MAC3702
EXAM PACK
,FINANCIAL MANAGEMENT TECHNIQUES - MAC3702
OCTOBER/NOVEMBER 2024
EXAMINATION MODEL ANSWERS AND CALCULATIONS
QUESTION 1 — Amazing Holiday Travel Limited (AHT) [45 marks]
The proposed investment concerns two luxury mobile homes. The paper provides a
purchase price of US$140 000 per mobile home, an exchange rate of US$1 = R17,20,
working capital of R800 000, operating revenues and costs, taxation information, and
financing details.
1(a) Critical evaluation of the capital budgeting working paper [15 marks]
David Glope's working paper contains several errors and inconsistencies when
assessed against capital-budgeting principles.
1. Purchase price is incorrect
The working paper records R140 000 as the purchase price. This is incorrect because
the stated price is US$140 000 for each of two mobile homes.
\[ 140\,000 \times 2 \times R17,20 =R4\,816\,000 \]
Therefore, the initial investment should be R4 816 000, not R140 000.
The working paper has therefore omitted both the number of mobile homes and the
exchange-rate conversion.
2. Working capital is incorrectly treated
The R800 000 working-capital investment should be included as an initial cash
outflow in Year 0, not as a Year 1 operating item.
,It should subsequently be recovered as a cash inflow at the end of Year 4 because the
question explicitly states that the working capital will be recouped at the end of Year 4.
3. Revenue is incorrectly calculated
For Years 1 and 2:
\[ R7\,000\times5\times49\times2 =R3\,430\,000 \]
The working paper records R3 640 000.
For Years 3 and 4:
\[ R7\,000\times6\times49\times2 =R4\,116\,000 \]
The working paper records R4 368 000.
Thus, the revenue calculations are incorrect. The scenario specifically states that the
homes operate for five days per week during Years 1 and 2 and six days thereafter, with
49 operating weeks per year.
4. Fuel costs are correctly calculated
\[ 200\text{ litres}\times R25\times12\times2 =R120\,000 \]
The R120 000 annual fuel cost is therefore correct.
5. Driver salaries are correctly calculated
Four drivers are required:
\[ 4\times R250\,000=R1\,000\,000 \]
Therefore, the R1 000 000 annual driver salary is correct.
6. Administrator salaries should be R0
, The three existing administrators have sufficient capacity to handle the additional
workload. Therefore, no additional administrative salary should be included in the
incremental cash flows.
The working paper incorrectly includes R360 000 per year.
\[ \boxed{\text{Incremental administrator cost}=R0} \]
MAC3702 Financial Management Te…
7. Repairs and maintenance are incorrectly allocated
The mobile homes have a free two-year service and maintenance plan. Therefore:
Years 1–2: R0
Years 3–4: R50 000 per year
The working paper reverses this treatment.
8. Booking-system costs should be based on correctly calculated revenue
The booking system costs 2% of revenue.
Therefore:
Year 1/2:
\[ 3\,430\,000\times2\%=R68\,600 \]
Year 3/4:
\[ 4\,116\,000\times2\%=R82\,320 \]
The working paper's amounts are therefore incorrect because its revenue figures are
incorrect.
EXAM PACK
,FINANCIAL MANAGEMENT TECHNIQUES - MAC3702
OCTOBER/NOVEMBER 2024
EXAMINATION MODEL ANSWERS AND CALCULATIONS
QUESTION 1 — Amazing Holiday Travel Limited (AHT) [45 marks]
The proposed investment concerns two luxury mobile homes. The paper provides a
purchase price of US$140 000 per mobile home, an exchange rate of US$1 = R17,20,
working capital of R800 000, operating revenues and costs, taxation information, and
financing details.
1(a) Critical evaluation of the capital budgeting working paper [15 marks]
David Glope's working paper contains several errors and inconsistencies when
assessed against capital-budgeting principles.
1. Purchase price is incorrect
The working paper records R140 000 as the purchase price. This is incorrect because
the stated price is US$140 000 for each of two mobile homes.
\[ 140\,000 \times 2 \times R17,20 =R4\,816\,000 \]
Therefore, the initial investment should be R4 816 000, not R140 000.
The working paper has therefore omitted both the number of mobile homes and the
exchange-rate conversion.
2. Working capital is incorrectly treated
The R800 000 working-capital investment should be included as an initial cash
outflow in Year 0, not as a Year 1 operating item.
,It should subsequently be recovered as a cash inflow at the end of Year 4 because the
question explicitly states that the working capital will be recouped at the end of Year 4.
3. Revenue is incorrectly calculated
For Years 1 and 2:
\[ R7\,000\times5\times49\times2 =R3\,430\,000 \]
The working paper records R3 640 000.
For Years 3 and 4:
\[ R7\,000\times6\times49\times2 =R4\,116\,000 \]
The working paper records R4 368 000.
Thus, the revenue calculations are incorrect. The scenario specifically states that the
homes operate for five days per week during Years 1 and 2 and six days thereafter, with
49 operating weeks per year.
4. Fuel costs are correctly calculated
\[ 200\text{ litres}\times R25\times12\times2 =R120\,000 \]
The R120 000 annual fuel cost is therefore correct.
5. Driver salaries are correctly calculated
Four drivers are required:
\[ 4\times R250\,000=R1\,000\,000 \]
Therefore, the R1 000 000 annual driver salary is correct.
6. Administrator salaries should be R0
, The three existing administrators have sufficient capacity to handle the additional
workload. Therefore, no additional administrative salary should be included in the
incremental cash flows.
The working paper incorrectly includes R360 000 per year.
\[ \boxed{\text{Incremental administrator cost}=R0} \]
MAC3702 Financial Management Te…
7. Repairs and maintenance are incorrectly allocated
The mobile homes have a free two-year service and maintenance plan. Therefore:
Years 1–2: R0
Years 3–4: R50 000 per year
The working paper reverses this treatment.
8. Booking-system costs should be based on correctly calculated revenue
The booking system costs 2% of revenue.
Therefore:
Year 1/2:
\[ 3\,430\,000\times2\%=R68\,600 \]
Year 3/4:
\[ 4\,116\,000\times2\%=R82\,320 \]
The working paper's amounts are therefore incorrect because its revenue figures are
incorrect.
