## QUESTIONS ON FINANCIAL MANAGEMENT AND STATE

QUESTION ONE

Discuss the goals of Financial Management and state which is the best goal?(12 marks)

(TOTAL 12 MARKS)

QUESTION TWO

XYZ Ltd is considering three possible capital projects for next year. Each project has a 1-year life, and project returns depend on next years state of the economy. The estimated return are shown in the table:

State of the Probability Rate of Return

economy of occurrence A B C

Recession 0.25 10% 9% 14%

Average 0.50 14 13 12

Boom 0.25 16 18 10

Required:

i. Compute each projects expected rate of return (6 marks)

ii. Compute the variance and standard deviation of each project(12 marks)

iii. Compute the co-efficient of variation for each project(3 marks)

iv. Which is a better project? Why?(3 marks)

(Total 24 Marks)

QUESTION THREE

Sammy and Jimmy Ltd purchased a machine 5 years ago at a cost of Sh 1,000,000. It had an expected life of 10 years at the time of purchase and an expected salvage value of Sh 100,000 at the end of its useful life. It is being depreciated by a straight line.

A new machine can be purchased for Sh 1,500,000 including installations costs. Over its 5 year life, it will reduce cash operating expenses by Sh 500,000 per year. Sales are not expected to change. At the end of its useful life the machine is considered to be worthless.

The old machine can be sold today for Sh 650,000. The firm's tax rate is 35% and the appropriate discount rate is 15%.

Required:

(a) Determine whether the machine should be replaced using the NPV criterion(16 marks)

(b) What other factors should be considered before making the decision at (a) above?(8 marks)

(Total 24 Marks)

QUESTION FOUR

Great Lakes utilities is deciding if it should build an oil or a coal generating plant. Its weighted average cost of capital is 8% for low-risk projects 10% for projects of average risk and 12% for high-risk projects. Management believes that an oil plant is of average risk but that a coal plant is of high risk. The cash outflows required to construct each plant are listed below. The revenue, fuel costs and other operating costs are expected to be the same under both plans.

Construction Cost (Shs`000')

Year Coal Plant Oil Plant

0 100 400

1 500 1,000

2 1,500 1,000

3 1,500 1,000

4 1,500 1,500

5 1,000 1,000

6 500 200

Required:

Which type of plant should be constructed?(20 marks)