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PAST PAPER QUESTION

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › PAST PAPER QUESTION

  • This topic has 1 reply, 2 voices, and was last updated 3 months ago by John Moffat.
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  • Author
    Posts
  • June 4, 2023 at 5:15 pm #685997
    kashafaltaf500
    Participant
    • Topics: 29
    • Replies: 10
    • ☆

    Mrs Glam wants to expand her clothes shop. Mrs Glam has commissioned a market research
    company at a cost of $3,000 to research her options for her. The company have offered two
    options:
    Option 1
    Remain in her the current premises and undertake an advertising campaign at a cost of
    $2,000 to increase the profile of the shop in the area. It is estimated that revenue will
    increase by 10% from its current level of $50,000 per year. The contribution earned on
    revenue is 30%.
    Option 2
    Move the shop to a more central location and undertake an advertising campaign to both
    increase the profile and the move to new premises. This more extensive campaign would
    cost $4,000 but revenue would be expected to increase by 18% from its current level. The
    level of contribution earned on revenue is not expected to change.
    There would be further costs involved in moving location which have been estimated:
    ? Moving costs are estimated to be $1,500. This includes the cost of refitting the shop,
    and would be payable immediately
    ? New shop fittings will be required costing $2,500. These will be depreciated on a
    straight line basis.
    ? Rates of $4,000 will be payable yearly in advance. This cost is 15% higher than
    Mrs Glam currently pays, due to the location.
    Other information
    ? Mrs Glam uses a cost of capital of 10%
    ? The expansion is to have a life of 4 years.
    Required:
    (a) State if the following items relating to Mrs Glam’s decision how to expand are
    relevant or irrelevant cash flows in a net present value calculation:
    (i) The $3,000 market research fee (1 mark)
    (ii) Depreciation of $625 per year for the new shop fittings. (1 mark)
    (iii) The costs of $1,500 incurred in moving to the new premises. (1 mark)
    (b) Calculate the present value of the INCREMENTAL contribution cash flow that will
    arise if option 2 is compared to option 1. (2.5 marks)
    (c) Calculate the present value of the cash flowsrelating to the INCREMENTAL ratesthat
    will arise if option 2 is compared to option 1.

    HI SIR I AM UNABLE TO SOLVE B AND C KINDLY EXPLAIN ME HOW TO SOLVE IT

    June 5, 2023 at 6:50 am #686016
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    We do not provide full answers to full questions.

    You must have an answer in the same book in which you found the question, so ask about what it is in the answer that you are not clear about and then I will explain.

    b is asking for the incremental i.e. extra flows of 2 as against 1.

    c wants the present value, and how to do this is explained in my free lectures.

  • Author
    Posts
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