REQUIRED: a) Define and calculate the break-even point. Illustrate this by drawing a graph using the data given above.

Transcription

1 These are the assessment questions for for IT & Accounting and you have to develop spreadsheets. Q1 RUG PLC Rug plc is considering the launch of a new type of sports toupee, guaranteed to remain in place even during strenuous exercise. The variable costs (direct labour and materials) are estimated to be 7 per toupee. Fixed costs relating to the product are estimated to be 350,000 p.a., and the selling price will be 12 per toupee. a) Define and calculate the break-even point. Illustrate this by drawing a graph using the data given above. b) Further information reveals, contrary to original expectations, that sales of up to 50,000 units per annum can be made at 15 per unit, but for sales to equal or exceed 50,000 units the price will have to be 10 for all additional units sold above 50,000 units. Calculate the new break-even point. c) It is subsequently revealed that if sales meet or exceed 50,000 units p.a. additional warehouse space will be required at an annual fixed cost of 80,000. How does this change your answer to (b)? Hint: Draw the new break-even graph. d) Explain briefly what qualifications you would want to make about the assumptions implied in breakeven analysis regarding the behaviour of sales revenues and costs.

2 Q2 MARIONETTE LTD Marionette Ltd. make puppets which they sell at 8 each. The management believe that the company's equipment could reduce up to 55,000 units per annum. During the previous financial year output only reached 40,000 units with the following costs: Per Unit Direct materials 3.00 Direct labour 1.10 Variable overheads 0.70 Fixed costs (for year) - production 65,000 - selling 28,000 (a) Calculate the company's break-even for the previous year. (b) Calculate the company's profit in the previous year. (c) How many more puppets would Marionette Ltd. have to sell to make a profit of 50,000? (d) At what price would they have to sell the 40,000 puppets to make a profit of 50,000? (e) The management want to increase sales and profits during the coming year and are currently considering the following two strategies: [2 marks] [3 marks] [4 marks] [4 marks] i. Spend 20,000 on advertising and raise the selling price by 5% to finance this. It is anticipated that sales will increase by 15% on the previous year s figures. ii. The company's saleswoman is currently paid 13,850 p.a. (included in the fixed selling costs above). A new contract of employment is proposed, under which she would not be paid a salary, but, instead, receive a commission of 30p for each puppet sold up to the new break-even quantity and then for every additional unit sold commission would be 50p p.u.. Expectations predict that this incentive would increase sales by 20%. [12 marks]

3 Q3 X LTD X Ltd has budgeted annual sales of 10,000 units of Mulders and 6,000 units of Scullies. The sales prices are 20 and 22 respectively. Direct costs per unit Mulder Scully Materials Assembly 2/hr Finishing 2/hr Variable Production Overheads Annual budgeted fixed (production and non-production) costs total 40,000. They comprise rent 20,000, canteen costs 8,000, machine maintenance and repairs 6,000, and administration expenses 6,000. All machinery is located in the assembly department. You are also given the following information: Staff Meals Floor Space (sq. ft) Production Departments Assembly department ,000 Finishing department 2,560 6,000 Production-Related Service Department Canteen - 3,000 Service Department Admin. department 320 3,000 3,200 24,000 a) Calculate the total absorption cost per unit of Mulders and Scullies, using the traditional method, absorbing production-related indirect costs into units on a labour hours basis. b) Old Co. Ltd produces pens and pencils in different colours, using traditional labour-intensive processes. It is just about to be taken over by its biggest competitor, New Co. Ltd, which manufactures a similar range of products. New Co. Ltd plans to replace Old Co. s workforce with modern machinery in the form of production lines. Both companies calculate their prices using total absorption cost, which Old Co. currently computes on the traditional labour-hour basis.

4 Q4 GRAPPA LTD Grappa Ltd makes two products the tavolo and the sedia. It has two production departments: assembly and finishing, and two production-related service departments: maintenance and the canteen. Grappa incurred the following overheads for the year: Rent and Rates 36,000 Depreciation - machinery 15,000 Buildings insurance 4,500 Electricity 4,000 Indirect materials 12,000 TOTAL OVERHEADS 71,500 The following statistics are available: Production department Finishing Production department Assembly Service department Canteen Service department Maintenance Area (M 2 ) 5,500 9,000 1,000 2,500 Machinery value 30,000 95,000 15,000 10,000 KW hour rating of 7,000 9,000 2,500 1,500 machinery Indirect material consumed 5,000 5,000 1, Use of canteen 30% 60% - 10% Use of Maintenance 30% 70% - - The firm s two products have the following direct costs: Tavolo Sedia Direct materials Direct labour Finishing 5 hrs hrs p.hr. 8 p.hr. Assembly 2 hrs hrs p.hr. 4 p.hr. Prime costs Production volume 800 units 4,800 units Calculate the total cost per unit for tavolo and sedia. Overheads are to be absorbed on the basis of direct labour hours. [25 marks] Hint: you will need to re-apportion the canteen department costs before re-apportioning the maintenance department costs.

5 Q5 ABC ABC Ltd manufactures 4 products, A, B, C and D, using the same plant and processes. The following information relates to the previous production period: Product Volume (units) Material cost per unit ( ) Direct labour per unit (hours) Machine time per unit (hours) A B 5, C D 7, Labour cost per unit ( ) Total overheads recorded by the cost accounting system are analysed under the following headings: Machine maintenance 37,425 Machine set-up costs 8,925 Cost of ordering materials 210 Cost of handling materials 1,134 Administration for spare parts 756 Overheads are currently absorbed by products on a labour hour rate of per hour, giving overhead costs per unit of: A: ; B: ; C: 6.706; D: However, investigation into the production overhead activities for the period reveals the following: Total no. of set-ups Total no. of material orders Total no. of times material was handled Total no. of spare parts needed A B C D (a) (b) Show how the current overhead absorption rate per labour hour was calculated. Compute an overhead cost per product using a ctivity-based costing, tracing overheads to production units by means of suitable cost-drivers.

6 Q6 BEEBLEBROX Beeblebrox Plc. manufactures a powdered form of the famous Pan-Galactic Gargle Blaster, and sells it under the name Fizzbang. The product sells for 4 per packet and the sales forecasts for the next period are: 2001 Quarter 1 40,000 packets Quarter 2 60,000 packets Quarter 3 56,000 packets Quarter 4 36,000 packets 2002 Quarter 1 44,000 packets Quarter 2 48,000 packets Manufacture requires the following resources per packet: Cane sugar p per kg Special ingredient per kg Labour per hour Expected opening inventories are (at ) Cane sugar 33,600 kgs Special ingredient 6,720 kgs Fizzbang mixture 6,000 packets The management of Beeblebrox have stated that their policies for stock holding as: Raw materials: hold 40% of next quarter s expected production Finished goods: hold 25% of next quarter s expected demand. (a) prepare a production quantity budget for 2001 (b) calculate the material usage for each quarter (c) prepare a materials purchases budget for 2001 (d) calculate the labour requirements for each quarter [5 marks] [5 marks] [5 marks] [5 marks] Remember - each quarter s opening stock is the previous quarter s closing stock.

7 Q7 ROSS Ross intends to start his own business trading from home on 1 January. The business will provide computer aided graphic designs for advertising agencies. The following information and assumptions are relevant to his first year of trading: capital will be introduced immediately and a further 5,000 in April. 2. The required computer equipment will be purchased for an immediate payment of 36,000 and a further 3,500 for software in March. The software is to be written off to the profit and loss account immediately. The computer will last for three years before becoming technologically obsolete. 3. Business will rounded up in the first month of trading so no chargeable work will be carried out until February. Travel and subsistence for January is anticipated to be 1,400, payable as it is incurred. 4. Ross will work for a charge out rate of 46 per hour. From February to May (inclusive) he will spend 50 hours a month on chargeable work for clients, rising to 75 hours per month thereafter. 5. Fixed costs are incurred from January. They are anticipated to be 200 per month paid in the month they are incurred. 6. Ross will operate with a gross profit margin of 90%. Stocks of stationery and art materials should be adequate to cover the following month's sales. 7. Ross has negotiated to pay 80% of purchases in the month they are received and 20% in the following month. 8. Maintenance and other variable overheads are expected to be 7.50 per hour spent by Ross on chargeable work from February to May (Inclusive) and 6 per hour thereafter. These are to be paid as they are incurred. 9. All work will be billed on the last day of the month which the work is done. 50% of clients are expected to pay within 30 days, 48% within 60 days and 2 % are anticipated to be bad. 10. Ross will need to withdraw per month for living expenses. (a) (b) A projected monthly cash flow budget for the first six months of trading for Ross. [15 marks] Hint: divide the cash budget up into inflows and outflows, calculate the net cashflow for each month, then work out the brought-forward and carry-forward cash balances. A forecast profit and loss account and balance sheet for the first six months of trading for Ross. [10 marks]

8 Q8 LEATHER LTD One of the departments of Leather Ltd manufactures high quality leather handbags. The standard cost schedule applicable for April is set out below. Standard Cost Schedule Per Handbag (assuming monthly production of 640 items) Leather 0.7 m 2 at 30 per m Set of Buckles etc Labour 2 hrs at 16 per hr Variable Overheads* 2 hrs at 2 per hr 4.00 Fixed Overheads* 2 hrs at 6 per hr Total Standard Cost Profit Margin Selling Price * Overheads are allocated on the basis of standard labour hours The actual figures for April are set out below. There were no changes in stock levels. Sales: 700 handbags 63,000 Less expenses: Leather: 525 m 2 16,800 Buckles etc.: 710 sets 1,420 Labour: 1,350 hrs 22,275 Variable Overheads 2,600 Fixed Overheads 8,000 51,095 11,905 a) An operating statement for the handbag department for April showing two variances for each category. [15 marks]

9 Q9 FOOTINTHEDOOR PLC Footinthedoor plc manufactures doorstops for the Travelling Salesman Corporation. During March, the factory is scheduled to produce 2,500 batches of Type A doorstops and 7,000 batches of other types. Each type is uses the same machinery, but with different moulds. The standard cost of a batch of Type A doorstops is: Direct Material 30 kgs at 1.00 per kg Direct Labour 100 hrs at 2.00 per hr Variable Overhead 100 hrs at 0.45 per hr Fixed Overhead Standard Cost The factory fixed overhead for the month is budgeted as 250,000, of which 62,500 has been allocated to this activity. Actual production in March was 2,000 batches of Type A and 7,500 batches of other types. The actual direct costs charged to Type A production were: Direct Materials 67,000 kgs at 0.95 per kg 63,650 Direct Labour 220,000 hrs at 1.90 per hr 418,000 Actual overhead costs for the month were: Variable: 99,000 Fixed: 61,500 (attributable to Type A) a) An operating statement for Type A doorstops for March, reconciling the standard cost of output to the actual cost, showing appropriate cost variances. [10 marks] Hint: There is no sales information in this question so you cannot calculate any sales variances or profit figures.

10 Q10 EALING LTD Ealing Ltd has received a request to tender for a job involving manufacturing a one-off batch of 2,000 valves; similar items are regularly made by Ealing. A standard cost schedule for the batch is set out below: Standard cost schedule for batch of 2,000 valves Materials steel 1,000 kg at 26 per kg 26,000 copper 250 kg at 44 per kg 11,000 Labour 2, hours at 10 per hour 10,000 Overheads variable 1,000 hours at 2.50 per hour 2,500 fixed 1,000 hours at per hour 20,500 Total 70,000 The sales manager knows that a price based on this cost will not be accepted, and as work is short she ordered an investigation into the specific costs of this job. The results are set out below: 1. Steel is ordered twice a week and low stocks are kept. A price rise to 30 per kg is expected imminently. 2. Copper is now rarely used by Ealing and the batch of 250 kg is the last in stock. It was purchased for 44 per kg. Ealing had been hoping to sell it to another manufacturer for 32 per kg as it foresaw no further use for it. 3. Ealing is not working at full capacity at present and this job could be fitted in with other production. However if the job is taken, maintenance work that the direct labour would have carried out will have to be undertaken by an outside contractor who will charge 15, Variable overheads for this particular job are estimated at 1.50 per valve. 5. Fixed costs in the standard cost schedule are allocated using standard labour hours. The estimated increase to existing fixed costs if this job were taken is 4, The sales department estimate that this job will cause them to incur an additional 2,000 to secure the contract. What is the minimum price Ealing could bid to secure this job and not be financially worse off?

11 Q11 GLOBAL LTD Global Ltd is considering a contract to supply 1,000 tons of a special composite material used in aircraft manufacture to the government of Plutonia. The accounts office has prepared the following statement: Direct material X (historic cost) 4,500 Y (contract price) 18,500 23,000 Labour manufacturing (2 hours per ton) 8,000 supervisors salaries 2,000 10,000 Overhead variable 4,500 fixed 6,500 11,000 Total cost 44,000 Normal profit margin 11,000 Total price 55,000 Notes: 1) Material X is already in stock. It is toxic and unstable. If it is not used within the next month it will have to be destroyed at a cost of 800. Global has no other use for X. 2) Material Y is in general use. The contract would need 2,000 tons. Global has entered into a long-term contract under which it receives 10,000 tons each month at 9.25 per ton from the supplier. Global had planned to use 7,000 tons from next month s delivery to fulfil existing orders, and to sell the remaining 3,000 tons at the current market price of per ton. 3) Manufacturing labour cost represents the basic wage rate of 4.00 per hour. However, meeting the Plutonia contract is likely to require overtime payments of an additional 25% on top. 4) Supervisors are paid fixed salaries and are employed on long-term contracts. The cost shown above does not include overtime of ) Statistical analysis has shown that only 80% of the costs classified as variable overhead actually vary with the level of output. The remaining 20% represent advertising and packaging costs that will not be incurred for the Plutonia contract. 6) The fixed overhead absorption rate (based on labour cost) is used to charge out items such as factory rent that will not change if the proposed contract is accepted. However, it will cost an additional 1,700 to deliver the product for shipping. 7) 2,500 was spent on a visit to Plutonia by a director of Global. The proposed contract is a result of this visit. 8) The government of Plutonia can only afford to pay 50,000 for the order, so Global Ltd is unwilling to accept the contract, despite the company s spare capacity. Should Global Ltd accept the contract at the offered price? Justify your answer using relevant costs.

12 Q12 ARR & PAYBACK a) Trotters Ltd is considering making an investment in a fleet of 5 delivery vans to distribute its pork products to customers. The vans will each cost 15,000 to buy, payable immediately. Annual running costs are expected to be 20,000 per van, including the driver s salary. The vans are expected to operate successfully for 6 years, at the end of which they will have disposal proceeds of 3,000 per van. At present the business uses a commercial carrier for its deliveries; the commercial carrier would charge a total of 115,000 each year if it continued to undertake the deliveries over the next 6 years. What is the ARR, calculated as average annual profit/average investment, of buying the vans? (Remember to take account of all cost savings.) b) Juicy Fruit plc is considering buying a new pulping plant to make apple juice in Weston-super-Mare. Two possible processors have been identified. Processor A has a capacity of 30,000 litres and will require an average investment of 2 million, producing an average profit of 200,000 p.a. Processor B has a capacity of 20,000 litres and will require an average investment of 1 million, producing an average profit of 125,000 p.a. What is the ARR of each investment opportunity? Which site would you select, and why? c) What is the payback period of the Trotters Ltd project in (a)? d) Calculate the payback periods of the following 3 projects. Which would you choose, and why? Time Cashflow Project 1 Project 2 Project Cost of machine (100) (100) (100) 1 Net cash flow Net cash flow Net cash flow Net cash flow 30 (20) Net cash flow 20 (10) Disposal proceeds

13 Q13 DISCOUNTING PROBLEMS a) What is the present value today, assuming a discount rate of 10%, of receiving: i 200 in 3 years time; ii 200 (at the end of) each year for the next 3 years; and iii 200 (at the end of) each year in perpetuity? b) What is the net present value of the Trotters Ltd project in Q9, assum ing a 15% discount rate? c) By trial and error, find a discount rate that will give the Trotters Ltd project an NPV of, approximately, zero. What are the implications of this rate for the investment appraisal?

14 Q14 FOSSIL Fossil Junior has just inherited a small coal mine. The mine was started 40 years ago when the mineral rights and all the existing equipment were purchased. The most recent accounts show: Balance Sheet Mineral rights at cost 20,000 Less straight line depreciation 16,000 4,000 Equipment at cost 10,000 Less straight line depreciation 8,000 2,000 Current assets 2,000 8,000 Creditors -2,000 Net Assets 6,000 Capital 6,000 Profit and Loss Account Sales 40,000 Less Wages 26,000 Operating expenses 7,400 Depreciation: mineral rights 400 equipment ,000 Net profit 6,000 Fossil Jr has asked your advice and gives you the following information: "With the use of the present equipment the company's profits are expected to continue at the present level for 10 years. At the end of that time the mine would be exhausted and the mineral rights and the equipment would be worthless. "But instead I could purchase new equipment for 20,000. Waste would be reduced and the coal seam would be worked more efficiently. The existing equipment would be worked alongside the new. The mineral rights and all the equipment would be depreciated on a straight-line basis over 10 years. I would increase current assets by about 2,000 (in increased stockholding and debtors) but I would not get any more credit from my suppliers. Profit would be greater; I estimate total annual profit with the new equipment will be 8,000." Assume that outlay on new equipment would occur immediately, that all annual amounts would occur at year-ends and that Fossil's cost of capital is 10 % per year. Ignore inflation and taxation.

15 (a) Calculations comparing the options available to Fossil, using the information available. HINTS: 1. Depreciation is not a cash outflow; add it back to profit to get cash flows for discounting. 2. Investment in working capital (current assets) is an outlay now, but gives a cash inflow when it is liquidated at the end of the project. 3. The quickest way to compare the options is to look at incremental costs and benefits.

16 Q15 PV & IRR A company has decided to install a new machine. The following methods are available: (1) Purchase of the machine for cash. (2) Purchase of the machine under a finance contract for an initial deposit and two further payments. (3) Renting the machine. The following data is relevant: Cash price of machine 1,000 Period of use in the business 5 years Sale value at end of use (under either purchase method) 200 Company's cost of capital for all periods 12% p.a. Initial deposit under finance contract, payable immediately 450 Two further annual instalments under the finance contract, first payable one year after payment of the deposit 350 Annual rent under a leasing contract, payable at the beginning of each year of 250 service Sales generated by machine (all cash arising at year-ends) 300 p.a. Maintenance and running expenses would be borne by the company in all cases, so can be ignored. (a) (b) (c) Calculate the present values and internal rates of return of the three methods of financing the machine. Draw a graph to illustrate the calculations. For option (1) ONLY, calculate the payback period and the accounting rate of return based on the average book value of the machine over the life of the project. Which financing method would you advise on the basis of the figures in (a), and what other factors would you suggest should be considered? Ignore tax and inflation in the calculations, but not your discussion.

17 Q16 LEWISHAM LTD Lewisham Ltd provide a refuse collection service for local councils in the Bristol and South Gloucester area. The work is currently highly labour intensive as the rubbish is manually placed in the dumper trucks. However, the company is considering the introduction of Wheelie bins which will involve adapting the current trucks and purchasing wheelie bins for each household. The council have offered to contribute to the cost of the bins but the adaptation of the trucks will cost Lewisham 500,000 in total. The fleet is currently 6 years old and they are expected to have a remaining life of four years (after which time the contracts with the local councils will have expired). Lewisham Ltd estimate that the introduction of the new style bins is likely to result in a considerable saving of labour costs. Estimates of the likely savings and their probabilities of occurring are set out below: Estimated Saving Probability 000 Year Year Year Year Estimates for each year are independent of other years. The company has a cost of capital of 10%. a) Calculate the net present value (NPV) of the best possible outcome. b) Calculate the NPV of the worst possible outcome. c) Calculate the expected NPV of the project. [4 marks] [4 marks] [8 marks]

18 Q17 DICKENS Dickens Ltd recently commissioned a market research survey into the expected future demand of the firm's new product, the Wackford. The survey, costing 45,000, which will be paid for shortly, showed that at the proposed selling price of 6 each, probable demand over the expected life of the product would be: Year Demand Probability 60% 40% 1 50,000 40, ,000 40, ,000 30, ,000 20, ,000 20,000 Production will require an immediate investment of 570,000 for the purchase of plant and machinery. This has an expected scrap value at the end of five years of 5,000. There will also be an immediate requirement to increase current working capital by 35,000, which will be sustained for the duration of the project. Variable costs are estimated to be 1 per unit. Fixed costs include the depreciation of the plant and machinery on a straight-line basis, an allocation of general overheads of 2 per unit and incremental fixed costs of the project of 5,000 for each of the five years of the project. The current nominal cost of capital is 14%. Inflation is currently 4.5% and is expected to remain at this level for the foreseeable future. Ignore all tax. All cash flows and prices above are expressed in real terms. a) Calculate the real cost of capital applicable to the company for capital appraisal. [2 marks] b) Taking the real cost of capital to be 10%, prepare calculations to decide whether the project should be accepted or not. [ 14 marks]

19 NOTE: See the tutorials where I have developed answers REVISION LECTURE 1 BOOKWORM Bookworm Ltd makes bookcases in two styles, the Wilde and the Austen, which are both priced at The company has two production departments (assembly and finishing), a maintenance department, a warehouse and a procurement office. The assembly department uses mechanised production lines but the finishing department is still completely manual, so that all the machinery is in the assembly department. Factory workers are paid 20 per hour. The factory manager provides you with the following production details: Direct product costs per unit: Wilde Austen Direct materials Direct labour - assembly 5 5 Direct labour - finishing Cost drivers (for part (b) of the question): Assembly labour hours per unit Finishing labour hours per unit Machine hours per month (driving maintenance overheads) Purchase orders per month Warehouse space 2,200 m m 2 Monthly production and demand 100 units 60 units The following monthly indirect costs can be directly allocated to the five departments: Assembly Finishing Maintenance Procurement Warehouse The company currently operates a traditional total absorption cost system as follows: 1. Warehouse costs are apportioned between the other departments according to the space used, which is divided between spare parts for maintenance, raw materials awaiting assembly and finished goods, in the ratio of 1:5:3. 2. The procurement costs are apportioned between the other departments according to use of the purchase clerk's time. She spends 70% of her time on purchase orders raised by the assembly department, 25% on orders raised by the finishing department, and the remainder on orders raised by maintenance. 3. Maintenance costs are reapportioned to the assembly department, as this contains all the machinery. 4. Total assembly and finishing costs are absorbed into unit costs on the basis of direct labour hours. (a) (b) Calculate the total absorption cost of each product using the current method. Round your calculations to the nearest penny. [7 marks] Recompute the total absorption costs under activity-based costing, apportioning the overheads between the products using the cost drivers identified by the factory manager. Round your calculations to the nearest penny. [17 marks]

20 REVISION LECTURE 2 PULLING LTD Pulling Ltd fits towbars to private cars. All the towbar kits are bought by Pulling Ltd for the same price, although occasionally extra kits need to be purchased if items are lost or damaged. All towbars are budgeted to take the same length of time to fit, and customers are charged a fixed price, usually 126, for fitting any towbar. The actual results and standard cost for May are set out below. May is one of the busiest months in the year and Pulling Ltd expects to be working at capacity, that is 500 units in the month. The standard cost has been calculated on this basis, with overheads allocated on standard labour hours. Standard Cost for Fitting Towbar Cost of bought-in kit 40 Labour: 2 8 per hr 16 Variable Overheads: 2 5 per hr 10 Fixed Overheads: 2 12 per hr 24 Total Cost 90 Profit Mark-Up 36 Price Charged 126 Actual Results for May Sales: 540 units 64,800 Materials: 550 kits used 20,900 Labour: 1,000 hrs 8,500 Variable Overheads 5,100 Fixed Overheads 14,000 Total Costs 48,500 Profit for May 16,300 a) Prepare an operating statement for Pulling Ltd for May, showing two variances for each category. [15 marks]

21 REVISION LECTURE 3 DISNEY Disney Ltd is a company which makes plastic ducks. It is considering a new project, manufacturing and selling a fashionable toy called the Soapie. You have the following information relating to the project: Expected annual sales Selling price per unit 1 million units for years 1 and 2; 200,000 unites for following 6 years 10 for years 1 and 2; 6 for following 6 years Note Costs Advertising 200,000 per annum Materials: plastic (1) 0.40 per unit hair (1, 2) 1 per head of hair (each Soapie has only one head) Labour: unskilled (3) 1.50 per unit supervisor (4) 15,000 per annum Notes (1) All materials are at purchase price. (2) Hair will be in limited supply in the first year only, when there will be just enough to make 1 million Soapies. If not used to make Soapies the hair could be used to make a different toy, earning a contribution of 1.10 per head of hair used. In all other years there will be an unlimited supply of hair. (3) The unskilled labour is paid piece rates (workers are paid for each Soapie produced). (4) The supervisor is currently on a four-year contract. For the next four years she will be paid 15,000 per annum regardless of the hours she works. From the fifth year onwards she will be employed only if the project is undertaken. The company will have to buy a machine at the start of the project which will cost 10 million. It is expected to have no scrap value and will be depreciated on a straight-line basis over the life of the project. Other than the machine purchase cost, cash flows will arise at the end of the year to which they relate. (a) Using a 12% discount rate, calculate the net present value of the project and advise the directors whether it is worth doing. Ensure that you explain your treatment of the costs. Use discount factors to 3 decimal places and calculate to the nearest '000. [10 marks] (b) Calculate the accounting rate of return on the average investment of the project, where return is defined as average annual profit before interest and tax. [5 marks]