ACT310 Management Accounting

Answer:

Answer to Requirement 1

The net present value of a project refers to the difference between the present value of the inflow of cash and the present value of the outflow of cash over a period of time. NPV essentially reflects the profitability of an investment project. Furthermore, the internal rate of return refers to the discount rate that essentially values the net present value (NPV) of all cash flows in regards to a particular project that is equal to zero. It should be noted here that the NPV and IRR are derived from the same formula. The issue presented in the question is that the two projects have been considered, Project A and B. An initial investment of AED 11,000 is required. The cash inflows occur at the end of each year. Therefore, the following computations have been carried out on the basis of the given considerations (Magni & Martin, 2017).

Req.1:
Year Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Project A	Project B
0	AED -11,000	AED -11,000
1	AED 1,000	AED 5,000
2	AED 2,000	AED 4,000
3	AED 3,000	AED 3,000
4	AED 4,000	AED 2,000
5	AED 5,000	AED 1,000
Required Rate of Return	8%	8%
NPV	AED 338.09	AED 1,473.26
IRR	9.00%	14.93%

The above table that has been presented shows the net present value and the internal rate of return computations for both of the projects. The table deduces that the internal rate of return and the Net present value of the projects are greater in case of Project B in comparison to Project A. Therefore, the project, which the Company should accept, is Project B.

Answer to Requirement 2

	Project A	Project B
Year	Annual Cash Flow	Cumulative Cash Flow	Annual Cash Flow	Cumulative Cash Flow
0	AED -11,000	AED -11,000	AED -11,000	AED -11,000
1	AED 1,000	AED -10,000	AED 5,000	AED -6,000
2	AED 2,000	AED -8,000	AED 4,000	AED -2,000
3	AED 3,000	AED -5,000	AED 3,000	AED 1,000
4	AED 4,000	AED -1,000	AED 2,000	AED 3,000
5	AED 5,000	AED 4,000	AED 1,000	AED 4,000
Payback Period	4.20	2.67

The payback period for each project refers to the time period that is needed by an investment project for the purpose of deriving the projected returns from the respective investment ventures. The payback period for Project A is 4.20 years and that for Project B is2.67 years.

In case the Company has the policy of accepting projects with 3 years or less, the company should accept the Project B.

Answer to Question 2

Answer to Requirement 1

Particulars	2019 Beginning	2019 Ending	2020 Ending	2021 Ending	2022 Ending	2023 Ending
Cash Inflow:
Option 1	AED 0	AED 6,000,000	AED 6,825,000	AED 7,717,500	AED 9,261,000	AED 10,939,556
Option 2	AED 0	AED 6,400,000	AED 7,175,000	AED 8,017,500	AED 9,461,000	AED 13,039,556
Option 3	AED 5,000,000	AED 6,600,000	AED 7,375,000	AED 8,217,500	AED 9,661,000	AED 21,239,556
Cash Outflow:
Option 1	AED 0	AED 0	AED 0	AED -400,000	AED -1,200,000	AED -2,000,000
Option 2	AED -25,000,000	AED -3,000,000	AED -3,000,000	AED -3,000,000	AED -3,000,000	AED -3,000,000
Option 3	AED -40,000,000	AED -2,000,000	AED -2,000,000	AED -2,000,000	AED -2,000,000	AED -2,000,000

Answer to Requirement 2

Option 1

Option 1:
Particulars	2019 Beginning	2019 Ending	2020 Ending	2021 Ending	2022 Ending	2023 Ending
Expected Sales Unit		60000	65000	70000	80000	90000
Production Level		65000	65000	65000	65000	65000
Additional Sourced-Out Unit		0	0	5000	15000	25000
Selling Price p.u.		AED 100	AED 105	AED 110	AED 116	AED 122
Initial Investment	AED 0
Sales Revenue		AED 6,000,000	AED 6,825,000	AED 7,717,500	AED 9,261,000	AED 10,939,556
Cost of Sourced Out Unit		AED 0	AED 0	AED -400,000	AED -1,200,000	AED -2,000,000
Net Operational Cash Flow		AED 6,000,000	AED 6,825,000	AED 7,317,500	AED 8,061,000	AED 8,939,556
Salvage Value						AED 0
Net Cash Flow	AED 0	AED 6,000,000	AED 6,825,000	AED 7,317,500	AED 8,061,000	AED 8,939,556
Discount Rate	10%
NPV	AED 25,135,745

Option 2

Option 2:
Particulars	2019 Beginning	2019 Ending	2020 Ending	2021 Ending	2022 Ending	2023 Ending
Expected Sales Unit		60000	65000	70000	80000	90000
Maximum Production Level		100000	100000	100000	100000	100000
Additional Production		40000	35000	30000	20000	10000
Normal Selling Price p.u.		AED 100	AED 105	AED 110	AED 116	AED 122
Lower Selling Price p.u.		AED 10	AED 10	AED 10	AED 10	AED 10
Initial Investment	AED -25,000,000
Normal Sales Revenue		AED 6,000,000	AED 6,825,000	AED 7,717,500	AED 9,261,000	AED 10,939,556
Sales at Lower Price		AED 400,000	AED 350,000	AED 300,000	AED 200,000	AED 100,000
Annual Operating Cost		AED -3,000,000	AED -3,000,000	AED -3,000,000	AED -3,000,000	AED -3,000,000
Net Operational Cash Flow		AED 3,400,000	AED 4,175,000	AED 5,017,500	AED 6,461,000	AED 8,039,556
Salvage Value						AED 2,000,000
Net Cash Flow	AED -25,000,000	AED 3,400,000	AED 4,175,000	AED 5,017,500	AED 6,461,000	AED 10,039,556
Discount Rate	10%
NPV	AED -3,674,756

Option 3

Option 3:
Particulars	2019 Beginning	2019 Ending	2020 Ending	2021 Ending	2022 Ending	2023 Ending
Expected Sales Unit		60000	65000	70000	80000	90000
Maximum Production Level		120000	120000	120000	120000	120000
Additional Production		60000	55000	50000	40000	30000
Normal Selling Price p.u.		AED 100	AED 105	AED 110	AED 116	AED 122
Lower Selling Price p.u.		AED 10	AED 10	AED 10	AED 10	AED 10
Cost of New Equipment	AED 40,000,000
Less: Sale of Old Equipment	AED 5,000,000
Initial Investment	AED -35,000,000
Normal Sales Revenue		AED 6,000,000	AED 6,825,000	AED 7,717,500	AED 9,261,000	AED 10,939,556
Sales at Lower Price		AED 600,000	AED 550,000	AED 500,000	AED 400,000	AED 300,000
Annual Operating Cost		AED -2,000,000	AED -2,000,000	AED -2,000,000	AED -2,000,000	AED -2,000,000
Net Operational Cash Flow		AED 4,600,000	AED 5,375,000	AED 6,217,500	AED 7,661,000	AED 9,239,556
Salvage Value						AED 10,000,000
Net Cash Flow	AED -35,000,000	AED 4,600,000	AED 5,375,000	AED 6,217,500	AED 7,661,000	AED 19,239,556
Discount Rate	10%
NPV	AED -4,114,470

The Net Present values of the three projects that have been computed shows the NPV of the three options. The NPV of option 1 reflects a positive value (AED 25,135,745) while the NPV of option 2 and that of option 3 reveals a negative figure of AED -3,674,756 and AED -4,114,470. This means that the option that should be used by the Company is Option 1. This is because it reflects a positive NPV. However, it should be noted here that the option 1 and the option 2 could also be considered by observing the following factors:

The production level of 65,000 units with the existing equipment has been sourced out at a cost of AED 80 per unit.
Moreover, the excess capacity in any of the five years period could be used for meeting the demands of other companies at a lower price. The lower price would result in ten dirhams per unit.
Therefore, in order to derive a positive net present value in case of Option 2 and Option 3 the lower price should be more than 10 dirhams per unit.

Answer to Question 3

Answer to Requirement 1(a)

Requirement 1.a:
Particulars	Amount
Cost of Material	AED 1,500,000
Conversion Cost	AED 500,000
Joint Cost	AED 2,000,000
	Salt	Chlorine
Production (ton)	1500	1000
Market Selling Price per ton	AED 50	AED 150
Sales Value	AED 75,000	AED 150,000
Allocation of Joint Cost	AED 666,667	AED 1,333,333

Answer to Requirement 1 (b)

Requirement 1.b:
Particulars	Amount
Cost of Material	AED 1,500,000
Conversion Cost	AED 500,000
Joint Cost	AED 2,000,000
	Salt	Chlorine
Production (ton)	1500	1000
Allocation of Joint Cost	AED 1,200,000	AED 800,000

Answer to Requirement 2

Particulars	Amount
Cost of Material	AED 1,500,000
Conversion Cost	AED 500,000
Joint Cost	AED 2,000,000
	Salt	Basalt
Production (ton)	1500	1000
Market Selling Price per ton	AED 50	AED 250,000
Sales Value	AED 75,000	AED 250,000,000
Further processing cost		AED -90,000
Net Realizable Value	AED 75,000	AED 249,910,000
Allocation of Joint Cost	AED 600	AED 1,999,400

Answer to Question 3

Gross Margin under Split-Off Method:
Particulars	Soda	Chlorine	Basalt
Sales Revenue	AED 75,000	0	AED 250,000,000
Cost of Material & Conversion	AED -666,667	AED -1,333,333
Transfer Cost		AED 1,333,333	AED -1,333,333
Processing Cost			AED -90,000
Gross Margin	AED -591,667	AED 0	AED 248,576,667
Gross Margin %	-788.89%	0.00%	99.43%
Gross Margin under Physical Measure Method:
Particulars	Soda	Chlorine	Basalt
Sales Revenue	AED 75,000	AED 0	AED 250,000,000
Cost of Material & Conversion	AED -1,200,000	AED -800,000
Transfer Cost		AED 800,000	AED -800,000
Processing Cost			AED -90,000
Gross Margin	AED -1,125,000	AED 0	AED 249,110,000
Gross Margin %	-1500.00%	0.00%	99.64%
Gross Margin under NRV Method:
Particulars	Soda	Chlorine	Basalt
Sales Revenue	AED 75,000	AED 0	AED 250,000,000
Cost of Material & Conversion	AED -600	AED 0	AED -1,999,400
Transfer Cost		AED 0	AED 0
Processing Cost			AED -90,000
Gross Margin	AED 74,400	AED 0	AED 247,910,600
Gross Margin %	99.20%	0.00%	99.16%

References

Arjunan, K. C. (2017). IRR Performs Better than NPV: A Critical Analysis of Cases of Multiple IRR and Mutually Exclusive and Independent Investment Projects.

Ioana, A. D. R. I. A. N. (2016, February). Theoretical and experimental elements of investment business in Romania. In Economics and Education ISI Proceedings of the 12th International Conference on Educational Technologies (EDUTE ‘16), Proceedings of the 10th International Conference on Business Administration,(ICBA ‘16) (pp. 88-98).

Liu, J., Jin, F., Xie, Q., & Skitmore, M. (2017). Improving risk assessment in financial feasibility of international engineering projects: A risk driver perspective. International Journal of Project Management, 35(2), 204-211.

Magni, C. A., & Martin, J. (2017). The Reinvestment Rate Assumption Fallacy for IRR and NPV.

Rodrigues, S., Torabikalaki, R., Faria, F., Cafôfo, N., Chen, X., Ivaki, A. R., … & Morgado-Dias, F. (2016). Economic feasibility analysis of small scale PV systems in different countries. Solar Energy, 131, 81-95.

Sultana, N. (2015). Conflicting Result between NPV and IRR: Which one is better?. International Journal of Research in Business and Technology, 7(1), 873-877.

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