Question 1

MAY 2008 #6

3. Capital Ventures is a new company, formed to sell merchandise for a major sporting event to be held
in four years’ time. After the major sporting event, the company will stop trading.

The directors have approached two merchant banks for funding. Each bank has put together a
funding proposal of £30 million for the directors to consider. The details of each proposal are
shown below.

Interest Rate/
Proposal A £ million
Expected return
Debenture 5 16%
Bank Loan 5 14%
Preference Shares 5 12%
Ordinary Shares 15 10%
Total 30

Interest Rate/
Proposal B £ million
Expected return
Debenture 12 15%
Bank Loan 3 13.5%
Preference Shares 3 12.5%
Ordinary Shares 12 11%
Total 30

Required:

(a) (i) For each funding proposal, calculate the weighted average cost of capital.
(10)

(ii) Select a funding proposal for the directors of Capital Ventures, giving a reason for your choice.
(2)

N30577A 10
 The expected sales for Capital Ventures are

Year 1 £300 000

Year 2 £500 000
Year 3 £1 200 000
Year 4 £60 000 000

The expected running costs for Capital Ventures (including depreciation) are

Year 1 £1 300 000

Year 2 £1 400 000
Year 3 £2 000 000
Year 4 £6 000 000

Depreciation is expected to be £800 000 per year for the first three years, and £1 000 000 for
year 4.

Required:

(b) Calculate the Net Present Value (NPV) of the project to sell merchandise.

Select the most appropriate discount factor for the calculation of the Net Present Value (NPV) from
the discount factors given in the table.
(12)

Year 10% 11% 12% 13% 14% 15%

1 0.909 0.901 0.893 0.885 0.877 0.870
2 0.826 0.812 0.797 0.783 0.769 0.756
3 0.751 0.731 0.712 0.693 0.675 0.658
4 0.683 0.659 0.636 0.613 0.592 0.572

(c) Evaluate the project for the company, using the calculations made, and considering any other
relevant factors.
(8)

(Total 32 marks)

Answer space for question 6 is on pages 28 to 30 of the question paper.

N30577A 11 Turn over

 MAY 2009 #6

4. The directors of Sunshine Theme Parks Limited are considering opening a new theme park in the
holiday resort of Utopious. They have leased land for five years, and have been granted a licence
to operate the theme park for five years.

The following information is available:

• Forecasts show that the initial cost of the investment will be £6 000 000.

• The investment of £6 000 000 includes 6 rides, costing £150 000 each. The rides are to be
depreciated over 5 years using the straight line depreciation method at a rate of 20% per year.

• Running expenses, including depreciation for the rides, for the first three years are forecast to
be £1 000 000 per year. In year four, running expenses, including depreciation, are forecast to
rise by £200 000. In year five, running expenses are forecast to stay at the same level as in year
four.

• For the first three years it is forecast that the theme park will operate for 210 days per year,
with an average of 500 visitors per day, each paying a £20 entrance fee.

• In year four, it is forecast that the theme park will operate for 210 days, with an average of 600
visitors a day, each paying a £25 entrance fee. These figures are expected to stay the same for
year five.

• It is company policy to have a payback period of five years on investment projects.

• It is company policy only to invest in projects achieving an average rate of return of 10% per
year.

Required:

(a) Calculate for the project the:

(i) payback period, showing your answer in years and months

(14)

(ii) average rate of return.

(10)

(b) Evaluate the project for the company, considering both financial and non-financial factors.
(8)

(Total 32 marks)

Answer space for question 6 is on pages 30 to 33 of the question paper.

M33447A 12

M33447A_Source_Booklet_GCE_Accou12 12 03/11/2008 10:07:36

 JAN 2010 7#

5. MetroTransit plc has been offered a contract by the government to build an underground railway
across the city. MetroTransit plc will be able to operate the railway, and collect and retain all fares,
for five years before the government takes over the railway. The directors of MetroTransit plc are
considering whether to accept the contract and invest in the project.

The following information is available:

(i) Forecasts show that the initial cost of the investment will be £900 million (£900 000 000).

(ii) Depreciation on all fixed assets of the railway is forecast to be £135 million (£135 000 000)
per year for each of the five years.

(iii) Operating expenses, including depreciation, for the first two years are forecast to be
£228 million (£228 000 000) per year. In year three, operating expenses, including
depreciation, are forecast to rise by 5%. In years four and five, operating expenses are
forecast to stay at the same level as in year three.

(iv) The railway will run for 365 days of the year.

(v) In years one, two and three, it is forecast that the railway will carry 280 000 passengers per
day, paying a fare of £4 each.

(vi) In years four and five, it is forecast that the railway will carry 310 000 passengers a day, and
the price of a fare will rise by 10%.

(vii) The company’s cost of capital is 11%.

(viii) The following is an extract of the present value table:

11%
Year 1 0.901
Year 2 0.812
Year 3 0.731
Year 4 0.659
Year 5 0.593

Required:

(a) Calculate the net present value for the project.

(24)

(b) Evaluate the project for MetroTransit plc, using the calculations made and considering any
other relevant factors.
(8)

(Total 32 marks)

Answer space for question 7 is on pages 36 to 38 of the question paper.

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M36363A_Source_Booklet_GCE_Accou13 13 03/09/2009 14:30:44

 MAY 2010 #6

6. The directors of Airwaves plc are considering making a bid to operate the satellite television
channel being offered by the government. The licence to operate the television channel will be for
five years. Airwaves plc has carried out research to discover possible costs and revenues of the
project.

The following figures have been estimated:

(i) The initial cost of the project will be £50 000 000. This will include all fixed assets required for
the project, at a cost of £25 000 000. The fixed assets are to be written off over 5 years using
the straight line method.

(ii) Running expenses, including depreciation, for the first two years are forecast to be £10 000 000
per year. In year three, running expenses, including depreciation, are forecast to rise by
£2 000 000. In years four and five, running expenses are expected to stay at the same level as
in year three.

(iii) For the first year it is expected the channel will have 90 000 customers, each paying a £150
subscription fee per year. In years two and three, it is expected the channel will have 110 000
customers, each paying a £175 subscription fee per year. In years four and five, it is expected
the channel will have 130 000 customers, each paying a £200 subscription fee per year.

(iv) It is company policy only to invest in projects achieving an accounting rate of return (average
rate of return) of 8% per year.

Required:

(a) Calculate for the project the:

(i) payback period, showing your answer in years and months

(16)

(ii) accounting rate of return (average rate of return).

(8)

(b) Evaluate the project for the company, using the calculations made and considering any other
relevant factors.
(8)

(Total 32 marks)

Answer space for question 6 is on pages 32 to 35 of the question paper.

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36985A_Source_Booklet_GCE_Accoun11 11 16/11/2009 13:53:41

JAN 2011 #2

7. The directors of Telstar Sports plc are considering the offer of a five year contract from the World
Cricket Authority to stage a cricket competition.

The following information is available:

(i) Forecasts show that the initial cost of the investment will be £2 000 000. This includes
noncurrent assets for new technology costing £675 000. The noncurrent assets are expected to
have a life of five years, after which they will have no value and will be scrapped. The
company uses the straight line depreciation method.
(ii) Running expenses, including depreciation, for the competition for the first two years are
forecast to be £840 000 per year. In year three, running expenses, including depreciation,
are forecast to rise by £120 000. In years four and five, running expenses are expected to
stay at the same level as in year three.
(iii) In addition, there will be the cost of players’ contracts. There will be 8 teams, with 16
players per team. Each team will have an average contract of £35 000 per player per year.
(iv) For each year of the competition, there will be 56 matches. Each match is expected to
attract 12 000 spectators, paying an average of £8.50 per person.
(v) The company’s cost of capital is 12%.
(vi) The following is an extract from the present value table:

12%
Year 1 0.893
Year 2 0.797
Year 3 0.712
Year 4 0.636
Year 5 0.567

Required:
(a) Calculate for the project the:

(i) payback period, showing your answer in years and months.

(26)
(ii) net present value.
(14)

(b) Evaluate the project for the company, using the calculations made and considering any other
relevant factors.
(12)

(Total 52 marks)
MAY 2011 #2

8. Lifecare plc provides private nursing homes for elderly people. The directors are considering the
possibility of opening a new nursing home, at a cost of £2.5 million.

The finance director is considering two possible options to finance the new nursing home. The
details are shown below.

Interest rate/
Option A £
Expected return
Debenture 500 000 15%
Bank loan 200 000 12.5%
Preference shares 300 000 10%
Ordinary shares 1 500 000 8%
Total 2 500 000

Interest rate/
Option B £
Expected return
Debenture 1 000 000 14%
Bank loan 500 000 11%
Preference shares 500 000 9%
Ordinary shares 500 000 7%
Total 2 500 000

Required:

(a) For each option, calculate the weighted average cost of capital.
(12)

(b) (i) Select the best finance option for the directors of Lifecare plc.
(2)

(ii) State one reason for your choice of finance option.

(2)

(c) Explain to a potential investor the difference between ordinary shares and preference shares.
(8)
The following figures are estimated for the nursing home:

• In the first year, the home will care for 40 people a week, each paying £650 a week.

• In years 2, 3 and 4, the home will care for 50 people a week, each paying £675 a week.

• In years 1 and 2, running costs (including depreciation) will be £30 000 a week.

• In years 3 and 4, running costs (including depreciation) will be £33 000 a week.

• Depreciation will be £750 000 per year for the first four years.

• Assume 52 weeks in a year

• Lifecare plc has a company policy that requires investments to have a positive net present value
within four years.

Required:

(d) Calculate the Net Present Value of the project at the end of year 4.
(16)
A table showing the discount factors is given.

Year 8% 9% 10% 11% 12% 13%

1 0.926 0.917 0.909 0.901 0.893 0.885
2 0.857 0.842 0.826 0.812 0.797 0.783
3 0.794 0.772 0.751 0.731 0.712 0.693
4 0.735 0.708 0.683 0.659 0.636 0.613

(e) Evaluate the opening of the new nursing home for Lifecare plc, using the calculations made,
and considering any other relevant factors.
(12)

(Total 52 marks)
MAY 2012 #4

9. A group of business people are thinking of creating a cycling team, Team Minerva, to take part in
cycle races over the next four years. The initial investment to create the team will be £1 500 000.

The following figures are estimated for the cycling team:

(i) Salaries for cyclists will be:

   
  


   
   



(ii) Running costs are £800 000 per year including depreciation.

(iii) Depreciation is expected to be £260 000 per year.

(iv) Estimated prize money the team will earn is

Year 1 £600 000 Year 2 £850 000 Year 3 £1 100 000 Year 4 £900 000

(v) A contract with sponsors will result in revenue of £400 000 per year for four years.

(vi) Television revenue will be

Years 1 + 2 £250 000 per year Years 3 + 4 £300 000 per year.

(vii) The cost of capital for the project is 9%.

(viii) The discount factors for 9% are

Year 1 0.917 Year 2 0.842 Year 3 0.772 Year 4 0.708

Required:

(a) Calculate the Net Present Value of the project at the end of Year 4.
(16)

(b) (i) State the Internal Rate of Return of the project.

(2)

(ii) Explain your answer given in b (i).

(6)

(c) Evaluate the Internal Rate of Return as a project appraisal method.

(8)

(Total 32 marks)

Answer space for question 4 is on pages 18 to 21 of the question paper.

P40267A 9 Turn over

JAN 2013 #5

10. Metro Clean plc is considering bidding for a contract to dispose of household waste in the city
of Valettori. The contract will last for five years, and the city authorities will pay the company to
dispose of household waste.

The following information is available.

1. The initial cost of the contract to Metro Clean plc will be £1 900 000. This will include six
specialist lorries costing £145 000 each. These lorries will last for five years when they will be
sold for £5 000 each.

2. Running expenses, including depreciation of the lorries, for the first three years are forecast
to be £850 000 per year. In year four running expenses, including depreciation, are forecast to
rise by £50 000. In year five, running expenses are expected to stay at the same level as in year
four.

3. The City of Valettori authorities will pay Metro Clean plc £1 200 000 for the first year. The
payment for year two will rise by 5%. The payment for year three will be the same as year two.
The payment for year four will increase by a further 5%. The payment for year five will be the
same as year four.

4. It is Metro Clean plc policy to have a payback period of three years on investment projects.

5. It is Metro Clean plc policy only to invest in projects achieving an average rate of return of at
least 10% per year.

Required:

(a) Calculate for the project the:

(i) payback period, showing your answer in years and months

(14)

(ii) average rate of return (accounting rate of return).

(10)

(b) Evaluate the project for Metro Clean plc, using the calculations made and considering any
other relevant factors.
(8)

(Total 32 marks)

Answer space for question 5 is on pages 21 to 24 of the question paper.

P42222A 9 Turn over

JAN 2014 #1

11. Tsevo Farms Limited has won a four-year contract to supply a major supermarket chain with salads
and sandwiches. The initial costs involved in obtaining the contract were £700 000.

The following information relates to the contract:

• In the first year, 13 500 products a week will be supplied, at an average selling price of £0.73
each.
• In years two and three, 14 000 products a week will be supplied, at an average selling price of
£0.75 each.
• In year four, 14 500 products a week will be supplied, at an average selling price of £0.77 each.
• In years one and two, the running costs (including depreciation) are expected to be £8 500 a
week.
• In years three and four, the running costs (including depreciation) are expected to be £8 800 a
week.
• Depreciation is expected to be £164 000 per annum for the first four years.
• Assume 52 weeks in a year.
• The cost of capital for the company is 9%.

Required:

(a) Calculate the net present value of the contract at the end of year 4.
(18)

A table showing the discount factors is given.

Year 9%
1 0.917
2 0.842
3 0.772
4 0.708

(b) Calculate the Payback period for the contract.

(8)

(c) Evaluate the project for the company, using the calculations made in (a) and (b) above and
considering any other relevant factors.
(12)

P43183A 2
 The Chief Accountant for the company is also appraising the project using the Internal Rate of
Return method. She has calculated the following figures:

Discount Rate Net Present Value

16% £21 430
20% (£34 239)

Required:

(d) (i) Complete the calculation, clearly stating any formula used, to find the exact Internal Rate
of Return, accurate to two decimal places.
(10)

(ii) Using your answer for the exact Internal Rate of Return calculated in (d)(i), decide whether
Tsevo Farms should invest in the project, giving a reason for your answer.
(4)

(Total 52 marks)

Answer space for question 1 is on pages 2 to 8 of the question paper.

P43183A 3 Turn over

MAY 2014 #7

12. The Bengal Bay Metal Company plc produces tin cans. The directors have decided to build a new
factory, and have to choose between two possible locations, Amillakat and Barigong. The directors
have decided to evaluate the forecast figures for the next five years, in order to choose the better
location.

The following information is available concerning the two locations.

Amillakat

• Location is in an industrial area, away from housing

• Cost of factory £22 million
• Running costs per year £5 million, which includes £800 000 of depreciation per year

Barigong

• Location is in the city centre, near housing area

• A grant is available which reduces the cost of the factory to £16 million
• Running costs per year £6.7 million, which includes £900 000 of depreciation per year

Sales will be 565 million tin cans per year, at a price of £0.02 (2 pence) per can, regardless of which
location is selected.

The cost of capital for the factory will be 7%. A table of discount factors for 7% is given below.

Year Discount Factor

1 0.935
2 0.873
3 0.816
4 0.763
5 0.713

Required:

(a) Explain the following accounting terms:

(i) payback period

(ii) accounting (average) rate of return

(iii) internal rate of return.

(6)

P43180A 16
 (b) Calculate the Net Present Value of the factory at each location after five years of operation.
(18)

(c) Evaluate the two possible locations on which to build the new factory.
(8)

(Total 32 marks)

Answer space for question 7 is on pages 39 to 42 of the question paper.

P43180A 17
JAN 2015 #6

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MAY 2015 #3

14 Purple Waves plc has been granted a licence to operate a mobile phone network in
another country for 5 years. The cost of the licence and other start-up costs total
£400 million.
The finance director has prepared two possible options to finance the funding of the
project. The details of each option are shown below.

Option A £m Interest Rate/

Expected return
Debenture 100 9%
Bank Loan 50 8%
Preference Shares 50 6%
Ordinary Shares 200 4%
Total 400

Option B £m Interest Rate/

Expected return
Debenture 50 8%
Bank Loan 200 9%
Preference Shares 40 4%
Ordinary Shares 110 4%
Total 400

Required:
(a) For each funding option, calculate the weighted average cost of capital.
(12)
(b) (i) Select the most appropriate funding option for the directors of Purple Waves plc.
(2)
(ii) Give one reason for your choice of funding option.
(2)

6
P44822A
 Additional Information:
• In year 1, the number of customers is estimated to be 1 million paying £180 each,
a year.
• In years 2 and 3, the number of customers is estimated to be 1.8 million each year,
paying £190 a year.
• In years 4 and 5, the number of customers is estimated to be 2.2 million each year,
paying £200 a year.
• In year 1 the running costs (including depreciation) are estimated to be
£285 million per year.
• In years 2 and 3, the running costs (including depreciation) are estimated to be
£300 million for each year.
• In years 4 and 5, the running costs (including depreciation) are estimated to be
£340 million for each year.
• Depreciation is estimated to be £80 million for each year.
• The directors of Purple Waves plc require investments to give an average rate of
return (accounting rate of return) of 10%.
• A table showing the discount factors is given.

Year 3% 4% 5% 6% 7% 8% 9%
1 0.971 0.962 0.952 0.943 0.935 0.926 0.917
2 0.943 0.925 0.907 0.890 0.873 0.857 0.842
3 0.915 0.889 0.864 0.840 0.816 0.794 0.772
4 0.888 0.855 0.823 0.792 0.763 0.735 0.708
5 0.863 0.822 0.784 0.747 0.713 0.681 0.650

Required:
(c) Calculate the Net Present Value of the project at the end of year 5.
(15)
(d) Calculate the average rate of return (accounting rate of return) of the project.
(9)
(e) Evaluate the project for the company, using the calculations made, and
considering any other relevant factors.
(12)

(Total for Question 3 = 52 marks)

Answer space for question 3 is on pages 15 to 23 of the question paper.

7
P44822A
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JAN 2016 #7

15 Gulf Catering Supplies Limited is a new business and has won a contract to supply a
major airline with in-flight meals. The initial costs involved in delivering the contract
are £2 000 000.
The following information relates to the contract:
• In year one, the contract will be to supply meals for 220 flights a week, serving
one meal per passenger
• The average number of passengers per flight is 150
• In the first two years, meals will be supplied at an average selling price of £0.52
• In years two and three, there will be 240 flights a week
• In years four and five, there will be 260 flights a week
• In years three and four, meals will be supplied at an average selling price of £0.55
• In year five, meals will be supplied at an average selling price of £0.58
• The cost of producing the meals in all five years will be £0.25
• In years one and two, running costs (including depreciation) will be £6 750 a week
• In years three, four and five, running costs (including depreciation) will be £6 950
a week
• Depreciation will be £235 000 per year for each of the five years
• Assume 52 weeks in a year.
Required:
(a) Calculate the payback period for the contract, giving your answer in years and
months.
(20)
Gulf Catering Supplies Limited financed the contract as follows:
• £0.50 Ordinary shares £500 000
• £1 Redeemable Preference shares £600 000
• 9% Bank Loan £900 000
(b) Calculate, stating the formula used, the gearing ratio for Gulf Catering Supplies
Limited.
(4)

16
P46930RA
 A prospectus was sent to potential shareholders, to persuade them to invest in
the new company. The prospectus states “Gulf Catering Supplies Limited is not a
company that takes financial risks”.
(c) Evaluate the statement “Gulf Catering Supplies Limited is not a company that
takes financial risks”.
(8)

(Total for Question 7 = 32 marks)

Answer space for Question 7 is on pages 42 to 45 of the question paper.

17
P46930RA
MAY 2016 #7

16 Suntours plc are considering building a hotel in the seaside resort of Komos. The
initial cost of building the hotel will be £2 000 000.
The following budgeted information is available:

Charge per room Running costs per room

Year Room occupancy
per week (including depreciation)
1 60% £225 £135
2 80% £230 £135
3 80% £230 £140
4 90% £235 £140
5 90% £235 £145

• The hotel has 5 floors with 16 rooms on each floor

• Depreciation will be £250 000 per year
• Assume 52 weeks in a year
• It is company policy to have a positive net present value on projects within
five years
• The cost of capital for the company is 8%.
A table showing the discount factors is given below.

Year 8%
1 0.926
2 0.857
3 0.794
4 0.735
5 0.681

Required:
(a) Calculate the net present value of the project at the end of Year 5.
(24)
(b) Evaluate the project for Suntours plc, using calculations made in (a) and
considering any other relevant factors.
(8)

(Total for Question 7 = 32 marks)

Answer space for Question 7 is on pages 33 to 36 of the question paper.

16
P46517A