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Question Two focuses on a new integrated air-conditioner manufacturing venture with forecasted sales, pricing, costs, depreciation, working capital, fixed overheads, terminal sale, and taxation, including discussion of whether the project discount rate is 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PROFESSIONAL EXAMINATIONS  \nADVANCED FINANCIAL MANAGEMENT  \nEXAMINERS GENERAL COMMENTS  \nGENERAL PERFORMANCE  \nBeing a new syllabus the students are now familiarizing themselves with the distinction between the financial management in part 2 and Advanced Financial Management in part 3. In all, the performance is not encouraging and is far below our expectations.  \nTHE INSTITUTE OF CHARTERED ACCOUNTANTS, GHANA NOVEMBER 2015 PROFESSIONAL EXAMINATION QUESTIONS ADVANCED FINANCIAL MANAGEMENT (3.3)  \nQUESTION ONE  \nAhomka Fruity Ltd (Ahomka), a listed company based in Ghana, produces fresh pineapple juice packaged in bottles and cans. The company has been exporting to Nigeria for many years, earning an annual after-tax contribution of NGN5 million. The company wants to establish a whollyowned subsidiary in Nigeria to produce and sell its pineapple juice products over there. If a subsidiary is established and operated in Nigeria, Ahomka will cease exporting pineapple juice products to Nigeria. However, Ahomka plans to sell some raw materials and services to the subsidiary for cash.  \nAcquiring a suitable premises, required plant and equipment, and installing the machinery will take the next two years to complete. Production and sales will commence in the third year and indefinitely.  \nCapital expenditure is estimated to be NGN10 million at the start of the first year and NGN5 million at the start of the second year. Ahomka will have to make working capital of NGN2 million available at the start of the third year, and this is expected to be increased to NGN2.5 million atthe start of the fifth year.  \nThe proposed Nigerian subsidiary will produce the following pre-tax operating cash flows at the end of each of the first three years of production and sales:  \n\n| Production/sales year | 1 | 2 | 3 |\n| --- | --- | --- | --- |\n| Pre-tax operating cash flows (NGN’ 000) | 2,800 | 4,500 | 5,200 |\n\nThe tax rate in Nigeria is 30% and tax is paid in the same year the profit is earned. Capital allowance is granted on capital expenditure at the end of each year of production/sale at the rate of 30% on reducing balance basis.  \nAfter the first three years of production and sales, post-tax incremental net operating cash flows will grow at the rate of 4% every year to perpetuity.  \nAhomka plans to finance the project entirely with loans raised from Ghana at an after-tax cost of 18%. The maximum post-tax operating cash flows possible will be remitted to the parent company at the end of each year to help pay off the loans. Nigeria does not restrict fund remittance to a parent company outside of Nigeria and there are no taxes on funds remittance.  \nThe Naira-Ghana Cedi exchange rate is currently NGN55.40/GHS. Annual inflation is expected to be 18% in Ghana and 20% in Nigeria.  \nRequired:  \n(a) Perform a financial appraisal of the project using the net present value and the modified internal rate of return (MIRR) methods, and recommend whether Ahomka should proceed with the project. (10 marks)  \n(b) Present a paper to the Board of Directors of Ahomka, which advises on potential risks the company might be exposed to if it proceeds with the Nigerian subsidiary project, and strategies the company could employ to avoid or manage the risks.  \n(Note: Professional marks will be awarded for presentation)  \n(10 marks)  \n(Total = 20 marks)  \nQUESTION TWO  \nABC Manufacturing Ltd (ABC) is an indigenous Ghanaian company that manufactures components used in air conditioners. The company now wants to manufacture air conditioners for sale in Ghana. Though the manufacture of air conditioners will be a completely new business, directors of ABC plan to integrate it into the company’s core business.  \nABC has premises it considers suitable for the project. This premises was acquired two years ago at the cost of GHS50,000 . ABC will acquire and install the needed machinery immediately, so production and sales can com","cbCaifhfhnGynALc","https://ap.wps.com/l/cbCaifhfhnGynALc","pdf",941753,43,"English","# Question One\n## Financial appraisal and board risk paper\n# Question Two\n## Manufacturing project appraisal and discount rate considerations","[{\"question\":\"What methods are required for the project evaluation in Question One?\",\"answer\":\"The question requires a financial appraisal using the net present value (NPV) and the modified internal rate of return (MIRR) methods, followed by a recommendation on whether to proceed.\"},{\"question\":\"What key cash flow components are included in the Nigerian subsidiary project in Question One?\",\"answer\":\"Capital expenditure, working capital, pre-tax operating cash flows for the first three production years, taxation timing, capital allowances, post-tax incremental growth to perpetuity, loan financing costs, and remittance assumptions are included.\"},{\"question\":\"What does Question Two require regarding risk/decision aspects for the new manufacturing venture?\",\"answer\":\"It requires presenting and evaluating the five-year integrated air-conditioner manufacturing project, including the effects of depreciation, working capital redeployment at sale, forecasted sales and pricing, taxation, and assessing whether the standard discount rate is appropriate for this new venture.\"}]","ADVANCED FINANCIAL MANAGEMENT - PROFESSIONAL EXAMINATIONS | PDF",1789634648,108]