FEEDBACK TUTORIAL LETTER

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1 FEEDBACK TUTORIAL LETTER 1 st SEMESTER 2017 ASSIGNMENT 2 MANAGEMENT ACCOUNTING 310 GMA711S 1

2 COURSE: MANAGEMENT ACCOUNTING 310 COURSE CODE: GMA711S TUTORIAL LETTER: 02/2017 DATE: 04/ 2017 Dear Student I hope you have received your first assignment back as well as the feedback tutorial letter for the first assignment. If you have not received these, please call your student support officer at COLL. This tutorial letter is to give feedback on Assignment 2 of Management Accounting 310. Assure yourself of all the correct answers and pay attention to the remarks of the marker-tutor. Feel free to call me if you need assistance. Use the time that you have available up to the end of the semester to do revision and prepare yourself for examination. Good Luck with the examinations! Regards, Mr. H Namwandi Tel hnamwandi@nust.na 2

3 ASSIGNMENT 2 Question 1 (15 Marks) The maximum amount that should be paid to the market research company is computed as the difference between the expected value of the selected project (s) with and without the information from the market research company. Step 1: (7 marks) Compute the expected value of the three projects without any information from the market research company. Next select the best project based on expected value numbers. Customer demand Probability Project A Project B Project C Mark Above average Average Below average Expected Value (EV) The best project out of the three based on expected value number is project A with EV = N$ ( = 1 mark) Step 2: (6 marks) Compute the expected value of projects assuming we get information from the market research company. To compute this we select the highest NPVs assuming each of the demand conditions materialize. Thus If there is above average demand, project C with NPV of will be selected. If there is above average, again project C with NPV of will be selected. If there is below average demand, project A with NPV of will be selected. The probability values will be assumed the same i.e. the market research company will forecast perfectly above average demand to be 20%, average demand to be 45% and below average demand to be 35%. Then the expected value will be = 0.2*800, *600, *700,000 = Step 3: (2 marks) Take the difference of step 2 and 1 i.e. 675, ,000 = 125,000. This is the maximum amount that should be paid to the market research company. ( = 1 mark) Question 2 (15 Marks) High (30%) EV Profit: N$

4 Medium (30%) Oil found (60% Profit: N$ Drilling cost Low (40%) N$ Loss:N$ No oil (40%) Do not drill N$0 - Recommendation: they should drill because expected profit will be N$ Marks I mark for each shape 1 mark for each branch 1 mark for each EV calculated 1 mark for recommendation Total = (15 marks) Alternative EV calculation Outcome Probability Net cash inflow EV 1. Oil found and high demand = Oil found and medium demand = Oil found and low demand = No oil found Total Question 3 (20 Marks) 4

5 a) Assume no capital rationing (5 marks) First compute the NPV of the three projects. Project A: (50 000)* (20 000)* * * *0.683 =5 700 The PV of future cash flows = NPV + Initial Investment (II) = = Project B: (28 000)* (50 000)* * * *0.683 = The PV of future cash flows = NPV + II = = Project C: (30 000)* (30 000)* * * *0.683 = 4,380 The PV of future cash flows = NPV + II = = Decision: Because all the three projects have positive NPV, they should be accepted if there is no capital rationing. b) Assume there is capital rationing (10 marks with 6 marks for the ranking of the projects based on PI and 4 marks for the actual amount invested in each project) If there is capital rationing, we have to rank projects. But before that we need to compute profitability index (PI) PI = PV of cash flows/ Initial investment For project A: PI = / = For project B: PI = / = For project C: PI = / = Project Initial investment PV Future CFs of NPV PI Ranking based NPV A B C on Ranking based on PI Selection based on NPV Selection based on PI Project Initial NPV Project Initial NPV investment investment A C C * B Total A # 5

6 Total ( = 1 mark) Notes + Out the capital constraint only is left to be invested in project C # Out of capital constraint, only is left to be invested in project A *The NPV of Project C will be proportionate to the amount of capital invested. From the full project cost, only is invested. Thus the NPV of the partial investment will be 1/3 of the full NPV i.e / *4 380 = 1 *The NPV of Project A will be proportionate to the amount of capital invested. From the full project cost, only is invested. Thus the NPV of the partial investment will be 2 000/ (4%) of the full NPV i.e. 4% *5 700 = 228 Decision: If there is capital rationing of we have to rank projects by PI to maximize the total NPV from the limited funds. As a result project C and A are selected. Project C is fully accepted whereas project A is partially accepted to the amount of 60%. In this the total NPV of will increase when we rank by NPV criteria with the total NPV value of Meaning of capital rationing and its type (5 marks) Capital rationing is a situation where there is insufficient funds to undertake all positive NPV projects. (2 marks) There are two types of capital rationing Soft capital rationing: occurs when the firm internally imposes a budget ceiling on the amount of capital expenditure (1.5 marks) Hard capital rationing: occurs when the amount of capital investment is restricted because of external constraints such as inability to obtain funds from the financial markets. (1.5 marks) THE END 6

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FEEDBACK TUTORIAL LETTER ASSIGNMENT 2 COST AND MANAGEMENT ACCONTING 102 CMA512S

FEEDBACK TUTORIAL LETTER ASSIGNMENT 2 COST AND MANAGEMENT ACCONTING 102 CMA512S FEEDBACK TUTORIAL LETTER 2 nd SEMESTER 2017 ASSIGNMENT 2 COST AND MANAGEMENT ACCONTING 102 CMA512S 1 COURSE: COST AND MANAGEMENT ACCOUNTING 102 COURSE CODE: CMA512S TUTORIAL LETTER: 01/2017 DATE: 08/2017