15 BAF 503 SFM - Ans

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016
STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5
1 of 10
Marks
Question No. 1
(a)
CMMC Limited
Projected Income Statement
Period from 2019 to 2024
Rs. in million
Years
Income:
Self-managed services
Outsourcing services
Other income
Total Income
Cost of services
(including depreciation) (N-1)
Gross profit/ (loss)
Administrative and selling
expenses (including
depreciation) (N-2)
Others expenses
Profit before tax
Income tax @ 32%
Profit after tax
2019
2020
2021
380.00
395.20
411.01
900.00
936.00
973.44
340.00
357.00
374.85
1,620.00 1,688.20 1,759.30
750.00
870.00
769.30
918.90
789.57
969.73
345.00
120.00
405.00
129.60
275.40
358.20
124.80
435.90
139.49
296.41
372.06
129.79
467.88
149.72
318.16
2022
2023
2024
427.45
444.55
1,012.38 1,052.87
393.59
413.27
1,833.42 1,910.69
462.33
1,094.99
433.94
1,991.25
1
1
1
810.84
833.19
1,022.58 1,077.51
856.64
1,134.61
1
1
417.94
146.00
570.67
182.61
388.06
1
1
1
1
1
386.61
134.98
500.98
160.31
340.67
401.89
140.38
535.23
171.27
363.96
Notes:
Rs. in million
Years
N-1: Cost of Services:
Cost of services (excluding
depreciation)
Add: depreciation (N-3)
Total Cost of Services
2019
2020
2021
2022
2023
2024
386.00
364.00
750.00
405.30
364.00
769.30
425.57
364.00
789.57
446.84
364.00
810.84
469.19
364.00
833.19
492.64
364.00
856.64
277.20
81.00
291.06
81.00
305.61
81.00
320.89
81.00
336.94
81.00
358.20
372.06
386.61
401.89
417.94
N-2: Administrative and Selling Expenses:

Administrative and selling
expenses (excluding
depreciation)
264.00
Add: depreciation (N-3)
81.00
Total Administrative and
selling expenses
345.00
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2 of 10
Marks
N-3: Depreciation Schedule:
Rs. in
million
Building and civil

works including
infrastructure
Plant and machinery
Furniture and fixture
Total
1,800
2,200
300
4,300
Annual
Annual Rate
Depreciation
of
(Rs. in
Depreciation
million)
10%
10%
15%
Allocation
Administrative and
Cost of Service
Selling Expenses
180.00
220.00
45.00
445.00
70
100
40
Rs. in
million
126.00
220.00
18.00
364.00
30
60
Rs. in
million
54.00
27.00
81.00
Ignore survey and other expenses amounting to Rs. 3.3 million because of irrelevant and sunk
cost.
(b) (i)
Year-Wise Future Net Cash Flows period from 2017 to 2024:

Rs. in million
Years
Profit after tax
Add back
Depreciation
Additional working
capital required
and recovered
Cash flows
Terminal cash flow
(N-4)
Future net cash
flows
2017
-
2018
-
2019
2020
2021
275.40 296.41 318.16
2022
340.67
2023
363.96
2024
388.06
445.00 445.00 445.00
445.00
445.00
445.00
- (52.00) (55.00)
720.40 741.41 763.16 733.67 753.96
(3,850.00) (1,650.00) 720.40 741.41 763.16 733.67 753.96
107.00
940.06
940.06
(3,850.00) (1,650.00) 720.40 741.41 763.16
733.67
11,071.77
753.96 12,011.82
N-4: Calculation of Terminal Cash Flow:

Terminal cash flow =
2024 earnings (1+g)

(r-g)
940.06 (1+0.06)
(0.15-0.06)
11,071.77
3 of 10
Marks
(ii) Payback Period:
Rs. in million
Years
2017
2018
2019
2020
2021
2022
2023
2024
Cash
flows
(3,850.00) (1,650.00)
720.40
741.41
763.16
733.67
753.96
940.06
Terminal
- 11,071.77
cash flow
(3,850.00) (1,650.00)
720.40
741.41
763.16
733.67
753.96 12,011.82
Cumulati
ve cash
flow
(3,850.00) (5,500.00) (4,779.60) (4,038.19) (3,275.03) (2,541.36) (1,787.41) 10,224.41
Payback period
7.15
Years
1
1
(iii) Net Present Value:

Rs. in million
Years
2017
2018
Cash
flows
(3,850.00) (1,650.00)
Terminal
cash flow
(3,850.00) (1,650.00)
PVF @
0.870
0.756
15%
2019
2020
2021
2022
2023
2024
720.40
741.41
763.16
733.67
753.96
940.06
- 11,071.77
720.40
741.41
763.16
733.67
753.96 12,011.82
0.658
0.572
0.497
0.432
0.376
0.327
(3,349.50) (1,247.40)
474.02
Net Present Value
Rs. 1,208.80
424.09
379.29
316.94
283.49
3,927.87
4
1
(iv) Internal Rate of Return:

NPV @ 15%:
Rs. in million
Years
2017
2018
Cash
flows
(3,850.00) (1,650.00)
Terminal
cash flow
Future
net cash
flow
(3,850.00) (1,650.00)
PVF @
0.870
0.756
15%
(3,349.50) (1,247.40)
NPV
2019
2020
2021
2022
2023
2024
720.40
741.41
763.16
733.67
753.96
940.06
- 11,071.77
720.40
741.41
763.16
733.67
753.96 12,011.82
0.658
0.572
0.497
0.432
0.376
0.327
474.02
1,208.80
424.09
379.29
316.94
283.49
3,927.87
4 of 10
Marks
NPV @ 20%:
Rs. in million
Years
2017
2018
Cash
flows
(3,850.00) (1,650.00)
Terminal
cash flow
Future
net cash
flow
(3,850.00) (1,650.00)
PVF @
0.833
0.694
20%
(3,207.05) (1,145.10)
NPV
2019
2020
2022
2023
2024
720.40
741.41
763.16
733.67
- 11,071.77
720.40
741.41
763.16
733.67
753.96 12,011.82
0.579
0.482
0.402
0.335
0.279
0.233
417.11
(16.00)
357.36
306.79
245.78
210.35
2,798.75
Internal Rate of Return
(v) Profitability Index (PI)
2021
15% +
19.93%
1,208.80
1,224.80
753.96
940.06
(20% 15)
1
Present value of cash inflow Present value of cash outflow
5,805.70 4,596.90
1.263
(c) Based on calculations given in (a) and (b), CMMC should ahead to incorporate model cattle
market because all indicators are positive and acceptable.
Question No. 2
Borrow and Buy Analysis:
Rupees
Years
Loan payment (Note-1)

Interest tax savings (Note-4)
Depreciation tax savings (Note-3)
PVF @ 9% (N-2)
Present Value
Present value cost of buying
1
(2,190,101)
300,000
666,666
2
(2,190,101)
213,607
666,667
3
(2,190,101)
114,255
666,667
(1,223,435)
0.917
(1,309,827)
0.842
(1,409,179)
0.772
(1,121,890)
Rs. (3,312,651)
(1,102,875)
(1,087,886)
1.00
Notes:
N-1: Annual Loan payment
N-2: Discount rate
Rs. 5,000,000(15%, 3 Years)
Rs. 2,190,101
15% x (1 Tax)
9.00%
1
=
15% x (1-0.40)

5 of 10
Marks
N-3: Depreciation Schedule:
Rupees
Year
1
2
Rate of Depreciation
33.33%
33.33%
33.34%
Amount of Depreciation
1,666,666
1,666,667
1,666,667
5,000,000
N-4: Loan Amortization Schedule:

Year
1
2
3
Beginning
Amount
5,000,000
3,560,115
1,904,248
Rupees
Payment
(2,189,884.81)
(2,189,884.81)
(2,189,884.81)
Interest
750,000
534,017
285,637
Repayment Remaining
of Principal
Balance
(1,439,885) 3,560,115
(1,655,868) 1,904,248
(1,904,248)
Lease Analysis:
Years
Lease payment
Payment tax savings
Market value machine (N-5)
PVF @ 9%
Present Value
Present value cost of leasing
1
1
1
Rupees
0
1
- (1,600,000)
640,000
(960,000)
1.00
0.917
(880,320)
Rs. (3,201,760)
2
(1,600,000)
640,000
(960,000)
0.842
(808,320)
3
(1,600,000)
640,000
(1,000,000)
(1,960,000)
0.772
(1,513,120)
Conclusion: Since the cost of leasing the machinery is less than the cost of buying it
(Rs.3,312,651 Rs.3,201,760 = Rs.110,891), the company should lease the
machinery.
N-5: Cost of purchasing the machinery after the lease expires. Note that since the company is
purchasing the machine at the end of the lease, there are no tax effects due to the residual
value (purchase price) being greater than the book value. If we were to assume that the
company would not want to keep the machine beyond the lease term, then we should show
the residual value of selling the machine as an inflow under the purchase alternative, and
there would be no residual value flow under the lease alternative. In this situation, there
would be tax on the residual value from selling the machine: (Rs.1,000,000 0) 0.40 =
Rs.400,000.
N-6: Maintenance expense is excluded from the analysis since the firm will have to bear the cost
whether it buys or lease the machinery.

6 of 10
Marks
Question No. 3
(a)
Rs. 000
Exiting return on equity
Profit before interest and tax
Less: debt interest @ 15%
Profit before tax
Taxes @ 32%
Net profit after tax
Return on equity
(Rs. 225,000 x 15%
48,450
375,000
(b)
105,000
33,750
71,250
22,800
48,450
12.92%
Rs. 000
Return on equity Alternate 1
Interest earned on investment @ 12% x Rs. 50 million x 1/2
Total
(Rs. 225,000 x 15%)
Profit before tax
Taxes @ 32%
Return on equity
Return on equity Alternate 2

(Rs. 225,000- Rs. 60,000) x 15%
Less: Interest on short term loan @ 16%

On Rs. 30 million (April)
On Rs. 20 million (May)
On Rs. 10 million (June)
Profit before tax
Taxes @ 32%
Return on equity
50,490
375,000
105,000
3,000
108,000
33,750
74,250
23,760
50,490
(30,000 x 16% x 6/12)

(20,000 x 16% x 5/12)
(10,000 x 16% x 4/12)
51,669
375,000
2,400
1,333
534
13.46%
105,000
24,750
80,250
4,267
75,983
24,315
51,669
13.78%
1
1
Alternative 2 is best for Nawab Rice Mills as return on equity is highest in this alternative.
7 of 10
Marks
Question No. 4
Proposal-1:
Rupees
Particulars
Purchase value
Operating costs
Salvage value
Equivalent Annual Cost
Year
Cost
0
720,000
1
55,000
2
55,000
3
75,000
4
92,000
5
115,000
6
131,000
6
(150,000)
Total present value
PV Factor
@ 10%
1.000
0.909
0.826
0.751
0.683
0.621
0.564
0.564
PV
720,000
49,995
45,430
56,325
62,836
71,415
73,884
(84,600)
995,285
Total Present value of the project

PV of annuity corresponding to the life of the
project at the given cost of capital
995,285
4.354
Rs.228,591
Proposal-2:
Rupees
Particulars
Purchase value
Operating costs
Salvage value
Year
0
1
2
3
4
4
Total present value
Equivalent Annual Cost
Cost
510,000
65,000
85,000
100,000
150,000
(45,000)
PV Factor
@ 10%
1.000
0.909
0.826
0.751
0.683
0.683
PV
510,000
59,085
70,210
75,100
102,450
(30,735)
786,110
Total Present value of the project

PV of annuity corresponding to the life of the
project at the given cost of capital
786,110
3.169
Rs.248,062
Recommendations:
Creative Lahore Centre (CLC) should go for inverter air conditioners as the equivalent annual cost is
lower; secondly inverter is a modern technology with reasonable operating cost.

8 of 10
Marks
Question No. 5
(a)
Sehar Clothing
Statement of Profit or Loss
for the year ended June 30, 2015
Sales
Cost of goods sold
Depreciation
Other operating expenses
Tax
Operating income
Translation gain
Net income
US $ 000
PKR
US $
163.46 163.46
106.38 102.04
5.77
5.56
37.50
37.50
11.54
11.54
2.27
2.27
6.82
9.24
16.06
1
1
1
1
+1
(b)
Sehar Clothing
Statement of Financial Position
as on June 30, 2015
Cash
Accounts receivables
Inventories
Net non-current assets
Total
Accounts payables
Ordinary share capital
Retained earnings
Cumulative translation adjustment
Total
US $ 000
PKR
6.50
34.50
34.00
28.00
US $
6.50
34.50
34.69
25.93
103.00 101.62
30.00
9.26
48.57
15.17
30.00
9.26
62.36
103.00 101.62
1
1
1
1

9 of 10
Marks
Question No. 6
Rs. 000
Estimate of Requirement of Working Capital:

Current Assets:
Finished stock (N-1)
Work-in-progress (N-2)
Raw Material stock (N-3)
Sundry debtors (Rs. 21,000,000 x 80% x 2 / 12) (N-7)
Cash in hand
Current Liabilities:
Creditors for:
Purchases (N-4)
Wages and manufacturing expenses (N-5)
Administration and selling expenses (N-6)
Provision for taxation
Working Capital Requirement (a b)
1,408.75
552.08
225.00
100.00
2,285.83
6,100.17
Rs. 000
Working Notes:
N-1: Finished Goods
Raw material
Wages and manufacturing expenses
Depreciation
N-2: Work-in-process:
Raw material
Wages and manufacturing expenses
Depreciation
1,700
1,776
1,610
2,800
500
8,386
(Rs. 8,400,000 x 15%)

(Rs. 6,250,000 x 15% x 40%)
(Rs. 2,350,000 x 15% x 40%)
N-3: Raw Material Stock (1/6th of material consumption):

Finished goods
Work-in-process
Raw material stock
(Rs. 9,660,000 x1/6)
N-4: Creditors for Raw Materials (11/2 month of total purchase of raw material for
the year):
Finished goods
Work-in-process
Raw material stock
Creditors for Raw Material Purchases
(Rs.11,270,000 x 1.5 /12)
N-5: Creditors for Wages and Manufacturing expenses:
(Rs. 6,250,000 + Rs. 375,000) x 1/12
840
625
235
1,700
1,260
375
141
1,776
8,400
1,260
9,660
1,610
8,400
1,260
1,610
11,270
1,408.75
552.08

Rs. 000
N-6: Creditors for Administrative and Selling expenses:
(Rs. 2,700,000) x 1/12
N-7: Sundry debtors breakup:
Material (8,400,000/21,000,000 2,800,000 90/100)
Wages and manufacturing expenses (6,250,000/21,000,000 2,800,000
90/100)
Depreciation (2,350,000/21,000,000 2,800,000 90/100)
Administrative & selling expenses (2,700,000/21,000,000 2800,000)
Profit (10,500,000/21,000,000 2,800,000)
Total
10 of 10
Marks
225.00
1,008
750
282
360
400
2,800
THE END

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SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

N-2: Administrative and Selling Expenses:

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

Building and civil

Year-Wise Future Net Cash Flows period from 2017 to 2024:

445.00 445.00 445.00

(3,850.00) (1,650.00) 720.40 741.41 763.16

N-4: Calculation of Terminal Cash Flow:

2024 earnings (1+g)

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

(iii) Net Present Value:

(iv) Internal Rate of Return:

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

Internal Rate of Return

(v) Profitability Index (PI)

Present value of cash inflow Present value of cash outflow

Loan payment (Note-1)

Rs. 5,000,000(15%, 3 Years)

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

N-4: Loan Amortization Schedule:

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

(Rs. 225,000 x 15%

Return on equity Alternate 2

(Rs. 225,000- Rs. 60,000) x 15%

Less: Interest on short term loan @ 16%

(30,000 x 16% x 6/12)

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

STRATEGIC FINANCIAL MANAGEMENT SEMESTER-5

Equivalent Annual Cost

Total Present value of the project

Equivalent Annual Cost

Total Present value of the project

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

Estimate of Requirement of Working Capital:

(Rs. 8,400,000 x 15%)

N-3: Raw Material Stock (1/6th of material consumption):

SUGGESTED SOLUTIONS/ ANSWERS EXTRA ATTEMPT EXAMINATIONS, MAY 2016

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