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No. of Pages = 09
No. of Questions = 06
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA
CA PROFESSIONAL (STRATEGIC LEVEL I) EXAMINATION – JUNE 2012
13304 – STRATEGIC MANAGEMENT ACCOUNTING
Time allowed : 3 hours Marks : 100 marks
Instructions to candidates:
(1) i. Section – A – Question No. 01 is compulsory.
ii. Section – B – Answer any four (04) questions.
(2) Begin each answer on a separate page. Submit all workings
(3) All answers should be in English language, in the answer booklets provided.
______________________________________________________________________________
SECTION – A
Question No. 01.
Hope PLC is the parent company of four subsidiaries operating in different industries. The
company has scheduled a meeting of Board members to present the budgets prepared for the year
2013 and to discuss and approve future projects and development strategies. Some of the
proposals to be forwarded to the meeting by two subsidiaries are summarized below;
Hope General (Pvt) Ltd. (HGPL), which is a manufacturing and trading company of food
products has prepared the following project proposal for a canned fish manufacturing plant. This
company is currently earning profits.
Canned Fish Manufacturing Plant
The cost of machinery required for this project will be Rs. 100 million payable immediately. The
life time of the machinery is estimated as five years. However the used machinery can be sold for
Rs. 15 million.
The revenue and cost details of the project are estimated as follows;
Year 01
Rs. million
Year 02
Rs. million
Year 03
Rs. million
Year 04
Rs. million
Year 05
Rs. million
Revenue
Cost of sales
Administration and
Selling overheads
75
55
5
100
67
6
120
72
6.5
130
77
7
150
90
8
The factory premises which have been rented out to an external party for Rs. 2 million per year
will be used for this new project. Income Tax applicable for the project is 28% and tax liability
will be paid in the following year. The accounting depreciation which is 20% on the cost of
machinery is included in the cost of sales. The annual depreciation allowance for tax purposes is
33 1/3% on the cost.
Hope Investment (Pvt) Ltd., (HIPL) is a newly formed venture capital company. The
following four new projects are being considered by the management. HIPL expects to put
forward these project proposals to this meeting seeking their approval.
HIPL presently (Year 00) has Rs. 500 million to invest for these projects. The details of these
projects are given in the following table;
Net Operational Cash Flows (After Income Tax)
(Rs. million)
Project
Year 01
Year 02
Year 03
Year 04
Year 05
A
B
C
D
(20)
(60)
(50)
(5)
85
(10)
100
30
130
110
110
45
160
170
120
75
210
220
150
60
All above investments are divisible, independent and they are not mutually exclusive. None of
these projects can be done more than once.
Group has a common cost of capital of 20% applicable for its investment projects.
You are the finance manager of the group and requested to assist the management of HGPL and
HIPL. In this connection you have been asked to;
(1) Hope General (Pvt) Ltd. (HGPL)
Calculate the Net Present Value (NPV) and the Internal Rate of Return (IRR) of the
proposal of HGPL and give your recommendation to the Board on the feasibility of the
project. (8 marks)
(2)
(2) Hope Investment (Pvt) Ltd. (HIPL)
(a) Calculate the Net Present Value and Profitability Index for each project that HIPL
considers investing. (4 marks)
(b) Advise the management how Rs. 500 million should be invested in order to
maximize the total NPV of selected projects and calculate the cumulative NPV of
your proposal. (2 marks)
(3) Based on your advice assume that the managing director of HIPL decides to select
projects A, B, and C and present to the board for approval. Moreover the manager-
treasury after analyzing the availability of funds has informed him that the total funds for
the year 01 will be restricted to Rs. 85 million.
(a) Taking into account the funding constraints for year 00 and year 01 and net
present values for project A, B and C, formulate a linear programming model that
will maximize net present value of investments. (You are not required to attempt
a solution) (4 marks)
(b) The following final simplex tableau for the above Linear Programming model has
been generated from a computer software;
Base
Variable
Solution
Values
A B C S1 S2 S3 S4 S5
Projects
Slack Variables