Q13-1: Williams, a professional services firm has overhead of £625,000. It operates three divisions

Q13-1: Williams, a professional services firm has overhead of £625,000. It operates three divisions and an accountant’s estimate of the overhead allocation per division is 38% for Division 1, 22% for Division 2 and 40% for Division 3. The divisions respectively bill 4,100, 1,950 and 3,300 hours. Calculate the business-wide overhead recovery rate and the cost centre overhead recovery rate for each division.

Q13-2: Randy’s Components uses an activity based costing system for its product costing. For the last quarter, the following data relates to costs, output volume and cost drivers. If set-up costs are driven by the number of production runs, what are the correct set-up costs for each product?

Overhead Cost £
Machinery 172,000
Set-ups 75,000
Materials Handling 25,000
Total 272,000

 

Product information A B C
Production and sales units 5,000 3,500 2,800
Number of production runs 11 9 6
Number of stores orders 15 10 9

Q14-1a: The projected net cash flows for an investment are (in £’000):

Y0: -950

Y1: 130

Y2: 200

Y3: 330

Y4: 270

Y5: 180

What is the net present value of the investment, assuming a 7% cost of capital and a 950 initial investment. What is the NPV when we change the cost of capital to 8% and have a 850 initial investment? Have a 9% cost of capital and a 825 initial investment? Or have a 6% cost of capital and a 900 initial investment?

Q14:-1b: Given the cash flow in the prior question (14a) and for the $900 initial investment, what is the IRR of the cash flows?

Q14-2: General Sales is considering three alternative investment proposals but can only accept one of these. The investments and cash flows are shown below:

Year 0 Year 1 Year 2 Year 3 Year 4
Project A
Cost of Capital 12%
Cash inflows -150,000 50,000 75,000 75,000 50,000
Project B
Cost of Capital 11%
Cash inflows -200,000 75,000 75,000 75,000 75,000
Project C
Cost of Capital 10%
Cash inflows -265,000 50,000 100,000 150,000 100,000

General uses discounted cash flow techniques to evaluate its investments, using a cost of capital as specified above. Compare for each alternative investment the Net present value, Profitability index, and the Internal rate of return. Which of the three investment proposals would you prefer and why?

 

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