Acca F9 Exam

ACCA

Paper F9 Financial Management

Tuition Mock Examination December 2012 Answer Guide

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How to fail

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Question 1

Tutorial help and key points

(a) ● (i) NPV should be calculated as the present value of future relevant cash flows (discounted using the appropriate cost of capital) less the initial investment. The $220,000 development and design cost is sunk as it has already been incurred and as such is irrelevant to cash flow. It should be ignored. Selling price, variable cost and fixed costs are all in current prices and should be adjusted by their respective inflation rates from year one onwards. Fixed cost includes depreciation, and depreciation does not involve movement of cash. The depreciation should therefore be deducted before inflating the remaining balances. The equipment cost is also sunk and should be ignored. Its sale value now of $300,000 meets the definition of opportunity cost and should be included as a year zero cash outflow whilest the $86,000 should be included as a cash inflow in year four. Working capital should be included in year zero and recovered in year four. Tax is payable one year in arrears. (ii) Internal rate of return...