Question 1
A company makes and sells a single product. At the beginning of Year 1, there are no opening inventories. Variable production cost is $7 per unit and the sales price is $12 per unit. Fixed costs are $4,000 per annum, of which $1,800 are fixed production costs. Units produced and sold are as follows:-
Year 1 Year 2
Units Units
Sales 1600 2000
Production 1800 1800
Required:
Prepare an Income Statement in which you calculate the profit in each year and over the two years in total using:-
- Absorption costing
- Marginal costing
- Critically discuss the differences in the Profit calculations
Question 2
Blue Ltd is a technology company and is considering a number of different capital projects. An initial outlay of €144,000 is payable immediately. There are two investment options – Project A or Project B – which will yield cash-flows over three years as follows:
| Project A | Project B | |
| Projected Cash-inflows | Projected Cash inflows | |
| Year 1 | 40,000 | 83,000 |
| Year 2 | 60,000 | 65,000 |
| Year 3 | 95,000 | 76,000 |
The company has a cost of capital of 8%.
Required:
- For Project A and Project B calculate:
- Net present Value (NPV)
- Discounted Payback
- Accounting Rate of Return (ARR)
- Estimated Internal Rate of Return (IRR)
- Critically evaluate which project should be undertaken.
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