Page 223 - Microsoft Word - 00 CIMA F1 Prelims STUDENT 2018.docx

Answers to supplementary objective test questions

10.7 Statements (iii) and (iv) are true.

First, find the NPV

C/f DF PV
Machine T0 –80,000 1 –80,000
Contribution T1 – T9 96,000 5.759 552,864
Fixed costs T1 – T9 –70,000 5.759 –403,130
Scrap value 6,000 0.424 2,544

72,278

Option 1 is wrong – if the contribution increased the project would only become
more worthwhile. The figure of 13% is the amount by which the contribution
would have to fall ($72,278/$552,864) for the project to no longer be viable.

Option 4 is correct – if the fixed costs increased by 17.9% ($72,278/$403,130)
the project would no longer be viable.

Option 5 is wrong – the PV of the scrap value is only $2,544. The project would
have a positive NPV even without the scrap proceeds.

Find the payback period:
Cum
Net cash flow Cum c/f DF PV of c/f discounted c/f

Machine –80,000 –80,000 1 –80,000 –80,000
Y1 26,000 –54,000 0.909 23,634 –56,366
Yr. 2 26,000 –28,000 0.826 21,476 –34,890
Yr. 3 26,000 –2,000 0.751 19,526 –15,364
Yr. 4 26,000 24,000 0.683 17,758 2,394

Option 2 is wrong. The payback period is 3.08 years (2/26=0.08)

Option 3 is correct. The discounted payback is 3.87 years (15364/17758 = 0.87)

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