BUSF_A01.qxd

Suggested answers to selected problem questions

Workings

Annual material cash flows

£

20X4

First 500 units

£380 − 120 =£260/unit

500 ×£260 = £130,000

Other 1,000 units

1,000 ×£380 = 380,000

£510,000

20X5

Opportunity cost of F451s

500 ×£100 = £50,000

Purchase of components

1,500 ×£380 = 570,000

£620,000

20X6

1,500 ×£380 = £570,000

20X7

1,500 ×£380 = £570,000

20X8

1,500 ×£380 = £570,000

5.1 Dodd Ltd

20X1 20X2 20X3 20X4

£ 000 £ 000 £ 000 £ 000

Investment and residual value* (250) 58

Annual cash flows* 168 176 116

Tax on annual cash flows (30%) (50) (53) (35)

(250) 118 123 139

Discounted at 15.5% (see workings below) (250) 102 92 90

NPV 34

*Subject to inflation.

Workings

Discount rate:

(1 +rm) =(1 +rr)(1 +i)

where rmis the ‘money’ discount rate, rris the ‘real’ discount rate and iis the rate of

inflation. This gives us:

rm=(1 +0.05)(1 +0.10) − 1

rm=0.155 or 15.5%

Chapter 5

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