Financial Daily from THE HINDU group of publications
Monday, Oct 04, 2004
Financial Daily from THE HINDU group of publications Monday, Oct 04, 2004 |
|
|
|
|
|
Mentor
-
Accountancy An accountant in a school bus P. V. Rathnam
The buses are garaged in the school. The workload of the students has been so arranged that in the morning the first trip picks up senior students and the second trip plying an hour later picks up junior students. Similarly, in the afternoon, the first trip takes the junior students and an hour later the second trip takes the senior students home. The distance travelled by each bus one way is 16 km. The school works 24 days in a month and remains closed for vacation in May and June. The bus fee, however, is payable by the students for all the 12 months in a year.
The details of expenses for the year 2003-2004 are as shown in Table 1. Each bus gives an average of 10 km per litre of diesel. The seating capacity of each bus is 60 students. The seating capacity is fully occupied during the whole year.
The school follows differential bus fees based on distance travelled (see Table 2). Ignore interest. Since the bus fees has to be based on average cost, you are required to: i) Prepare a statement showing the expenses of operating a single bus and the fleet of 25 buses for a year; ii) work out the average cost per student per month in respect of: a) students coming from a distance of up to 4 km from the school; b) students coming from a distance of up to 8 km from the school; and c) students coming from a distance of up to 16 km from the school.
Answer: The statement of operating cost for 2003-2004 is presented in Table 3. Working note 1: Diesel cost: Outward journey: 25 buses x 16 km x 24 days x 10 months x 4 trips = 3,84,000 km Return journey = 3,84,000 km Total = 7,68,000 km Diesel cost: 7,68,000 / 10 = 76,800 litres at Rs 18.50 = Rs 14,20,800 Diesel cost per bus in a year 14,20,800 / 25 = Rs 56,832 ii) Average cost per student per month: 15 per cent of 60 = 9 students x 25 per cent of full fee = 2.25 30 per cent of 60 =18 students x 50 per cent of full fee = 9.00 55 per cent of 60 = 33 students x 100 per cent of full fee = 33.00 Total = Rs 44.25 Average cost per month per full student 2,52,082 / 12 months = Rs 21,006.83 per month. Rs 21,006.83 / 44.25 = Rs 474.73 per full student. a) 25 per cent of 474.73 = Rs 118.68 up to 4 km b) 50 per cent of 474.73 = Rs 237.37 up to 8 km c) 100 per cent of 474.73 = Rs 474.73 up to 16 km Or rounded off to Rs 119, Rs 237 and Rs 475 respectively. Reconciliation: a) 118.68 x 9 students = Rs 1068.12; b) 237.37 x 18 students = Rs 4272.66; c) 474.73 x 33 students = Rs 15666.09 Total for 60 students = Rs 21,006.87 per month.
Working capital working
It keeps two month's stock of finished goods and one month's stock of raw materials as inventory. It keeps a cash balance of Rs 2,50,000. Assume a 5 per cent safety margin, work out the working capital requirements of the company on cash cost basis. Ignore work-in- progress. Answer: The annual figures of MNP Ltd are presented in Table 5.
Solution: The working capital requirement (cash-cost basis) is worked out in Table 6.
Note: A Similar question appeared in the May 1990 CA (Final) examination.
NPV vs IRR
Required: i) estimate the net present value (NPV) of the Project `P' and `J' using 15 per cent as the hurdle rate; ii) estimate the internal rate of return (IRR) of the Project `P' and `J'; iii) Why is there a conflict in the project choice by using NPV and IRR criterion?; and iv) Which criteria will you use in such a situation? Estimate the value at that criterion. Make a project choice. The present value interest factor values at different rates of discount are as given in Table 8.
Answer: The statement of NPV and the IRR of Project P are shown in Tables 9 and 10 respectively. The IRR of Project P lies between 18 per cent and 20 per cent. Actual IRR can be ascertained by way of interpolation as follows: L + (P1 - C / P1 - P2) x D
18 + (41,838 - 40,000 / 41,838 - 39,722) x 2 = 18 + 1.74 = 19.74 per cent
The IRR of Project J is given in Table 11.
IRR of Project J lies between 24 per cent and 26 per cent. Actual IRR can be ascertained by way of interpolation as follows: 24 + (20,395 - 20,000 / 20,395 - 19,744) x 2 = 24 + 1.21 = 25.21 per cent Conflict: These two methods may often give contradictory results in case of alternative proposals that are mutually exclusive (see Table 12).
Reason: The IRR method assumes that funds are invested at the internal rate of return over the balance life of the proposal whereas the NPV method assumes that investment rate is equal to the cost of capital which is the minimum required rate for a company. Because of the above different assumptions, the results of both the methods are contradictory. In addition, the IRR method favours short-lived project such as Project J in this case, whereas the NPV method favours long-life projects (that is, Project P).
iv) In case of unequal lives of projects, the choice can be made by comparing their annual equivalent value (AEV) as follows: Formula: AEV = NPV / Annuity factor Project P: 5374 / 3.7845 = Rs 1,420 Project J: 3806 / 2.2832 = Rs 1,667 Higher AEV is better. Project J should be selected. (Suggested answers to the May 2004 CA (PE II) paper on cost accounting and financial management.) To access Mentor archives visit: http://www.thehindubusinessline.com/mn/arcmn.htm
Article E-Mail :: Comment :: Syndication :: Printer Friendly Page
|
Stories in this Section |
|
The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | Home |
Copyright © 2004, The
Hindu Business Line. Republication or redissemination of the contents of
this screen are expressly prohibited without the written consent of
The Hindu Business Line
|