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Financial Management 2 Test 2

This document provides a marking key for an assignment in financial management. It includes a multi-part question calculating the payback period of an investment in manufacturing equipment. It gives the solution showing the payback period as 3 years 9 months without discounting, and 3 years 9 months with a 12% discount rate. It also lists two reasons why payback period alone should not determine an investment decision, and two advantages of using payback period for investment appraisal.

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William Mushonga
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205 views3 pages

Financial Management 2 Test 2

This document provides a marking key for an assignment in financial management. It includes a multi-part question calculating the payback period of an investment in manufacturing equipment. It gives the solution showing the payback period as 3 years 9 months without discounting, and 3 years 9 months with a 12% discount rate. It also lists two reasons why payback period alone should not determine an investment decision, and two advantages of using payback period for investment appraisal.

Uploaded by

William Mushonga
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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INTERNATIONAL TRAINING COLLEGE - LINGUA

Towards Educational Excellence


NCHE Reg. No: R0014
NQA Accreditation No: 000095

DEPARTMENT OF BUSINESS AND MANAGEMENT

MARKING KEY: ASSIGNMENT 1

Lecturer: MR W. MUSHONGA Due Date: 12 MARCH 2020

QUALIFICATION : DEGREE IN ACCOUNTING AND FINANCE ( NQF Level 7)

MODULE : FINANCIAL MANAGEMENT 2 (NQF 7)

ASSIGNMENT : 1

TOTAL MARKS: 40 marks

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Question 1

Matola Enterprises is considering purchasing manufacturing equipment costing N$38,000,000.


It is expected that the piece of equipment shall add annual revenues as follows:

2016: N$3,500,000; 2017: N$8,000,000; 2018: N$14,000,000; 2019:N$16,500,000; 2020:


N$18,000,000; 2021: N$19,500,000.

(a) What is the payback period of the investment. Hint: Provide your answer in years and
remaining months where necessary. [16 Marks]

(b) Compute the payback period using a discount rate of 12%. [16 Marks]

(c) Mention two reasons why Matola should not base the investment decision solely on the
payback period. [4 Marks]

(d) Mention two advantages of using payback for investment appraisal. [4 Marks]

Solution

a).

Answer

Year Annual cashflow (N$,000) Cumulative net cashflow

2015 (38,000,000) (38,000,000) 2marks

2016 3,500,000 (34,500,000) 2marks

2017 8,000,000 (26,500,000) 2marks

2018 14,000,000 (12,500,000) 2marks

2019 16,500,000 4,000,000 2marks

2020 18,000,000 22,000,000 2marks

2021 19,500,000 41,500,000 2marks

Therefore, payback period is (3 + 12,500,000/16,500,00 x 12) years 2marks

=3 years 9 months 2marks

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b).

Year Annual cashflow (N$,000) Discounted Cumulative net


cashflow

2015 (38,000,000) (38,000,000) (38,000,000) 2marks

2016 3,500,000 3,125,000 (34,875,000) 2marks

2017 8,000,000 6,377,551 (28,497,449) 2marks

2018 14,000,000 9,965,122 (18,532,327) 2marks

2019 16,500,000 10,486,177 (8,046,150) 2marks

2020 18,000,000 10,213,925 2,167,775 2marks

2021 19,500,000 9,879,420 12,047,195 2marks

Therefore the payback period is (4+ 8,046,150/10,213,925 x 12) years 2marks

=3 years 9 months 2marks

c).

It does not consider time value of money 1 mark

It ignores total returns of investments such that you may opt for a project that generates lees
income to an entity. 1 mark

d).

The advantages are:

It is simple to calculate and explain 1 mark

It provides the initial basis of appraising an investment 1 mark

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