Finance prolems – Case Study Example

FINANCE PROBLEMS By of the of the School The following information applies to question 6 Consider the following projects Projects NPV (£m) Initial Investment (£m) A 9.6 3 B 10 5 C 16.1 7 D 12.0 8 E 14 10 A capital constraint of £17m has been imposed on the total investment. 1) What is the total NPV (within which of the following ranges) if projects are divisible but cannot be repeated? a) £35m – £40m b) £40m – £45m c) £45m – £50m d) £50m – £55m ANSWER: A Identify the most probable combinations taking care of the capital constraint. The projects should be ranked using their profitability index PI=PV/Initial investment A=12.6/3= 4.2 B=15/5=3 C=23.1/7=3.3 D=20/8=2.5 E=24/10=2.4 Ranking in descending order A-C-B-D-E A-9.6 C-16.1 B-10 D-12.0 E-14 Range of NPVs= 9.6+16.1+10= 35.7(£35m-40m) 2) Yakuza plc plans to make 3,000 units of a particular product. The revenue from sales is expected to be £270,000. It plans to spend £36,000 on raw materials and £60,000 on operatives’ wages. The production fixed costs will be £120,000 and the administration fixed costs will be £27,000. What will the break-even point be? a) 2,535 b) 3,410 c) 3,500 d) 4,025 ANSWER: A Break-even point= Fixed Costs/Price - Variable Costs Total fixed cost= 120000+27000= $147000 Total variable costs= 36000+60000=$96000 Unit VC= 96000/3000= $32 Unit price =270000/30000=$90 BEV= 147000/ (90-32) = 2534.48units =2535units 3) Harajuku Hats Ltd produces three products, and absorbs production costs on the basis of the number of labour hours. Estimated information for next year is given below. Product 1 2 3 Output (units) 2,500 4,500 5,000 Labour Hours per unit 1 2 4 Production costs £200,000 Using labour hours as the absorption basis, what is the production cost per unit of Product 2? a) £14.20 b) £12.70 c) £13.50 d) £11.50 ANSWER: B Production cost per unit= production cost/total labour hours Production cost apportioned to product 2= (2/7*200000)=£57142.857 Production cost per unit= 57142.857/4500= £12.6984 =£12.70 4) Wasabi Ltd has invested £70,000 to date in developing a new type of skin cream. However, there has been no interest in the new cream from healthcare companies. Wasabi Ltd believes that there is such potential for the cream as a sun block. However, further research would have to be carried out. Contracts of two research chemists would have to be extended for a further year at a cost of £80,000. The research chemists are due to be made redundant at a total cost of £30,000. However, if the contract is extended the redundancy cost will be £40,000 at the end of the contract. The further research that will have to be carried out will take up one quarter of the laboratory space available within the company. The company rents the laboratory at an annual cost of £60,000 per annum. What is the minimum price that Wasabi Ltd could charge the cosmetics company to justify the additional research: a) £205,000 b) £105,000 c) £90,000 d) £135,000 ANSWER: C Minimum price= invested cost +research cost+ rent = 70000+1/4*60000+10000-60000/12 =£90000 Reference Bhat, S. (2008). Financial Management: principles and Practice. New Delhi, Excel Books.