PROJECT FINANCING: DPM 202

1. a) Briefly explain the limitation of the assumptions of cost volume profit (C.V.P)
analysis.
(10 marks)
b) Explain five features of a sound project appraisal technique
(10 marks)
2. a) Identify four disadvantages of payback period.
(8 marks)
b) Asante Sana Ltd is a manufacturing company which produces and sells a single
product; Dawa Moto.
Cost
Variable Manufacturing
Fixed manufacturing
Variable selling & administration
Fixed selling & administration

Shs
45
35
8
30
118
Fixed manufacturing costs per unit are based on a predetermined rate established at a
normal activity level of 18,000 production units per period.
Fixed selling and administration costs are absorbed into the cost of sales at 20% of the
selling price. Under/over recovery of overheads are transferred to the profit and loss
account at the end of each period.
The following information has been provided for two consecutive periods.
Period 1
Period 2
Sales (units)
17,000
18,000
Value
2,550,000
2,700,000
Variable manufacturing costs
720,000
828,000
Variable selling and admin costs
136,000
144,000
Fixed manufacturing costs
640,000
630,000
Fixed selling and admin costs
540,000
540,000
Production (units)
16,000
18,400
Required
Income statement for each period under the full costing method

(12 marks)

3. Magma Ltd wishes to make a choice between two mutually exclusive projects. Each
pf this projects require shs 400,000,000 cash outlay. The details of the two projects
are as follows.
Project A
This project is made up of two sub-projects. The first sub-project will require an
initial outlay of shs 100,000,000 and will generate shs 25,600,000 per annum in
perpetuity. The second sub-project will require an initial outlay of sh 300,000,000 and
will generate shs 85,200,000 per annum for the 8 years of its useful life. This subproject does not have a residual value at the end of the 8 years. Bot sub-projects are to
commence immediately.
Project B
This project will generate shs 87,000,000 per annum in perpetuity. The company has
a cost of capita of 16%.

Required
i. Determine N.P.V of each project
ii. Compute the Internal Rate of Return (IRR) for each project
4. a) Explain 5 objective of budgetary control
b) Identify 5 advantages of budget control

(10 marks)
(10 marks)
(10 marks)
(10 marks)

5. a) Define the term cost budget and explain 3 functions of a cash budget (8 marks)
b) Identify and explain 6 sources of funds for a business
(12 marks)
6. a) Outline the advantages and disadvantages of sensitivity analysis
b) Identify and explain 5 long term sources of capital

(10 marks)
(10 marks)

7. Mumias Milling Company purchased a grinder 3 years ago at a cost of shs 3.5
million. The grinder had a life of 8 years at the time of purchase. It is being
depreciated at 15% per year on a declining balance. The company is considering
replacing it with a new grinder costing shs 7 million with an expected useful life of 5
years.
Due to the increased efficiency, profit before depreciation is expected to increase by
shs 400,000 a year. The old and new grinders will be now depreciated at 25% per year
on a declining balance.
The salvage value of the new grinder is estimated at shs 210,000. The market value of
the old grinder today is shs 4,000,000. It is estimated to have a zero salvage value
after 5 years.
Tax is 30% and after tax cost of capital is 12%
Required
Should the new grinder be bought? Explain
(20 marks)
8. a) Define the term capital allowances
(4 marks)
b) Cindera enterprises is a partnership manufacturing timber pallets. The partners are
L, M and N. The business has an account in the balance sheet titled property. The
account had been used to record a variety of expenditures at the end of the year, the
property account contained.
Debit Entries
Purchase of building site by cash
Cost of removing old building from site
Paid contract price for new factory building
completed on 1 January 2005
Insurance, inspection & other costs directly
related to construction of new building
New machinery brought to use on 1 Jan 2005
Cost of fixing machinery & testing
Credit Entries

Shs

Shs
2,000,000
80,000
5,600,000
180,000
4,000,000
400,000
12,260,000

Proceed entries from sales of salvage material

Depreciation for year completed at 4% of shs 12,260,000
Balance in property account as at 31st Dec 2005

30,000
490,400

(520,400)
11,739,600

Required
a) Show the capital allowances due to the partnership in 2005
(10 marks)
b) If the profits, before capital allowances and salaries were shs 2,860,000, show its
allocation among partners if each receives a salary of shs 120,000 per annum.
(6 marks)