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Cost Volume Profit Analysis & Worksheet Solution

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December 2004 Examiner's Solution
C a s e S o l u t i o n 1
1. Prepare an assessment of the two options under consideration and make a recommendation to the directors on the
preferred option.
(26 marks)
Assessment of Lightair 3000 Option
Year
Demolition
Scrap
Purchase and
Installation
Annual
Operating Costs
Insurance
Overhaul
Net Cash
Outflows
Discount Factor
Present Values
£
£
£
£
£
£
£
£
£
0
20 000
−5 000
70 000
85 000
1
85 000
1
20 000
3 000
23 000
0.926
21 298
2
21 000
3 000
24 000
0.857
20 568
3
22 050
3 000
25 050
0.794
19 890
4
23 153
3 000
8 000
34 153
0.735
25 102
5
24 310
3 000
27 310
0.681
18 598
6
25 526
3 000
28 526
0.630
17 971
7
8 000
26 802
3 000
37 802
0.584
22 076
23 0503
Assessment of Cleanayr 100 Option
Year
Demolition
Purchase and
Installation
Annual Operating
Costs
Insurance
Net Cash Outflows
Discount Factor
Present Values
£
£
£
£
£
£
£

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0
20 000
45 000
60 000
1
60 000
1
35 000
22 000
2 000
59 000
0.926
54 634
2
22 880
2 000
24 880
0.857
21 322
3
23 795
2 000
25 795
0.794
20 481
4
24 747
2 000
26 747
0.735
19 659
5
25 737
2 000
27 737
0.681
18 889
6
26 766
2 000
28 766
0.630
18 123
7
6 000
27 837
2 000
35 837
0.584
20 929
234 037
Conclusion:
On the basis of a lower NPV, the Lightair 3000 System is the recommended option. Note that it is the lower cost option that is preferred
that with the lower NPV.
2. Any investment appraisal process involves the identification of key investment factors. Identify four key investment
factors.
(4 marks)
Identification of key investment factors:
Capital investment.
Operating cash flows.
Investment life.
Cost of capital.
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December 2004 Examiner's Solution Case Solution 1 1. Prepare an assessment of the two options under consideration and make a recommendation to the directors on the preferred option. (26 marks) Assessment of Lightair 3000 Option Year 0 Demolition Scrap Purchase and Installation Annual Operating Costs Insurance Overhaul Net Cash Outflows Discount Factor Present Values £ £ £ £ £ £ £ £ £ 20 000 −5 000 70 000 85 000 1 85 000 1 20 000 3 000 23 000 0.926 21 298 2 21 000 3 000 24 000 0.857 20 568 3 22 050 3 000 25 050 0.794 19 890 4 23 153 3 000 34 153 0.735 25 102 5 24 310 3 000 27 310 0.681 18 598 6 25 526 3 000 28 526 0.630 17 971 26 802 3 000 37 802 0.584 22 076 7 8 000 8 000 23 0503 Assessment of Cleanayr 100 Option Year Demolition Scrap Purchase and Installation Annual Operating Costs Insurance Net Cash Outflows Discount Factor Present Values £ £ £ £ £ £ £ £ 0 20 000 −5 000 1 45 000 35 000 60 000 1 60 000 22 000 2 000 59 000 0.926 54 634 2 22 880 2 000 24 880 0.857 21 322 3 23 795 2 000 25 795 0.794 20 481 4 24 747 2 000 26 747 0.735 19 659 5 25 737 2 000 27 737 0.681 18 889 6 26 766 2 000 28 766 0.630 18 123 27 837 2 000 35 837 0.584 20 929 7 6 000 234 037 Conclusion: On the basis of a lower NPV, the Lightair 3000 System is the recommended option. Note that it is the lower cost option that is preferred – that with t ...
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