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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 –
DECEMBER 2013
13304 – STRATEGIC MANAGEMENT ACCOUNTING
Instructions to candidates:
(1) Time allowed:
Reading and planning : 15 minutes
Writing : 3 hours
(2) Marks : 100 marks
(3) (i) Section A – Question No. 01 is compulsory.
(ii) Section B – Answer any four (04) questions.
.
(4) Begin each answer on a separate page. Submit all workings.
(5) All answers should be in English Language, in the answer booklets provided.
____________________________________________________________________________
SECTION – A
Question No. 01
Hands Lanka (Pvt) Ltd (HL) which engaged in manufacturing fabric gloves is a group company
of Industrial Equipment Plc (IEP). Currently HL is making losses due to the competition. HL has
recently developed a specialty dipped glove (new product) and the management is contemplating
a project of a dipping plant. Total investment in machinery and installation will be Rs. 400
million out of which Rs. 300 million should be paid now and balance at the end of the first year
from now (Year 1). At the end of five years from now (expected lifetime of the project) the
residual value would be Rs. 50 million.
(2)
You have been given the following forecasted cash flows and profits for the project, which are
stated according to the present day costs and prices.
Year 1
(Rs. Mn)
Year 2
(Rs. Mn)
Year 3
(Rs. Mn)
Year 4
(Rs. Mn)
Year 5
(Rs. Mn)
Sales
530
580
592
525
500
Materials
Labour
Overheads
Interest
240
48
120
20
260
50
120
15
265
52
120
10
255
48
115
5
240
45
110
–
Total expenses
428
445
447
423
395
Profit before tax
102
135
145
102
105
Working capital in present day’s cost terms are:
Beginning
of year 1
(Rs. Mn)
Beginning
of year 3
(Rs. Mn)
Beginning
of year 4
(Rs. Mn)
Beginning
of year 5
(Rs. Mn)
Working capital
100
120
130
140
Additional information:
HL has spent Rs. 400,000 to develop this new product. A competitor of HL has already
offered Rs. 1 million for the technology of manufacturing this product.
The machinery will be installed in a rented floor area owned by IEP for a rental of Rs. 1
million per year during the project period, which cost is included in overheads. This area is
presently rented out by IEP to another subsidiary for the same amount. If the area is given to
HL, this subsidiary will rent another location from a third party, which will cost Rs. 1.5
million per year.
Selling prices of the gloves and working capital requirements are expected to increase by 5%
per year while material and labour costs are expected to increase by 10% per year. Working
capital will be released at the end of the project period.
Depreciation is charged on straight-line basis and included in the overheads. Overheads are
expected to increase by 5% every two years.
Profits are taxable at 12% and HL has a carried forward tax loss of Rs. 30 million which will
be utilised for this project subject to a maximum of 35% of assessable income. Depreciation
allowance for machine is 33 1/3% per annum. Taxes are assumed to be paid in the year in
which they are incurred.
HL’s real after tax Weighted Average Cost of Capital (WACC) is 15% per year, and nominal
after tax WACC is 20% per year. Management of IEP will accept the project if it generates a
positive net present value from the group’s viewpoint.
Discounting rates are given in the following table.
Discounting Rate
Year 1
Year 2
Year 3
Year 4
Year 5
15%
20%
0.870
0.833
0.756
0.694
0.658
0.579
0.572
0.482
0.497
0.402
You are required to :
(a) Evaluate the acceptability of the project using net present value (NPV) and the internal
rate of return (IRR) from the group’s viewpoint. (You are advised to state the amounts for
your calculation in Rupees thousands.)
Explain the treatment of the following in your appraisal :
Cost of product development incurred by HL
Annual rent cost to be paid by HL to IEP
Interest expense of HL
Discounting rate (16 marks)
(b) The engineering firm, which has quoted for the machinery installation of HL’s new
project, has given the following costs and time estimates for the installation activities.
Activity
Preceding
Activity
Cost (Rs.)
Duration
in weeks
A
B
C
D
E
F
G
–
A
A
B
D
B
C
540,000
140,000
200,000
220,000
290,000
480,000
180,000
6
1
2
3
2
3
1