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?