Question 1:
You have recently been appointed as the Financial Manager’s Assistant of Prime Ltd, and you were provided with the following information for project Lime.
| Year | Net cash flows |
| 1 | R87 015 |
| 2 | R98 280 |
| 3 | R94 038 |
| 4 | R100 667 |
| 5 | R103 983 |
The initial investment amounts to R288 519, and the cost of capital (required rate of return) of 15%. NOTE: YOU MAY USE THE INTEREST TABLES IN APPENDIX A OF THE PRESCRIBED TEXTBOOK FROM PAGES 493-496
Required:
a) Calculate the net present value (NPV) and the profitability index (PI) of the project Lime. (12 Marks)
b) Evaluate the project using the NPV and PI and recommend whether to accept or reject the project. Also, indicate the effect of the project on the shareholders. (4 Marks)
Question 2 [12 Marks]
You have been presented with the following information from Bogus Ltd.
| Source of Capital | Book Value | Market Value | Before-tax cost |
| Long-term debt | R11 823 158 | R7 389 474 | 8% |
| Preference shares | R118 232 | R177 347 | 13% |
| Ordinary shares | R3 103 579 | R8 867 368 | 17% |
| Total | R15 044 969 | R16 434 189 |
Assume Bogus Ltd has an average tax rate of 27% Required:
a) Calculate the WACC based on the book value weights. Round off answers to two decimal places (10 Marks)
b) Compare the book value and market value method of calculating the WACC. (2 Marks)
Question 3 [22 Marks]
You have recently been appointed as the cost manager at Kingdom Stationaries. Kingdom buys and sells a standard type of diary.
The details for the year ended 30 June 2023 are as follows: 1 July 2022
• Opening inventory of 936 diaries at R78 each.
31 July 2022
• Purchased 312 diaries at R125 each.
30 April 2023
• Purchased 390 diaries at R120 each.
During the financial year ended 30 June 2023, 400 diaries were sold at R117 each.
Required:
a) Calculate the value of the closing stock by using the FIFO method. (8 Marks)
b) Calculate the gross profit by using the weighted average method.
Use the below format in the next page. (14 Marks)
Answers to Above Questions on Financial Accounting
Answer 1: The net present value (NPV) and the profitability index (PI) of the project Lime is calculated as follows:
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