Exercise 9 (15 Jan 2023)

SEMESTER A221
BKAM 3023 MANAGEMENT ACCOUNTING II

EXERCISE 9
QUESTION 1
Persatuan Ibu Bapa Guru (PIBG) of Sekolah Kebangsaan Uniutama is considering on acquisition of
several minibuses for use in transporting students to school. Currently, the PIBG owned five full size
buses. The plan under consideration is to replace these five full size buses with eight minibuses, each
of which would cover a much shorter route than a full size bus. Below are the information related to
the plan:
1. The cost of a full size bus is RM180,000; whereas a minibus cost RM54,000.
2. The bus drivers are part time employees whose compensation cost is RM36,000 per year for
each driver. There is no difference between wages for full size buses and minibuses driver.
3. The annual costs of operating and maintaining a full size bus amount to RM100,000.
4. In contrast, a minibus will cost only RM40,000 annually to operate and maintain.
5. The initial cost to redesign the bus routes, inform the public, install caution signs in certain
hazardous location, and retrain the drivers amount RM30,500.
6. The useful life of a new minibus is projected to be five years.
7. The PIBG uses straight line depreciation for all its long lived assets.
If the minibuses are purchased, the PIBG has two options regarding the five full size buses. First, the
buses could be sold now for RM30,000 each. Second, the buses could be kept in reserve to use for
field trips and out of town athletic events and to use as backup vehicles when buses break down.
Currently, the PIBG charters buses from a private company for these purposes. The annual cost of
chartering buses amounts to RM60,000. The PIBG has estimated that this cost could be cut to
RM10,000 per year if the five buses were kept in reserve. The five full size buses have five years of
useful life remaining, either as regularly scheduled buses or as reserve buses.
The PIBG uses discount rate of 12 percent on all capital projects.
REQUIRED:
(a) Prepare a present value analysis for the PIBG’s plan to replace full size buses with minibuses.
State your decision and reason on whether the minibuses should be purchased or not.
(b) If the minibuses are purchased:

(i) Compute the internal rate of return. State your decision and reason on whether you
agree or not with the decision to purchase the minibuses.
(ii) Prepare a net present value analysis of the two options for the five full buses. State
your decision and reason on whether these buses should be sold now or kept in
reserve.
(c) List and briefly explain FOUR (4) assumptions underlying discounted cash flow analysis.
1
QUESTION 2
Viki Alina, president of Vistana Idaman, is considering the purchase of a computer aided
manufacturing system. The annual net benefits/savings associated with the system are described as
follows:
RM
Decreased waste 300,000
Increased quality 400,000
Decrease in operating costs 600,000
Increase in on time deliveries 200,000
The system will cost RM9,000,000 and last 10 years. The company’s cost of capital is 12%.
REQUIRED:
(a) Calculate the payback period for the systems. Assume that the company has a policy of only
accepting projects with payback period of five years or less. Would the system be acquired?
(b) Calculate the Net Present Value (NPV) and the Internal Rate of Return (IRR) for the project.
Should the system be purchased, even if it does not meet the payback criterion?
(c) The project manager reviewed the projected cash flows and pointed out that two items had
been missed. First, the system would have a salvage value, net of any tax effects, of
RM1,000,000 and at the end of 10 years. Second, the increased quality and delivery
performance would allow the company to increase its market share by 20%. This would
produce an additional annual net benefit of RM300,000. Recalculate the payback period, NPV
and IRR, given this new information. For IRR calculation, ignore salvage value. Does the
decision change?
(d) If the salvage value is only 75% of what is projected, does it change the company’s decision?
Explain.
Present Value Interest Factor (PVIF) for n=10
i 8% 10% 11% 12% 13% 14% 15% 16%

0.463 0.386 0.352 0.322 0.295 0.270 0.247 0.227
Present Value Interest Factor (PVIFA) for n=10
i 8% 10% 11% 12% 13% 14% 15% 16%

6.710 6.145 5.889 5.650 5.426 5.216 5.019 4.833
QUESTION 3
A. Multi Sdn. Bhd. (MSB) is planning to explore in a self-service car wash activity. MSB
provides the following information for the proposed plan:
i. A building would be leased at RM3,400 per month for eight (8) years.
ii. A machine cost RM400,000 would be purchased and installed and the machine can
be sold after eight years at 10% of its original cost.
2
iii. Working capital of RM4,000 would be required to cover supplies and would be
released after eight years.
iv. MSB plans to charge RM4.00 per use for car wash and RM2.00 per use for vacuum
services.
v. The variable costs are RM0.40 per use of the car wash for water and RM0.10 per use
of the vacuum services for electricity.
vi. Other monthly costs involved would be RM900 for cleaning, RM150 for insurance
and RM1,000 for maintenance.
vii. The gross receipt for the car wash would be RM3,000 per week. Based on the study
conducted by MSB, 70% of customers using car wash would also use the vacuum
services.
viii. MSB plans to open the car wash for 52 weeks in a year.
ix. MSB would involve in project if the project yields at least 10% return.
REQUIRED:
(a) Compute the annual net cash receipt (gross cash receipt less cash disbursement) from
the proposed operation. Provide all the calculations.
(b) Compute the net present value for the proposed investment.
(c) Based on your answer in (b), what would be your advice to MSB?
B. Bolaround Sports Sdn. Bhd. (BSSB) is a sports equipment manufacturer. It is considering

producing a new exercise ball. The following data is prepared by the management accountant:
Annual sales volume 1,000,000 units

Selling price RM10.00 per unit
Variable cost RM4.00 per unit
Fixed cost RM2,000,000
Investment required RM12,000,000
Project life 5 years
At the end of the five-year useful life, there will be no residual value. Cost of capital for the
company is 14%.
REQUIRED:
(a) Compute the annual cash flow from the investment.
(b) Compute the internal rate of return (IRR) for the investment.
(c) Assuming there is a 10% reduction in the per unit selling price, compute the new IRR
for the investment.
(d) Briefly explain TWO (2) disadvantages of calculating investment using IRR.

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SEMESTER A221

BKAM 3023 MANAGEMENT ACCOUNTING II

(b) If the minibuses are purchased:

Present Value Interest Factor (PVIF) for n=10

i 8% 10% 11% 12% 13% 14% 15% 16%

Present Value Interest Factor (PVIFA) for n=10

i 8% 10% 11% 12% 13% 14% 15% 16%

B. Bolaround Sports Sdn. Bhd. (BSSB) is a sports equipment manufacturer. It is considering

Annual sales volume 1,000,000 units

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