BUSINESS ANALYSIS

Time allowed – 3 hours

Maximum Marks – 100

[N.B. – Figures in the margin indicate full marks. Question must be answered in English. Examiner will take
account of the quality of language and of the way in which the answer are presented. Different parts,
if any, of the same question must be answered in one place in order of sequence.]
Marks
1. (a) Explain the difference between risk and uncertainty in the context of investment appraisal,
and describe how sensitivity analysis and probability analysis can be used to incorporate risk
into the investment appraisal process. 6
(b) D Co. needs to increase production capacity to meet increasing demand for an existing
product, `Super’, which is used in food processing. A new machine, with a useful life of four
years and a maximum output of 600,000 kg of Super per year, could be bought for Tk.800,000,
payable immediately. The scrap value of the machine after four years would be Tk.30,000.
Forecast demand and production of Super over the next four years is as follows:
Year 1 2 3 4
Demand (kg) 1.4 million 1.5 million 1.6 million 1.7 million
Existing production capacity for Super is limited to one million kilograms per year and the new
machine would only be used for demand additional to this.
The current selling price of Super is Tk.8.00 per kilogram and the variable cost of materials is
Tk.5.00 per kilogram.
Other variable costs of production are Tk.1.90 per kilogram. Fixed costs of production
associated with the new machine would be Tk.240,000 in the first year of production,
increasing by Tk.20,000 per year in each subsequent your of operation.
D Co. pays tax one year in arrears at an annual rate of 30% and can claim capital allowances
(tax-allowable depreciation) on a 25% reducing balance basis. A balancing allowance is
claimed in the final year of operation.
D Co. uses is after-tax weighted average cost of capital when appraising investment projects. It
has a cost of equity of 11% and a before-tax cost of debt of 8.6%. The long-term finance of the
company, on a market-value basis, consists of 80% equity and 20% debt.
Required:
i. Calculate the net present value of buying the new machine and advise on the acceptability
of the proposed purchase (work to the nearest Tk.1,000). 10
ii. Calculate the internal rate of return of buying the new machine and advise on the
acceptability of the proposed purchase (work to the nearest Tk.1,000). 4

2. A Ltd. achieved sales of Tk.25 million for the year ending 30 November 2010. Sales have not
increased over the past three years and the sales forecast prepared by the marketing department
suggests that there will be no change in the forthcoming year. All sales are on credit and trade
debtors are expected to pay one month after being invoiced. However, trade debts outstanding
are received, on average, three months after the invoice date.
A new marketing director has recently been appointed and she has suggested that the company
should offer a 2% discount for those trade debtors who pay within one month. She believes that
this policy will result in 80% of the value of trade debts outstanding being received at the end of
one month and only 20% being received, on average, at the end of three months. The marketing
director has also argued that a discount policy for prompt payment would prove popular with
customers and would lead to a 20% increase in sales.
The following forecasts were made for the forthcoming year before the proposed policy was
suggested:
(i) a gross profit margin on sales of 40%;
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(ii) variable overhead expenses of 30% of sales;
(iii) fixed expenses of Tk.1.2 million;
(iv) sales, cost of sales and overhead expenses will accrue evenly over the year;
(v) variable and fixed overhead expenses will be paid one month after being incurred;
(vi) two months’ credit (based on the cost of sales) will be taken from trade creditors.
The Marketing Director believes these forecasts will be unaffected by any decision concerning the
introduction of a discount.
Company policy is to hold three months’ stock at all times and to have a cash balance at the year-
end of Tk.0.1 million. Ignore taxation and dividends.
Required
(a) Calculate the expected net profit for the forthcoming year assuming:
(i) the discount policy is introduced;
(ii) the discount policy is not introduced. 8
(b) Calculate the investment in working capital at the end of the forthcoming year assuming:
(i) The discount policy is introduced;
(ii) The discount policy is not introduced. 8
(c) Comment on your findings in (a) and (b) above and state whether or not the proposed
discount policy for prompt payment should be introduced. 4
(Workings should be Tk. millions and should be made to one decimal place)

3. One of your corporate clients has purchased following data which provides scores of political risks
for a number of countries in which your client is considering investing in a new subsidiary.
Total Economic Debt in Credit Government Remittance Access
Performance default ratings stability restrictions capital
Weighting 100 25 10 10 25 15 15
Freehold 37 13 4 5 5 10 0
Bunia 52 5 10 9 16 8 4
Patalia 36 12 2 3 9 5 5
Patalpur 30 9 3 2 15 1 0
Combia 39 15 4 3 11 4 2
Countries have been rated on a scale from 0 up to the maximum weighting for each factor (e.g. 0-
15 for remittance restrictions). A high score for each factor, as well as overall, reflects low political
risk. A proposal has been put before the company’s board of directors that investment should take
place in Bunia.
Required
Prepare a brief report for the company’s board of directors discussing whether or not the above
data should form the basis for:
a. The measurement of political risk, and 12
b. The decision about which country to invest in. 8

4. Accountants Limited (AL) is a national organization which provides private tuition courses in
accounting. The courses are generally attended by individuals who work as bookkeepers for other
companies and who want to develop their practical skills. None of the attendees is aiming towards
any professional qualification or examination.
Courses are run on basic bookkeeping; value added tax, payroll, credit control, company
administration and basic business management. Other bespoke courses, run on demand, are
charged out at higher than normal rates.
AL has six branches nationwide with individual branch managers. Head office is situated at Dhaka
and has responsibility for company accounting, payroll and inventory ordering activities. Individual
branch managers have responsibility all other areas of the business, such as pricing, product mix
and staffing.
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Each branch rents its premises (a national company policy) and staff numbers range from 4 in
Rangpur to 18 in Dhaka. Staffs are generally former accountants, bankers and tax inspectors who
concentrate on keeping courses practical and applicable to their customers.
To date managers have always been appraised by return on investment (ROI) with a target return
of 40%. Branches have regularly exceeded this target and branch managers seem happy to be
appraised in this manner.
Abdul Karim, the company’s main shareholder and managing director, recently visited all branches
in order to promote corporate identity and inspect performance at a local level. He returned
dismayed at the condition of some branch premises and feels overall that, although recent
financial performance has been consistent with previous years, the company does not seem to
have changed or developed since he last visited branches five years ago.
Karim believes that he needs to change the appraisal method for branches so that they fit more
closely with what he expects from the company. He wants the business to develop and grow and
become the leading provider of business training in Bangladesh.

Required
Answer the following questions, considering each independently from the others, and supporting
your answers with appropriate calculations:
(a) Outline the problems the business is likely to have from its use of ROI as its sole of
performance indicator. 4
(b) Describe the balanced scorecard approach to performance measurement and how it might
rectify these problems. 8
(c) Outline possible performance measures which might be used in each area of the balanced
scorecard for AL. 8

5. (a) Explain the various methods of reducing foreign exchange risk. 6

(b) PKA Co. is a European company that sells goods solely within Europe. The recently appointed
financial manager of PKA Co. has gathered the following information:
PKA Co. has used a foreign supplier for the first time and must pay $250,000 to the supplier in
six months’ time. The financial manager is concerned that the cost of these supplies may rise
in euro terms and has decided to hedge the currency risk of this account payable. The
following information has been provided by the company’s bank:
Spot rate ($ per €): 1.998 ± 0.002
Six months forward rate ($ per €) 1.979 ± 0.004
Money market rates available to PKA Co.:
Borrowing Deposit
One year euro interest rates: 6.1% 5.4%
One year dollar interest rates: 4.0% 3.5%
Assume that it is now 1 December and that PKA Co. has no surplus cash at the present time.

Required
Evaluate whether a money market hedge, a forward market hedge or a lead payment should be
used to hedge the foreign account payable. 14

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