Assgnt Acfn 3202 2020ext

ADDIS ABABA UNIVERSITY
SCHOOL OF COMMERCE
ACCOUNTING & FINANCE PROGRAM UNIT
Group Assignment (ACFN 3202)
Submission date: May 31, 2020
Group size: 3-4 students
1. Assume you have various investment opportunities at hand and there is financial crisis in
the country due to COVID-19 Pandemic. How would you fix the priority of various
investment proposals you have? Categorize your various proposals under priority I, II, III
with explanations.
2. Explain SWOT analysis in relation to market planning. Make SWOT analysis and design
the appropriate marketing strategy for the following two projects:
i) A firm that manufactures and sells medical devices (other than mechanical
ventilators) plans to produce and sell mechanical ventilators.
ii) An Audit firm (that renders auditing services) plans to start IFRS Consulting
services.
3. Identify two project ideas (projects with no profit motive) which you can undertake.
i. Indicate the sources of identifying each project.
ii. Make stakeholder analysis of each project.
iii. Prepare project concept note for each project.
4. E4A PLC is considering Bee Keeping Business beginning 2013 E.C. The following are
project requirements and costs related to the new project:
o Land will be obtained on a lease basis for annual rental payment of Br800,000 payable
at the beginning of each year over term of the lease. The lease satisfies the conditions
for IFRS 16 lease contract & the lease term is 6 years. The costs of constructing fences
and other infrastructures is Br1,500,000 with no residual value. An office building will
also be constructed at a cost of Br1,200,000 with no residual value.
o Proposed number of hives: 600 (acquires for Br 3,000 each hive including bees). The
salvage value of bee hives is Br 150,000. Site preparation costs (to be added to cost of
hives) total Br240,000.
o Production equipments will cost the PLC Br520,000 with salvage value of Br 40,000.
o The cost of office equipments and furniture totals Br360,000 with no residual value.
o Number of people to be employed… 25 (the average wage of each employee is Br
7,000 per month and becomes Br 9,000 per month starting from year 4).
o Raw materials… Sugar and other carbohydrate products….. 2 kilogram per hive per
day for 365 days a year. The cost per Kilogram of these raw materials will be Br 50
from year 1 to year 3 and Br 55 from year 4 to year 6.
o Cleaning supplies worth Br 7,000 per month.
o Other Selling and other administrative expenses total Br 100,000 per year.
1
o Production:
o 12,000 kilograms of honey per month (Sold for Br 200 per kilogram in year 1 and
will increase by 10% each year starting from year 2)
o 6,000 kilograms of byproduct for wax manufacturing per month (sold for Br 30
per kilogram in year 1 and will increase by 20% each year starting from year 3)
o The project needs the following minimum balances on hand throughout the life of the
project:
a. cash balance of Br150,000 per month
b. Raw materials inventory of 30 days.
c. Cleaning Supplies of 3 months
o Preparatory study costs: Br 90,000 (Br 30,000 is already spent). Such costs will be
amortized over 6 years on straight line basis.
o The PLC will finance this project using target capital structure of 60% bank loan and
40% equity. The bank loan will be obtained at 14% annual interest rate. Interest will
be paid at the end of each year & the principal will be repaid after 6 years. Equity will
be raised by issuing Br1,000 par value shares. The market required rate of return from
equity, risk free rate and beta (risk measure) will be 16%, 4% and 1.5 respectively.
o Tax rate is 30%.

o Project’s life is assumed to be 6 years.
o The useful life of property, plant & equipment items is assumed to be the project’s life
and straight line method of depreciation is to be used.
o The project’s discount rate will be the weighted average cost of capital.
o Annual interest payments on debt used to finance this project would be a tax
deductible expense.
o All purchases and sales are on a cash basis.
Required:
1. Calculate the Weighted Average Cost of Capital (WACC) for the project. Hint: Use
CAPM to calculate cost of equity.
2. Determine the investment cost of the project
3. Determine the relevant cash inflows of the project for each of the six years
4. Determine the relevant cash outflows of the project for each of the six years
5. Prepare the projected income statement for each of the six years
6. Determine the net cash flows of the project for each of the six years
7. Evaluate the feasibility of the project using
a. Payback period method where the acceptable time limit is 2 years
b. Average Accounting Rate of Return where the required AARR is 40%
c. NPV
d. Profitability Index
e. IRR
f. Discounted Payback Period where the acceptable time limit is 3 years

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o Tax rate is 30%.

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