NATIONAL OPEN UNIVERSITY OF NIGERIA

UNIVERSITY VILLAGE, PLOT 91, CASDASTRAL ZONE, NNAMDI AZIKIWE EXPRESS WAY, JABI, ABUJA.
FACULTY OF MANAGEMENT SCIENCES
JANUARY 2021 EXAMINATION

COURSE CODE: MBF 843

CREDIT UNIT: 3

COURSE TITLE: Capital Investment and Financial Decisions

TIME ALLOWED: 2 1 /2HRS

INSTRUCTIONS: 1. Attempt Question One (1) and any other three (3) questions

2. Question 1 carries 25 marks, while the other questions carry 15 marks each

3. Present all points in coherent and orderly manner

Question 1

(a) Joy Yomi Ltd has a cost of capital of 10% and has a limit of N20,000,000 available for investment in the current period.

Capital is expected to be freely available in future periods.

You are required to calculate the optimal investment plan:

(i) Where there are no alternative investments available for any surplus funds. (71 /2 marks)

(ii) Where surplus funds can be invested to produce 12% perpetuity. (71 /2 marks)

(b) Write short notes on:

(i) Single period capital rationing,

(ii) Real cash flows.

(iii) Multi- period capital rationing

(iv) Two stage discounting

(v) Single discounting

(vi) Money cash flows (10 marks) Total = 25 marks

Question 2

Oyewole Ltd is contemplating investing in a project and the following tentative estimates have been made.

Required Calculate the maximum tolerable unfavourable change in each of the areas (as a percentage of the original estimated value) in:

i. Sales unit

ii. Unit cost

iii. Sales volume

iv. Initial outlay

v. Project File Comment on the results.

Question 3

(a) Ugugu, Apafa Plastic Ltd. is considering investment in two mutually exclusive projects – 1 and 2, each having a life span of 5 years and no residual value.

The company does not accept any rate of return that is less than 15%.

Required

Using the Accounting Rate of Return on average capital employed, evaluate the above two projects and advise the company accordingly. Marks = 5marks

(b) Asupenmotari Engineering co. is about to decide which type of machine tool to buy, of the two types available. Type 1 costs N100m and the net annual income from the first three years of its life will be N30m, N40m and N50m respectively. At the end of this period, it will be worthless except for scrap value of N10m. To buy a type A tool, the company would need to borrow from a Finance company at 9%. Type 2 will last for three years too, but will give a constant net annual cash flow of N30m. It costs N60m but credit can be obtained from its manufacturer at 6% interest. It has no scrap value.

Require

Evaluate the above investment projects using the Net present value criterion and indicate which investment would be the more profitable. Marks = 10 Marks Total = 15 marks

Question 4

(a) Idumagbodi & Sons has been looking for a suitable investment which will give a target internal rate of return of 17 to 20%.

An investment adviser has offered the company a project, the details of which are given below: Initial investment outlay involving the purchase of machinery for N18m, and installation expenses of N3m.

The plant can produce 100,000 cartons of pineapple squash per annum, during the first two years, rising to 125,000 cartons per annum, for the next three years.

Cost of production of each carton, excluding depreciation costs is N210 and the selling price will be N270.

The plant will be scrapped at the end of the 5 th year and is expected to have negligible scrap value.

You are required to determine the actual internal rate of return of the above project. (13 marks)

(b) What are the advantages of internal rate of return method of project appraisal. (2 Marks) Total = 15marks

Question 5

Aiyenijo Joseph Ltd is considering five different investment projects. The company’s cost of capital is 12%. Data on these projects under consideration are given below:

Required:

(i) Compute the profitability index of the above projects (5 marks)

(ii) Rank the above five projects in descending order of preference, according to: NPV, IRR and profitability index. (6 marks)

(iii) Which ranking would you prefer? . (2marks)

(iv) Based on your answer in part 2, which projects would you select if N1,100, 000,000 is the limit to be spent? . (2 marks) Total = 15 marks