Sogbae Local Government has identified
a vacant land beside its marriage registry building.
The
director of administration proposed that the land be used either for a cybercafé where the general public can browse,
make phone
calls,
photocopy and carry out other computer services or
for construction
of an entertainment
event-hall that can
be rented out on commercial basis.
This idea was tabled at the council`s management meeting and
unanimously accepted. However, the Finance and General Purposes Committee recommended five years
for the project since the council secretariat building
will be extended in
future to
accommodate more
offices for the increased
staff strength
and this was approved.
The cost of building the cybercafé and the event-hall with necessary facilities and fittings as well as the
expected cash inflows/profits as
prepared by the director of administration are as
follows:
Cybercafé
|
Event hall
|
|
₦‟000
|
₦‟000
|
|
Initial cash outlay
|
225,000
|
300,000
|
Residual value
|
20,000
|
20,000
|
Cash inflows:
|
||
Year 2012
|
90,000
|
150,000
|
Year 2013
|
105,000
|
150,000
|
Year 2014
|
120,000
|
30,000
|
Year 2015
|
135,000
|
30,000
|
Year 2016
|
150,000
|
30,000
|
Required
As the consultant engaged by Sogbae Local Government, advise the Local Government on the more viable
project using:
i. Pay Back Period (PBP)
(7
Marks)
ii. Accounting Rate of Return (ARR)
(13 Marks)
(Total 20 Marks)
SUGGESTED SOLUTION
i. Pay Back Period
Year Cybercafé Event hall
Cash outflow/inflows Cumulative cash flows Cash outflow/inflows Cumulative cash flow
2011
|
(225,000.00)
|
(225,000.00)
|
(300,000.00)
|
(300,000.00)
|
2012
|
90,000.00
|
(135,000.00)
|
150,000.00
|
(150,000.00)
|
2013
|
105,000.00
|
(30,000.00)
|
150,000.00
|
00.00
|
2014
|
120,000.00
|
90,000.00
|
30,000.00
|
30,000.00
|
2015
|
135,000.00
|
225,000.00
|
30,000.00
|
60,000.00
|
2016
|
150,000.00
|
375,000.00
|
30,000.00
|
90,000.00
|
Residual
|
20,000.00
|
395,000.00
|
20,000.00
|
110,000.00
|
The payback period for cybercafé is 2 years + (30/120 X 12) =2 years and 3 months while the payback
period
for
event hall is
exactly 2
years.
Decision:
Event hall project is more viable based on
payback period.
ii. Accounting
Rate of Return
(ARR)
Calculation of accounting
profit
Year
|
Cashflow
Cash inflows
|
Cybercafé
Depreciation
DepDereciation
|
Accounting
Profit
Accounting
Profit
|
Cashflow
Cash inflows
|
Event hall
Depreciation
Depreciation
|
Accounting Profit
Accounting
Profit
|
1
|
90,000
|
41,000
|
49,000
|
150,000
|
56,000
|
94,000
|
2
|
105,000
|
41,000
|
64,000
|
150,000
|
56,000
|
94,000
|
3
|
120,000
|
41,000
|
79,000
|
30,000
|
56,000
|
(26,000)
|
4
|
135,000
|
41,000
|
94,000
|
30,000
|
56,000
|
(26,000)
|
5
|
150,000
|
41,000
|
109,000
|
30,000
|
56,000
|
(26,000)
|
Total
|
395,000
|
110,000
|
Depreciation = 225,000-20,000 300,000-20,000
5 5
Depreciation =
41,000 56,000
Average
Accounting Profit = 395,000 110,000
5 5
Average Accounting Profit = 79,000
22,000
Average
Investment = 225,000 + 20,000 300,000
+20,000
2 2
Average Investment = 122,500
160,000
ARR = 79,000 x
100 22,000
x 100
122,500 160,000
ARR = 64.49%
13.75%
The accounting rate of return for cybercafé is 64.49% while the accounting rate of return for event hall is
13.75%.
Decision Cybercafé project is more viable
based
on Accounting Rate of Return(ARR)
REMARKS:
The question tests candidate`s knowledge of investment appraisal in the public sector. It requires
candidates to evaluate two projects using the Pay-Back-Period (PBP) and the Accounting Rate of
Return
(ARR).
Majority of the candidates attempted the question and their performance was above average.
However
their
major pitfall was
poor presentation of their solutions.
Candidates are advised to practice
very
well before writing
the future examinations.
Marking guide Marks Marks
i. Computation of cumulative cash flows up till year 2014for the
4 two project @ ½ mark each tick
Determination
of viable project based on pay back period 3 7
ii.
|
Calculation of total 5 years profits for each project
|
@ 1/3 mark
|
||
each tick for 12 ticks
|
4
|
|||
Calculation of
average accounting profit
for the
|
two project
|
|||
@1½ marks per project
|
3
|
|||
Calculation of average investment for the two project @ 1½
|
||||
marks per project
|
3
|
|||
Calculation of Accounting Rate of Return for the two project @
|
||||
1 mark per project
|
2
|
|||
Decision
|
1
|
13
|
||
Total
|
20
|
|||
REVIEW QUESTION
Ajimaronu embark on two projects and you are required to calculate :
a. Pay Back Period (PBP)
b. Accounting Rate of Return (ARR)
c.. Net Present Value (NPV) of two projects assuming a discount rate of 11.5%.
d. Internal Rate of Return (IRR)
e. Suggest in (a-d) above which of the two projects should be accepted
Ajimaronu embark on two projects and you are required to calculate :
a. Pay Back Period (PBP)
b. Accounting Rate of Return (ARR)
c.. Net Present Value (NPV) of two projects assuming a discount rate of 11.5%.
d. Internal Rate of Return (IRR)
e. Suggest in (a-d) above which of the two projects should be accepted
Project A
|
Project B
|
|
Initial Investment
|
N35,000
|
N56,000
|
Estimated Life
|
5years
|
5years
|
Scrap Value
|
N2,000
|
N5,000
|
Cash flows are given as follow:
Year
|
Cash
Inflow
|
|
Project A
N
|
Project B
N
|
|
1
|
10,000
|
40,000
|
2
|
15,000
|
30,000
|
3
|
8,000
|
10,000
|
4
|
6,000
|
5,000
|
5
|
4,000
|
4,000
|
LAGOS
CITY POLYTECHNIC, IKEJA, LAGOS
SCHOOL
OF MANAGEMENT AND BUSINESS STUDIES
HBF
417/BAM 412-MANAGERIAL ECONOMICS1
TO
WHOM: HND2 BA AND HND 1 AC TIME:
45MINUTES
FULL NAME………………………………………………………………….
MATRIC NUMBER………………………………………………………….
MOBILE NUMBER………………………………DATE…………………..
DEPARTMENT……………………………………LEVEL…………..........
SECTION A
Sogbae Local Government has identified a vacant land
besides its marriage registry building.
The
director of administration proposed that the land be used either for a cybercafé where the general public can browse,
make phone
calls,
photocopy and carry out other computer services or
for construction
of an entertainment
event-hall that can
be rented out on commercial basis.
This idea was tabled at the
council`s management meeting
and unanimously
accepted. However, the Finance and General Purposes Committee recommended five years
for the project since the council secretariat building
will be extended in
future to
accommodate more
offices for the increased
staff strength
and this was approved.
The cost of building the cybercafé and the event-hall with necessary facilities and fittings as well as the
expected cash inflows/profits as
prepared by the director of administration are as
follows:
|
|
Cybercafe
|
Event
Hall
|
|
|
N`000
|
N`000
|
|
Initial Cash Outlay
|
225,000
|
300,000
|
|
Residual Value
|
20,000
|
20,000
|
|
Cash Inflows:
2013
2014
2015
2016
2017
|
90,000
105,000
120,000
135,000
150,000
|
150,000
150,000
30,000
30,000
30,000
|
As the consultant engaged by Sogbae Local Government,
you are required to answer the underlisted questions.
1. Determine the depreciation of both projects.
(a)
N41,000, 000 and N56,000,00 (b)
N45,000 and 60,000 (c) N41,000 and N56,000
(d) None of the above
2. Calculate the Accounting Rate of Return for
both projects.
(a) 64.49% and 13.75% (b) 2.45% and 1.22% (c) 32.25% and 6.88%
(d) 2.67% and 1.30%
3. What is the payback
period of the two projects?
(a) 2years 3months and 2years (b) 2years and 2years 3months (c) 3years and
2years
(d) None of the above
4. Estimate the Accounting Profit of both
projects.
(a) N395,000,00 and N110,000,000 (b) N395,000 and N110,000 (c) N355,000 and
N70,000
(d) N355,000,000 and N70,000,000
5. As the consultant engaged by Sogbae Local Government, advise the Local Government on the more viable
project using Pay Back Period and Accounting Rate of
Returns.
(a) Event hall project is more viable based on
payback period and Cybercafé
project is
more
viable based on Accounting Rate of Return
(b) Cybercafé
project is more viable based on
payback period and Event hall project is more viable
based
on Accounting Rate of Return (c)
Both Event hall project
and Cybercafé project
are more viable based on Accounting Rate of Return (d) Both Event hall project and Cybercafé project
are more viable based on payback period and Accounting Rate of Return.
SECTION B
6. A market economy is
an economic system in which most of the means of ……………….. are owned and
controlled by private individuals and in which the economic activities of the
government are at minimum.
7. Imperfect market are usually
classified into four, these are monopoly……………., ………………….,and monopsony.
8. A firm in a perfect market is said to be at
equilibrium in the short run where……………
9. Managerial Economics
uses……………..and……………………..to solve managerial problems.
10. Calculate the value of a firm
when the profits and interest for its two years of operations are:
Year1 Year 2
Profit N300,000 N450,000
Interest 10% 12%
Best of Luck!
Visit the website for more
clarification.
SOLUTIONS:
SECTION A
1. A
2. A
3. A
4. A
5. A
SECTION B
6. Production
7. Duopoly and Oligopoly
8. P = MC and MC= MR
9. Economic Concept and Decision Science Technique
10. N631,464.51
SHINE YOUR EYE VERY WELL!
Visit:
ACC 415-Management Accounting:
HBF 417/BAM 412-Managerial Economics 1:
08038454008
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