Mock exam answers: The basics of financial management

Mock exam for Financial Management | Year 2 – Period 1 ANSWERS

Assignment 1

A security firm is considering offering a new service. As this new service concerns
personal protection, it will require investments in high-tech equipment and modes of
transport that have been modified to offer personal protection. The total amount to be
invested is €350,000. As a result of these investments, the firm will reduce costs
(which are also cash outflows) of €25,000. The additional sales revenue which will be
generated by this new service is expected to be €40,000 a year. The economic
lifespan of the high-tech equipment is six years. The residual (salvage) value is zero.
The straight-line depreciation method is applied.


a. Draw up a cash flow overview for this investment project. Treat the yearly cost
reduction as a positive cash flow.

b. Calculate the accounting rate of return (ARR) for this investment.

c. Calculate the payback period of this investment.


a.
Cash
Year Cash inflows+ (Net) Cash flow
outflow-
-350,000 -350,000
1 -350,000 65,000 -285,000
2 -285,000 65,000 -220,000
3 -220,000 65,000 -155,000
4 -155,000 65,000 -90,000
5 -90,000 65,000 -25,000
6 -25,000 65,000 40,000


b. (6 x 65,000 - 350,000) / 6 = 6,666.67
Average capital invested = (350,000 + 0) / 2 = 175,000
6,666.,000 x 100% = 3.81%


c. 350,,000 = 5.38 years


Study for more information chapter 5 of the book (Basics of Financial Management)




Mock exam for Financial Management | Year 2 – Period 1 Page 1

, Mock exam for Financial Management | Year 2 – Period 1 ANSWERS

Assignment 2

The CleanFloor company manufactures robot floor cleaners. The selling price of a
robot floor cleaner is €7,000 (excl. VAT). The variable costs are €2,750 (excl. VAT).
CleanFloor's fixed costs are €350,000 in wage costs and €190,000 in other fixed
costs, including depreciations, maintenance and insurance. The normal output is
4,000 robot floor cleaners per year. The company expect to sell 3,500 robot floor
cleaers this year.


a. Calculate the break-even sales revenue.

b. If the company objective is to achieve a profit of €250,000, how many robots need
to be sold?

c. The company is launching a new type of robot floor cleaner, which is a
sustainable variant of the existing robot floor cleaner, for a selling price of €8,900
(incl. VAT at 21%). The gross margin profit on this new robot floor cleaner is 45%
of the selling price (excl. VAT). Calculate the cost price (excl. VAT) of this new
type of robot floor cleaner.

d. In many situations, direct costs are also variable costs. Give two examples of
manufacturing costs for robot floor cleaners which are variable costs.


a.
Break-even point = overheads / (selling price - variable costs per unit)
(350,000 + 190,000) / (7,000 - 2,750)
540,,250 = 127.06, rounded up to 128 units
The break-even sales are therefore 128 x 7,000 = €896,000

b.
(Overheads + profit) / 7,000 - 2,750
540,000 + 250,,250 = 185.88, rounded up to 186 units

c.
The selling price incl. VAT is €8,900; this equals 121%
The selling price excl. VAT is 8,900 x () = €7,355.37
The profit is 45% of the selling price, i.e. 45% of 7,355.37 = €3,309.92
Therefore, the selling price - profit is 7,355.37 - 3,309.92 = €4,045.45

d.
Tyres, plastics, PCBs, machine-specific electronics, bolts, nuts, degradables




Mock exam for Financial Management | Year 2 – Period 1 Page 2