Question

A manufacturing company estimates the following expenditures for the current month:

- preferred dividends paid of RM12,200;

- wages paid to workers of RM 79,600;

- overhead costs of RM 14,300;

- raw materials of RM 25,000;

- shipping costs of RM 18,100.

What are the total production costs?

Select one:

a. RM 149,200

b. RM 137,000

c. RM 153,200

d. RM 131,000

Abdullah Associates’ accounts payable for the month are RM200,000 and its wages and salaries are RM100,000. What is its total outgoing cash flow and ending balance (respectively) for the company if its interest payments for the month are RM50,000, its accounts receivable RM100,000, and beginning cash of the month is RM250,000?

Select one:

a. RM450,000 and RM0

b. RM450,000 and RM700,000

c. RM350,000 and RM500,000  

d. RM350,000 and RM0

How would you rank the following investment proposals using profitability index method?

Project Alpha (A): Requires investment of RM80,000, and has present value of future cash inflows of RM96,000;

Project Beta (B): Requires investment of RM75,000 and has present value of future cash inflows of RM120,000;

Project Gamma (G): Requires investment of RM100,000, and has present value of future cash inflows of RM150,000.

Select one:

a. A, B, G

b. G, A, B

c. B, G, A

d. B, A, G

Kencana Bhd has an 11% required rate of return. It does not expect to initiate dividends for 20 years, at which time it will pay RM4.00 per share in dividends. At that time, Kencana expects its dividends to grow at 6% forever. What is an estimate of Kencana's price in 20 years (P20) if its dividend at the end of year 20 is RM4.00?

Select one:

a. RM34.80

b. RM84.80

c. RM57.50

d. RM55.00

Lim Manufacturing is considering two investments, Project A and Project B, and both costs equally at RM10,000. The cash flow projected is as follows:

YEAR PROJECT A (RM) PROJECT B (RM)

1 6,000 5,000

2 4,000 3,000

3 3,000 8,000

Select one:

a. Project B which has a payback period of 2.25 years.

b. Project B which has a payback period of 2.0 years.

c. Project A which has a payback period of 2.0 years.

d. Project A which has a payback period of 2.25 years.

Answer 1

(1) Production cost includes expenses such as raw materials purchases, consumables, overhead costs, shipping costs, manufacturing supplies

Production cost = 79600+14300+25000+18100 = 137000

Hence option b is the correct answer.

(2) Given

Accounts Payable (AP) = 200000 RM

Wages and Salaries (W&S) = 100000RM

Interest Payments (I) = 50000 RM

Total Cash Outflow = AP + W&S + I

= 200000+ 100000+ 50000

= 350000 RM

Ending cash balance would be = opening cash balance + Receipts - Payments

Accounts receivable = 100000 RM

Opening cash balance = 250000RM

Ending cash balance would be = 250000+100000-350000

=0

Therefore option d is the correct answer.

(3)

Profitability index = (Present Value of future cash flows/ investment )

A = 96000/80000 = 1.2 times

B= 120000/75000 = 1.6 times

C= 150000/100000=1.5 times

So the order of the selection of projects based on profitability index is B, G, A. hence option c is correct.

(3) Given

Required rate of return(r) = 11%

Dividend at 20th year (D20)= 4 RM

Growth (g) = 6%

Price in 20 years (P20) = (D20*(1+g))/(r-g)

P20 = (4*(1+0.06)) / (0.11-0.06)

P20 = 84.8 RM

Hence option b is the correct answer.

(4)Given Initial Investment of both projects is 10000 RM

Pay back period formula = years before full recovery + (un recovered cost at the start of the year / cash flow during that year).

Project A

Exactly A is taking 2 years to recover its investment.

Project B

Years before recovery = 2

Unrecovered cost = 100000-5000-30000 = 2000

Cash flow in 3 rd year = 8000

Payback period = 2 + (2000/8000) = 2.25 years.

Hence we select that project whose payback period Is less

So project A will be selected because its payback period is 2 years.

Hence option c is the correct answer