Answering Questions

  • Read each question carefully.
  • When you answer a question, your answer will automatically be saved.
  • You can revisit questions and change your answers at any time during the exam.
  • The only permitted characters for numerical answers are:
    • Numbers
    • One full stop as a decimal point if required
    • One minus symbol at the front of the figure if the answer is negative.

              For example: -10234.35

No other characters, including commas, are accepted.

Navigating between questions

  • Click Next Button to move to the next question.
  • Click Previous Button to move back to the previous question.
  • Click on a question number from the Exam Progress Details panel (see next page) to move directly to that question.
  • A message will be displayed when you click to move away from a question which has been partially attempted. You can choose to stay on the question and review your answer(s) or continue.
  • When reviewing your answer(s) for partially attempted questions ensure you read any message displayed in red text below the question in Section A or below the question
    part(s) in Section B
    .

Pinks Co (Mar/Jun 2019)

Pinks Co is a large company listed on a major stock exchange. In recent years, the board of Pinks Co has been criticised for weak corporate governance and two of the company’s non-executive directors have just resigned. A recent story in the financial media has criticised the performance of Pinks Co and claims that the company is failing to satisfy the objectives of its key stakeholders.

Pinks Co is appraising an investment project which it hopes will boost its performance. The project will cost $20 million, payable in full at the start of the first year of operation. The project life is expected to be four years. Forecast sales volumes, selling price, variable cost and fixed costs are as follows:

Year

1

2

3

4

Sales (units/year)

300,000

410,000

525,000

220,000

Selling price ($/unit)

125

130

140

120

Variable cost ($/unit)

71

71

71

71

Fixed costs ($’000/year)

3,000

3,100

3,200

3,000

Selling price and cost information are in current price terms, before applying selling price inflation of 5% per year, variable cost inflation of 3.5% per year and fixed cost inflation of 6% per year.

Pinks Co pays corporation tax of 26%, with the tax liability being settled in the year in which it arises. The company can claim tax-allowable depreciation on the full initial investment of $20 million on a 25% reducing balance basis. The investment project is expected to have zero residual value at the end of four years.

Pinks Co has a nominal after-tax cost of capital of 12% and a real after-tax cost of capital of 8%. The general rate of inflation is expected to be 3.7% per year for the foreseeable future.

Required

A.
(i) Calculate the nominal net present value of Pinks Co’s investment project.
(ii) Calculate the real net present value of Pinks Co’s investment project and comment on your findings.

B. Discuss FOUR ways to encourage managers to achieve stakeholder objectives

Leave a Reply

Your email address will not be published. Required fields are marked *