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Investment Appraisal

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Investment Appraisal

  • This topic has 5 replies, 3 voices, and was last updated 2 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • May 7, 2023 at 6:16 pm #684023
    boaz7bm
    Participant
    • Topics: 9
    • Replies: 8
    • ☆

    Charm Inc., a software company, has developed a new game, ‘Fingo’, which it plans to launch in the near future. Sales volumes, production volumes and selling prices for ‘Fingo’ over its four-year life are expected to be as follows: Year 1
    Year 2
    Year 3
    Year 4
    Sales and production units
    150,000
    70,000
    60,000
    60,000
    Selling price ($ per game)
    $25
    $24
    $23
    $22
    Financial information on ‘Fingo’ for the first year of production is as follows:
    Direct material cost $5.40 per game
    Other variable production cost $6.00 per game
    Fixed costs $4.00 per game
    Advertising costs to stimulate demand are expected to be $650,000 in the first year of production and $100,000 in the second year of production. No advertising costs are expected in the third and fourth years of production. Fixed costs represent incremental cash fixed production overheads. ‘Fingo’ will be produced on a new production machine costing $800,000, which will be invested at the start of the project (Year 0).
    Charm Inc. uses a discount rate of 10% when appraising new capital investments. Ignore inflation.
    Required: Calculate the net present value of the proposed investment and comment on your findings.

    May 7, 2023 at 9:09 pm #684027
    simranxdeep
    Participant
    • Topics: 39
    • Replies: 60
    • ☆☆

    The only thing that I couldn’t understand in this question was “Fixed costs represent incremental cash fixed production overheads.”.

    May 8, 2023 at 9:21 am #684042
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Boaz7bm: This question is from a past Paper FM exam (not a Paper AFM exam). You must have an answer in the same book in which you found the question so ask about whatever it is in the answer that you do not understand. We are not here to simply provide full answers to full questions!

    I suggest that you watch my free Paper FM lectures on investment appraisal where everything needed to be able to answer this question is explained.

    May 8, 2023 at 9:24 am #684043
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    simranxdeep: Incremental fixed costs means extra fixed costs (as opposed to simply a reallocation of existing fixed costs). As always, any extra costs are relevant cash flows in NPV decision making. This is explained in my lectures.

    As I replied to boaz7pm, this is a past Paper FM exam question and everything needed to be able to answer it is explained in my free Paper FM lectures. The lectures are a complete free course and cover everything needed to be able to pass the exam well.

    May 13, 2023 at 10:22 am #684293
    boaz7bm
    Participant
    • Topics: 9
    • Replies: 8
    • ☆

    Thank you

    May 13, 2023 at 4:54 pm #684303
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Investment Appraisal’ is closed to new replies.

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