, generating a stable net cash flow of N0.85 million annually for five years with a salvage value of N0.50 million. The applicable cost of capital is the associated weighted average cost of capital of the company. (7 Marks)

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  • 20 Marks

MA – Nov 2019 – L2 – Q1a – Performance analysis

Calculation of key financial ratios for GRAT Authority and evaluation of financial performance from 2017 to 2018.

GRAT Authority operates passenger railway services and is responsible for the maintenance of track signaling equipment, and other facilities such as stations. In recent years it has been criticized for providing poor services to the traveling public in terms of punctuality, safety, and the standard of facilities offered to passengers. Last year, GRAT Authority invested over GH¢20 million in new carriages, station facilities, and track maintenance programs in an attempt to address these criticisms.

Summarized financial results for GRAT Authority for the last two years are given below:

Extracts of Statement of Profit or Loss account for the year ended 31 December

Statement of Financial Position as at 31 December

Required:

a) Calculate the following ratios for GRAT Authority for 2017 and 2018, clearly showing your workings.

i) Return on capital employed (ROCE)
ii) Net profit margin
iii) Asset turnover
iv) Current ratio

b) Evaluate the financial performance of the entity in 2017 and 2018 as revealed by the above ratios.

c) Suggest THREE (3) non-financial indicators that could be useful in measuring the performance of a passenger railway service and explain why your chosen indicators are important.

d) Explain the term short-termism and suggest ways in which a long-term view can be encouraged.
(Total: 20 marks)

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