MAC3702
EXAM PACK
,APPLICATION OF
FINANCIAL
MANAGEMENT
TECHNIQUES
,MAY – JUNE
2020
, SOLUTION 1: CAPITAL BUDGETING, WEIGHTED
AVERAGE COST OF CAPITAL, WORKING
CAPITAL MANAGEMEN, RATIOS & DISCUSSION
(a) Calculate internal rate of return
Year 0 2020 2021 2022 2023 2024 2025
Rm Rm Rm Rm Rm Rm Rm
Alterations & renovations (245) (245)
Store Fittings (𝐶1) (73.33)
Working Capital (𝐶2) (22) (14.67) 33
Mark up (𝐶3) 81.62 141.57 166.74 176.75 187.35
Operating costs excluding
marketing (30) (30) (30) (30) (30)
Marketing Costs (𝐶4) (2) (1.6) (1.28) (1.02) (0.82)
Once off reallocation cost (0.038)
Sign – on Bonus (0.1)
Salaries (𝐶5) (0.844) (0.912) (0.985) (1.064) (1.149) (1.241)
Income tax expense (𝐶6) (2.397) (19.549) (26.664) (29.156) (32.514)
Terminal Cash Flow (𝐶7) 223.039
Net Cash Inflow / Outflow (318.468) (269.844) 32.041 89.756 107.992 115.625 379.634
Internal rate of return (Financial 4.75%
calculator)
Conclusion
EFH should not undertake the ARISE & DREAM project as it results in an internal
rate of return of 4.75% which is below the minimum required internal rate of return of
20%
Calculations
C1. Shop fittings and Working Capital
Balance of project amount = [600 − (245 ∗ 2)]
= 𝑹𝟏𝟏𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Let the spending on store fittings be x
The spending on working capital will be 0.5x
𝒙 + 𝟎. 𝟓𝒙 = 𝟏𝟏𝟎
1.5𝑥 = 110
110
𝑥=
1.5
𝒙 = 𝟕𝟑. 𝟑𝟑
EXAM PACK
,APPLICATION OF
FINANCIAL
MANAGEMENT
TECHNIQUES
,MAY – JUNE
2020
, SOLUTION 1: CAPITAL BUDGETING, WEIGHTED
AVERAGE COST OF CAPITAL, WORKING
CAPITAL MANAGEMEN, RATIOS & DISCUSSION
(a) Calculate internal rate of return
Year 0 2020 2021 2022 2023 2024 2025
Rm Rm Rm Rm Rm Rm Rm
Alterations & renovations (245) (245)
Store Fittings (𝐶1) (73.33)
Working Capital (𝐶2) (22) (14.67) 33
Mark up (𝐶3) 81.62 141.57 166.74 176.75 187.35
Operating costs excluding
marketing (30) (30) (30) (30) (30)
Marketing Costs (𝐶4) (2) (1.6) (1.28) (1.02) (0.82)
Once off reallocation cost (0.038)
Sign – on Bonus (0.1)
Salaries (𝐶5) (0.844) (0.912) (0.985) (1.064) (1.149) (1.241)
Income tax expense (𝐶6) (2.397) (19.549) (26.664) (29.156) (32.514)
Terminal Cash Flow (𝐶7) 223.039
Net Cash Inflow / Outflow (318.468) (269.844) 32.041 89.756 107.992 115.625 379.634
Internal rate of return (Financial 4.75%
calculator)
Conclusion
EFH should not undertake the ARISE & DREAM project as it results in an internal
rate of return of 4.75% which is below the minimum required internal rate of return of
20%
Calculations
C1. Shop fittings and Working Capital
Balance of project amount = [600 − (245 ∗ 2)]
= 𝑹𝟏𝟏𝟎 𝒎𝒊𝒍𝒍𝒊𝒐𝒏
Let the spending on store fittings be x
The spending on working capital will be 0.5x
𝒙 + 𝟎. 𝟓𝒙 = 𝟏𝟏𝟎
1.5𝑥 = 110
110
𝑥=
1.5
𝒙 = 𝟕𝟑. 𝟑𝟑
