THE OPEN UNIVERSITY OF SRI LANKA
BACHELOR OF MANAGEMENT STUDIES (HONOURS) DEGREE PROGRAMME
LEVEL 5
ACADEMIC YEAR: 2019/2020
MCU3208 / MSU5508 – Financial Management and Managerial Accounting
Deadline for Submission: 23.02.2020
Instructions: Late Assignments will not be accepted.
Answers should be clearly hand written or typed on the A4 size paper.
Write your student registration number in every answer script
Plagiarism is considered an offence.
(1) Any change in fixed costs, variable costs, or selling price has the effect of shifting the Break-Even point (BEP). Illustrate this with the help of figure given below assuming 10% increase in each of the three elements stated above separately. Give reasons in support of your answer.Rs.
Sales (30,000 units) 120,000
Variable cost 40,000
Fixed cost 50,000 90,000
Profit 30,000
You are also required to show how the profit figure is affected if all the elements increase simultaneously each by 10%. (40 Marks)
(2) A plastic manufacturing company is considering replacing an older machine with a new machine costing Rs.6.5 million. The existing machine was originally purchased two years ago for Rs.2.8 million and is being depreciated by the straight line method over its seven year life period. It can be sold currently for Rs. 3 million with no removal costs. The new machine would cost Rs.1 million to install and would be depreciated over five years. The management believed that the new machine would have a salvage value of Rs. 500,000/= at the end of year 5. The management also estimate an increase in net working capital requirement of Rs. 1 million as a result of expanded operations with the new machine. The firm is taxed at a rate of 55% on normal income and 30% on capital gains. The companies’ expected Profits After Tax (PAT) for next 5 years with existing machine and with new machine are given below.
Year Expected (PAT) (Rs. Million)
Existing machine New machine
1 20 21.6
2 15 15.0
3 18 20.0
4 21 24.0
5 22 23.0
(a) Calculate the net investment required by the new machine.
(b) If the firm’s cost of capital is 15%, determine whether new machine should be purchased. (60 Marks)
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