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8 marksCapital Budgeting and Investment Appraisal

CAPE Accounting Unit 2 · 2015 · Paper 2 · Question 3(a)(iv)

Bernice Industries Ltd is evaluating replacing Equipment Y183 (purchased 5 years ago for 475 000 plus 25 000 installation, depreciated at 25% reducing balance, current resale value 155 000) with Equipment X154 (750 000 cost, $50 000 installation, 5-year straight line). Cash flows and PVIF factors at 10% cost of capital are provided.

Compute the net present value for the proposed replacement of Equipment Y183 with Equipment X154.

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Other parts of this question

  1. 3(a)(i)Calculate the net book value (NBV) of Equipment Y183.[6 marks]
  2. 3(a)(ii)Compute the initial investment associated with the proposed replacement of Equipment Y183 with Equipment X154.[3 marks]
  3. 3(a)(iii)Compute the payback period for Equipment X154.[6 marks]
  4. 3(a)(v)State whether Bernice Industries should purchase Equipment X154 and explain why.[2 marks]
  5. 3(b)List SIX reasons why you would recommend the use of a standard costing system.[6 marks]
  6. 3(c)State FOUR arguments against the use of budgeting as an accounting tool.[4 marks]

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