QUESTION ONE
a) Cash flows are considered to be more important than accounting profits in making an investment decision, explain why this is the case (5 Marks)
b) Discuss the major functions performed by financial intermediaries in an economy (5 Marks)
c) A company is considering the launch of a new product called Zed which requires an investment of Ksh 6,000,000 in plant and machinery. The production of Zed is expected to last for five years after which the plant and machinery would be sold for Sh. 1,500,000. In additional information:
i) Zed would be sold at Shs.6oo per unit with a variable cost of Shs.210 per unit
ii) Fixed production costs (excluding depreciation) would amount to Shs.600,000 per annum
iii) The company applies straight line method of depreciation
iv) The cost of capital is 10% per annum
v) The company expects to Sell 8,000, 7,000, 7,000, 5,000 and 3,000 units of Zed in the first, second, third, fourth and fifth year of production, respectively
vi) The corporation tax rate is 30%
Required:
Calculate the net present value (NPV) of the project and advice the management on appropriate course of action. (15 Marks)
QUESTION TWO
a) In a contemporary economy ethical responsibility isn’t a legal requirement but a moral imperative for companies to operate in an ethical and fair manner. State and explain the main ways in which the ethical responsibility of a company can be discharged. (12 Marks)
b) Pentex Limited Company intends to raise funds to finance its operations and the proposed investments, as a finance advisor explain to the management of the company factors that will influence their decisions on sources of funds. (13 Marks)
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