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1 markCapital Budgeting and Investment Appraisal

CAPE Accounting Unit 2 · 2004 · Paper 2 · Question 3(b)(iii)

Management is considering purchasing a zero-discharge, closed-loop wastewater system requiring investment in equipment and a treatment room, with annual operating costs and projected savings given. Tax rate is 40% and cost of capital is 12%. Discount factor tables are provided.

State, with reason, whether the company should invest in the system.

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Other parts of this question

  1. 3(a)(i)Compute the price and efficiency variances for direct materials.[4 marks]
  2. 3(a)(ii)Compute the price and efficiency variances for direct labour.[4 marks]
  3. 3(a)(iii)Compute the variable overhead spending and efficiency variances.[4 marks]
  4. 3(a)(iv)Compute the fixed overhead spending and volume variances.[4 marks]
  5. 3(b)(i)Prepare a schedule of expected cash flows.[8 marks]
  6. 3(b)(ii)Calculate the Net Present Value (NPV) of the closed-loop system.[6 marks]
  7. 3(b)(iv)Identify TWO non-financial factors that the company should consider in deciding whether to invest.[4 marks]

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