Advanced Business Calculations

Level 3

Model Answers
Series 4 2006 (Code 3003)

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Advanced Business Calculations Level 3

Series 4 2006

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Advanced Business Calculations Level 3

Series 4 2006
QUESTION 1 (a) A bank tenders for a 500,000 Treasury bill that runs for 6 months and is to be redeemed at par. The bank calculates that it will earn 4% per annum simple interest on its investment. Calculate the amount the bank will pay for the Treasury bill. Give your answer to the nearest 100. (5 marks) (b) An investment account of 650,000 attracts 4.65% compound interest per annum, compounded six-monthly. (i) (ii) How much will be in the account after 5 years? How much of this is interest? (5 marks) (1 mark) (2 marks) (Total 13 marks)

(iii) How much interest will be earned in the first six months?

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MODEL ANSWER TO QUESTION 1 (a) Percentage interest for the 6 month period = 2% Par value represents 102% of the initial investment Bank tenders 500,000 102% = 490,196 = 490,200 (b) (i) Interest rate per six month period = 4.65% 2 = 2.325% Number of time periods = 5 x 2 = 11 Amount after 5 years = A = P(1 + R) T 100 = 650,000 (1.02325) 11 = 836,975.30 (ii) Interest = 836.975.30 650,000 = 186,975.30

(iii) Initial six month interest = 650,000 x 4.65% 2 = 15,112.50

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QUESTION 2 An investor bought 20,000 Ordinary Shares (nominal value 5.00) at 410 pence each. After 2 years, the shares were sold for 432 pence. The investor paid a total of 65 brokers commission. (a) Calculate the capital gain from the purchase and sale of the shares. (4 marks) The dividends declared on the nominal value of the ordinary shares were: Year 1 3% Year 2 8.5% (4 marks) The investor could instead have invested 80,000 in a Unit Trust, buying the units at 5 each and selling them after two years at 5.99 each. Assume that the units are accumulative, that is, the price Includes the dividend. (c) Compare the two investment options. (7 marks) (Total 15 marks)

(b) Calculate the total dividends received by the investor.

MODEL ANSWER TO QUESTION 2 (a) Cost of the shares = 20,000 x 4.10 = 82,000 Income from sale = 20,000 x 4.32 = 86,400 Capital gain = 86,400 - 82,000 - 65 = 4,335

(b) Total percentage dividend = (3 + 8.5)% = 11.5% Nominal value of shares = 20,000 x 5.00 = 100,000 Total dividend = 100,000 x 11.5% = 11,500 (c) Net income from shares = 4,335 + 11,500 = 15,835 Number of units purchased = 80,000 5.00 = 16,000 Net income from one unit = 5.99 - 5.00 = 0.99 Net income from units = 16,000 x 0.99 = 15,840 The income from the units would have been 5 more The investment in the units would have been 2,000 less The unit trust would have been a marginally better investment

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QUESTION 3 A factory manufactures two products. (a) Product A may be manufactured by two methods of production. Using Method X, fixed costs are 1,500,000 per period and variable costs are 215 per unit of product. Using Method Y, fixed costs are 2,250,000 per period and variable costs are 175 per unit of product. (i) (ii) Calculate the level of output per period for which the total costs are the same. (3 marks) Compare the costs of Method X and Method Y for an output of 50,000 units of product per period. (3 marks) (b) Product B has unit costs of production during a trading period as follows: Components Labour Production overheads Distribution expenses 195 460 145 80

The cost of components varies directly with the number of units produced. 65% of the labour costs vary directly with the number of units produced. The production overheads do not vary irrespective of how many units are produced. 70% of the distribution expenses vary directly with the number of units produced. Calculate, for the trading period, the variable cost as a percentage of the total cost of production. (5 marks) (Total 11 marks)

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MODEL ANSWER TO QUESTION 3 (a) (i) For an output of Q units Cost for Method X Cost for Method Y = 1,500,000 + 215Q = 2,250,000 + 175Q

Total costs are equal when Cost X = Cost Y 1,500,000 + 215Q = 2,250,000 + 175Q 40Q = 750,000 Output = (ii) Q = 18,750 units per period

At the required output: Total cost for method X = 1,500,000 + 215 x 50,000 = 12,250,000 Total costs for method Y = 2,250,000 + 175 x 50,000 = 11,000,000 Method Y is cheaper The difference is 1,250,000

(b) Variable element of labour costs = 65% x 460 = 299 Variable element of distribution expenses = 70% x 80 = 56 Total unit variable cost = 195 + 299 + 56 = 550 Total unit cost = 195 + 460 + 145 + 80 = 880 Variable cost percent = 550 x 100% = 62.5% 880

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QUESTION 4 The following information relates to a retailers business at the end of the first year of trading. Net sales Cost of goods sold Initial stock value Final stock value Overhead expenses Calculate: (a) the overhead expenses as a percentage of net sales (b) gross profit as a percentage of net sales (c) net profit as a percentage of net sales (d) net purchases (e) rate of stockturn (2 marks) (3 marks) (3 marks) (2 marks) (3 marks) (Total 13 marks) 350,000 200,200 19,100 17,300 104,300

MODEL ANSWER TO QUESTION 4 Net sales Cost of Goods Sold Initial stock value Final stock value Overhead expenses 350,000 200,200 19,100 17,300 104,300

(a) Expense ratio = Overhead expenses x 100% = 104,300 x 100% = 29.8% Net sales 350,000 (b) Gross profit = Net sales cost of goods sold = 350,000 - 200,200 = 149,800 Gross profit percent = Gross profit x 100% = 149,800 x 100% = 42.8% Net sales 350,000 (c) Net profit = Gross profit overheads = 149,800 - 104,300 = 45,500 Net profit percent = Net profit x 100% = 45,500 x 100% = 13% Net sales 350,000 (d) Net purchases = Cost of goods sold Initial stock value + final stock value = 200,200 - 19,100 + 17,300 = 198,400 (e) Average stock = (Initial stock value + final stock value) = (19,100 + 17,300) = 18,200 Rate of stockturn = Cost of goods sold = 200,200 = 11 times Average stock 18,200

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QUESTION 5 (a) An investor estimates the following figures for investment project A: Initial cost of project Expected life of project Total return before allowing for repairs and maintenance Average cost per annum of repairs and maintenance Estimate the average rate of return of project A. (4 marks) (b) An investor estimates the costs and returns for investment project B as follows: Initial cost 4,000,000 Year 1 net cash inflow 1,500,000 Year 2 net cash inflow 1,500,000 Year 3 net cash inflow 1,500,000 (i) Using a discount rate of 13%, and the following table, calculate the net present value of project B. (4 marks) Year Year 1 Year 2 Year 3 Discount factor (13%) 0,885 0.783 0.693 4,600,000 5 years 7,000,000 250,000

The investor believes that project B can also provide cash inflow in year 4. She now estimates that the NPV will be positive with a value of 31,900. The discount factor for year 4 is 0.613. (ii) Calculate the estimated net cash inflow for year 4. (3 marks) (Total 11 marks)

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MODEL ANSWER TO QUESTION 5 (a) Average return per annum = 7,000,000 5 = 1,400,000 Net of repairs &c = 1,400,000 - 250,000 = 1,150,000 Average rate of return = 1,150,000 4,600,000 = 0.25 = 25% (b) (i) Initial cost Year 1 net cash inflow Year 2 net cash inflow Year 3 net cash inflow

4,000,000 1,500,000 1,500,000 1,500,000

Discount Factor 0.885 0.783 0.693

NPV (4,000,000) 1,327,500 1,174,500 1,039,500 (458,500)

(ii)

Contribution to NPV from year 4 = 31,900 (458,500) = 490,400 Net cash inflow in year 4 = 490,400 0.613 = 800,000

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QUESTION 6 In each of the following two bankruptcies calculate the rate in the pound paid to unsecured creditors and the amount received by an unsecured creditor who is owed 10,000. (a) Bankruptcy A: An unsecured creditor who is owed 6,500 is paid 2,080 (4 marks) (b) Bankruptcy B: The total liabilities are 550,000, of which 340,000 is owed to secured creditors. The total assets available for creditors are 394,600. (6 marks) (Total 10 marks)

MODEL ANSWER TO QUESTION 6 (a) Bankruptcy A: Rate in the pound paid to unsecured creditors = 2080 x 1 = 0.32 6,500 Received by an unsecured creditor who is owed 10,000 = 0.32 x 10,000 = 3,200 (b) Bankruptcy B: Amount owed to unsecured creditors = 550,000 - 340,000 = 210,000 Amount available for unsecured creditors = 394,600 - 340,000 = 54,600 Rate in the pound paid to unsecured creditors = 54,600 x 1 = 0.26 210,000 Received by an unsecured creditor who is owed 10,000 = 0.26 x 10,000 = 2,600

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QUESTION 7 A factory buys two machines. Machine A costs 575,000 and is estimated to have a life of 5 years and a scrap value of 25,000. Using the equal installment method: (a) Calculate: (i) (ii) the percentage of the cost which must be written off in total the percentage of the cost to be written off each year (3 marks) (1 mark)

(b) Prepare a depreciation schedule that shows: (i) (ii) the annual depreciation for each year the accumulated depreciation for each year (5 marks) Machine B is depreciated by the equal installment method over 6 years. It has the same scrap value as machine A. It also has the same book value at the end of one year as machine A. (c) Calculate the original cost of machine B. (5 marks) (Total 14 marks)

(iii) the book value at the end of each year

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MODEL ANSWER TO QUESTION 7 (a) (i) Amount to be written off in five years = 575,000 - 25,000 = 550,000 % of cost to be written off in five years = 550,000 x 100% = 95.65% 575,000 (ii) % of cost to be written off each year = 95.65% 5 = 19.1%

(b) Annual depreciation = 550,000 5 = 110,000 Depreciation schedule () Annual End of Year Depreciation Purchase value, start of year 1 1 110,000 2 110,000 3 110,000 4 110,000

Accumulated Depreciation 110,000 220,000 330,000 550,000

Book Value 575,000 465,000 355,000 245,000 25,000

(c) Machine B: end of year 1 to end of year 6 is five years Depreciation in 5 years = 465,000 - 25,000 = 440,000 Annual depreciation = 440,000 5 = 88,000 Original cost of machine B = 465,000 + 88,000 = 553,000

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QUESTION 8 Company A sells Product P with the following prices

Year Price ()

2002 10.24

2003 12.80

2004 15.20

2005 17.10

(a) Calculate the prices of Product P for years 2003 to 2005 as a chain base index. (5 marks) (b) Giving your answers correct to four significant figures, calculate the index of prices for Product P for the years 2002 to 2005 with year 2002 as the base year. (6 marks) (c) The price relative for year 2002 with 2001 as the base year is 1.28. Calculate the selling price of Product P in year 2001. (2 marks) (Total 13 marks)

MODEL ANSWER TO QUESTION 8 (a) 2003: Chain base index = 100 x 12.80/10.24 = 125 2004: Chain base index = 100 x 15.20/12.80 = 118.75 2005: Chain base index = 100 x 17.10/15.20 = 112.5

(b) 2002: Price index = 100.0 2003: Price index = 100 x 12.80/10.24 = 125.0 2004: Price index = 100 x 15.20/10.24 = 148.4 2005: Price index = 100 x 17.10/10.24 = 167.0

(c) Selling price in year 2001 = 10.24 1.28 = 8

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