MI 2021 Prelim Paper 2 Answer Guide

2021 Prelims Paper 2 Suggested Answer Guide 1 (b) Year 0 1 2 3 4 5 Net Present value Initial Cost -500 000 Cash flow from profits (NP+Depn) 160 000+ 90 000 150 000+ 90 000 80 000+ 90 000 60 000+ 90 000 40 000+ 90 000 Sales proceeds 50 000 Total Cash flows -500 000 250 000 240 000 170 000 150 000 180 000 Disc factor 1 0.893 0.797 0.712 0.636 0.567 Present Value -500 000 223 250 191280 121040 95 400 102 060 233 030 / / / / / / [6] Depreciation = (500-50)/5 = 90 (a) Year 0 500 000 1 -250 000 Left to cover 250 000 2 -240 000 Left to cover 10 000 -10 000 10000/170000 x 12 = 1mth 0 Payback period = 2 years 1 month /// [3] (c) Buy P. / - P’s NPV is only slightly lower than Q’s by $6 97 0 [6970/240000 = 3% lower] but its payback period is much shorter than Q’s by 8 months [8 mths/ 33mths = 24% shorter]. // - The cost of Q is also much higher than P by $100 000 but its NPV is only higher by $6 970 and there are opportunity cost of the extra $100 000 cash tied up from being invested elsewhere. / - The earlier payback period for P means that is less risky to invest in P and the funds can be recovered earlier to be reinvested for profits. / - Other relevant points [5] (d) - Projected amount and timing of cash flows may not be accurate. - Difficult to establish an accurate cost of capital - Difficult to determine a suitable acceptable NPV or minimum payback period - Impacts on business such as savings from productivity are difficult to estimate Any 2 [2]

(e) % loan $ loan $ shares Cost of loans Cost of shares Cost of capital 40% 80000 120000 9600 [80000 x 12%] 16800 [120000 x 14%] 26400 // 60% 120000 80000 21600 [120000 x 18%] 12800 [80000 x 16%] 34400 // [4] 2. a July August Sept Sales (units) 20000 26000 28000 + Closing stock 3900 4200 5700 - Opening stock (3000) (3900) (4200) Production (units) 20900 26300 29500 X2 X2 X2 Purchases (units) 41800 / 52600 / 59000 / Purchases ($) 209000 / 263000 295000 / [5] b September / Shortfall = 59000 – 55000 = 4000 units / [2] c To minimise storage costs, he should minimise the stock holding period. Hence he should buy the shortfall in August followed by July. units workings Shortfall 4000 Purchase in August (2400) (55000-52600) 1600 Purchase in July OF (1600) Hence he should buy 2400 units in August and 1600 units in July. [2] d workings $ August’s 2400 units 2400 units x 1 mth x $0.50 1200 / July’s 1600 units 1600 units x 2 mths x $0.50 1600 / OF Storage costs 2800 Purchase costs 4000 units x $5 20000 / OF Total costs 22800 / [4] e. Costs = 4000 units x $6 = $24000 OF [2] f. Option 1 / - It is cheaper by $1200 (24000 - 22800). // - Original supplier so quality is assured However, need to consider the