Question

Remark
27 PV Co (6/09) 25 45 24 118
27 PVRemark
Co (6/09) 25 45 24 118

27 PVRemark
Co (6/09) 25 45 24 118

27 PVRemark
Co (6/09) 25 45 24 118

27 PVRemark
Co (6/09) 25 45 24 118

27 PVRemark
Co (6/09) 25 45 24 118

27 PV Co (6/09) 25 45 24 118
27 PV CoIdentification
(a) (6/09) 25 45 24 118
of decision-making stages 1-2
ion-making
27 stages 1-2 25 45 24 118
PV Co (6/09)

ion-making
27 stages 1-2 25 45 24 118
PV Co (6/09)
ion-making
27 stages 1-2 25 45 24 118
PV Co (6/09)

ion-making
27 stages 1-2 25 45 24 118
PV Co (6/09)
ion-making
27 stages 1-2 25 45 24 118
PV Co (6/09)

Explanation
27 PV of 24
Co (6/09) 25 45 decision-making
118 stages 4-6
Role
27 PV of investment
Co (6/09) appraisal
25 45 24 118 1-2
estment 27 PV Co (6/09)
appraisal 1-2 25 45 24 118

Discussion
27 PV Co (6/09) 25of
45investment
24 118 appraisal findings 4
nt appraisal findings
27 PV 4 25 45 24 118
Co (6/09)

nt appraisal findings
27 PV 4 25 45 24 118
Co (6/09)

nt appraisal findings
27 PV 4 25 45 24 118
Co (6/09)

nt appraisal findings
27 PV 4 25 45 24 118
Co (6/09)
 27 PV
nt appraisal Co (6/09)
findings 4 25 45 24 118
 Top tips. Plan your answer to part (a) and use headings to give it a clear structure. In
part (b), the NPV is positive at 10% so it is best to then use a second higher discount rate
when calculating the IRR. This will give a more accurate result than using, say, 5%.
Remember that you must use profit, not cash flow in a ROCE calculation, so you need to
subtract total depreciation from the total net cash flow.
Easy marks. The calculations in part (b) should be straightforward provided you have
practised using the techniques.
Examiner's comments. In part (a), better answers identified and discussed
identification screening, analysis and evaluation, approving, implementation and
monitoring. Poorer answers looked at different aspects of the analysis and
evaluation stage, or went off track by discussing the relative merits of the investment
appraisal methods required in part (b).
In part (b) some candidates introduced capital allowances and taxation into their
answers, but this was not required by the question. There is no point doing unnecessary
calculations in the exam, as marks will be lost elsewhere due to time pressure. Most
candidates calculated correctly the NPV, although some answers did not handle inflation
correctly, or omitted the fixed costs, or calculated and used (unnecessarily) a real
discount rate. Most candidates were not able to correctly calculate the ROCE. The most
common error was using average annual net cash flow, rather than average
annual accounting profit. Many candidates were able to calculate discounted
payback, although some used an unnecessary amount of rounding eg giving 3 years
rather than 2.9 years.
In part (c) many candidates failed to recognise the superiority of the NPV method. Better
answers gave reasons why ROCE cannot be relied upon.
V Co (6/09) 25 45 24 118
(a) Identification of decision-making stages 1-2
Identifying investment opportunities: looking for opportunities suitable to Co's
investment creteria
Project screen: qualitative evaluation is made, screen to find the most suitable project
Analysing and evaluating: comprehensive financial analysis and evaluate to compare
outcome to predertermined creteria
Approving: submited to senior authority to get approval
Review: Project control to ensures not exceed the limitation and implementaion is not
delay
Explanation of decision-making stages 4-6
Role of investment appraisal 1-2
Each company has its own investment policy for appraisal. Due to limited fund, the
company have to evaluate the funding resource and structure.
Discussion of investment appraisal findings 4
NPV: positive NPV of $366k and therefore financially acceptable. NPV always give the
correct investment advice on financial grounds
IRR of 18.2% is higher than the 10% return required by PV Co (10%). Even if IRR result is
less than 10%, the NPV result would still have been preferred.
ROCE of 25% is less than the target return of 30% but this is not a realiable method
comapared to NPV. The huddle rate appears to be too highand may be out of date
Discount payback: there is no target given to paybackperiod but pay back is expected to
be well into the life cycle of the project.The life cycle is quite short at 4 yrs and it would
be useful to conduct a sensitivity analysis of demand and ensure the risk is acceptable.
Conclusion: The NPV and IRR both indicate that the project is financially acceptable, and
subject to further analysis of the risks of the project, it should go ahead.
Original Investment
Scrap (residual value)
Writing down allowance (WDA)
Tax rate in arrear

Year Year claim Capital cost allowance (CCA) saving

(Tax relief/Tax benefit)
2 1 60000 x 0.25 x 0.3
3 2 4500 x (1-0.25)
4 3 3375 x (1-0.25)
Total previous year CCA saving
5 4 Balancing alowance (BA)
Total tax-allowable depreviation (60000-10000) x 0.3

Year Tax-allowable Dprn

Year Capital cost allowance (CCA) saving
(Tax relief/Tax benefit)
1 60000 x 0.25 15,000.00 2 15000 x 0.3
2 15000 x (1-0.25) 11,250.00 3 11250 x 0.3
3 11250 x (1-0.25) 8,437.50 4 8437.5 x 0.3
34,687.50
4 By difference 15,312.50 5 15312.5 x 0.3
(60000-10000) 50,000.0
 60,000.0
10,000.0
25%
30%

ance (CCA) saving

relief/Tax benefit)
4,500.0
3,375.0
2,531.3
10,406.3
4,593.8
15,000.0

ance (CCA) saving

relief/Tax benefit)
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