Ican 2022 Performance Management Question 3

Uzochuks Nigeria Limited is a company established four years ago to produce medical equipment. The income statement and statement of financial position for 2019 and 2020 are as follows: Income Statement Particulars 2019 2020 NM NM Sales 250 280 Operating costs (180) (200) Operating Profit 70 80 Finance charges (10) (14) Profit before tax 60 66 Tax at 25% (15) (18) Profit after tax 45 48 Statement of Financial Position Particulars 2019 2020 NM NM Non- Current Asset 350 440 Current Asset 190 260 Total 540 700 Shareholders’ fund 400 445 Long-term and medium term debts 100 100 Current Liabilities 40 155 Total 540 700 Other information are given as follows: (3) Operating costs include the following: Particulars 2019 2020 N’M N’M Depreciation 25.0 28.0 Provision for doubtful debts 2.8 1.2 Research and development 5.0 - Other non-cash items 4.0 3.0 Economic depreciation is assessed to be N50.5million in 2020. Economic depreciation includes any appropriate amortisation adjustments. In previous years, it can be assumed that economic and accounting depreciation were the same. Tax is the cash paid in the current year (N16 million) and an adjustment of N2 million for deferred tax provisions. There was no deferred tax balance prior to 2020. The provision for doubtful debts was N2.5million on the 2020 statement of financial position. Research and development is not capitalised in the accounts. It relates to a new project that will be developed over five years and is expected to be of long-term benefit to the company. 2020 is the first year of this project. The company had a non-capitalised leased assets of N18million in January 2020. These assets are not subjected to depreciation. Cost of capital of Uzochuks: Equity 18% Debt (pre-tax) 6% Capital structure of Uzochuks: Equity 60% Debt 40% The company had the opportunity to invest in a solar project that will require the procurement of an equipment worth N3million in January 2020 and run for a period of 5 years with a salvage value of N0.50million, generating a stable net cash flow of N0.85 million. The applicable cost of capital is the associated weighted average cost of capital of the company.