Department of Law and Finance
FINANCIAL
MANAGEMENT AAF002-3
Mock Exam Paper
Question and Answer
(Main exam paper will differ significantly from main exam)
Date of Exam: Assessment Department to
complete
Start Time: Assessment Department to
complete
Time Allowed: Three (3) hours (including reading
time)
Unit Co-ordinator
INSTRUCTIONS TO STUDENTS
• This is a closed-book examination.
• ALL five questions are compulsory and MUST be attempted. Each
question is worth 20 marks.
• Start each question on a new page.
• Non-programmable calculators are permitted. You are NOT
allowed to use other electronic devices including mobile phones,
and others capable of holding texts.
• Answer all questions in the answer booklet and NOT on the question
paper.
• A formulae sheet and present value tables are provided with the
examination paper.
PLEASE DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO
SO BY THE SENIOR INVIGILATOR
,You are required to attempt ALL the questions.
Question 1
Jim’s Shoes Ltd manufactures elite sports shoes. The main raw material for
the production of these sport shoes is the shoe soles. Jim’s Shoes currently
purchases these shoe soles at £4.50 per sole and it has locked this price in
for the next four years with an agreed contract. The company is
considering producing these soles in-house and is planning to buy a new
machine that will allow them to manufacture these soles.
The new machine to manufacture the shoe soles will cost Jim’s Shoes
£1,500,000. Jim’s Shoes expects that after four years, the machine will
have a salvage value of
£500,000.
The costs associated with the planned project is as follows:
Variable cost (per shoe sole produced) £0.50
Fixed costs (per annum) £500,000
The additional fixed costs for Jim’s Shoes include £150,000 for machine
maintenance and a charge for depreciation on the machine which is
calculated on a straight-line basis over the useful life of the asset.
All quoted prices above are in current terms, the following is the expected
annual increases due to inflation.
Variable cost 4%
Maintenance 6%
costs
Other fixed cost 5%
The finance manager of Jim’s Shoes Ltd has provided in the table below
the annual demand for the shoe soles based on the expected sales for the
company.
Year 1 Year 2 Year 3 Year 4
Demand (units) 120,000 130,000 140,000 170,000
The company pays annual tax of 30% in arrears; the company can claim
tax allowable depreciation at a rate of 25% on the cost of the equipment
calculated on a reducing balance basis. The balancing allowance will be
2
, claimed in Year 4 when the machine is sold.
/Question continues on the next page.
3
FINANCIAL
MANAGEMENT AAF002-3
Mock Exam Paper
Question and Answer
(Main exam paper will differ significantly from main exam)
Date of Exam: Assessment Department to
complete
Start Time: Assessment Department to
complete
Time Allowed: Three (3) hours (including reading
time)
Unit Co-ordinator
INSTRUCTIONS TO STUDENTS
• This is a closed-book examination.
• ALL five questions are compulsory and MUST be attempted. Each
question is worth 20 marks.
• Start each question on a new page.
• Non-programmable calculators are permitted. You are NOT
allowed to use other electronic devices including mobile phones,
and others capable of holding texts.
• Answer all questions in the answer booklet and NOT on the question
paper.
• A formulae sheet and present value tables are provided with the
examination paper.
PLEASE DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO
SO BY THE SENIOR INVIGILATOR
,You are required to attempt ALL the questions.
Question 1
Jim’s Shoes Ltd manufactures elite sports shoes. The main raw material for
the production of these sport shoes is the shoe soles. Jim’s Shoes currently
purchases these shoe soles at £4.50 per sole and it has locked this price in
for the next four years with an agreed contract. The company is
considering producing these soles in-house and is planning to buy a new
machine that will allow them to manufacture these soles.
The new machine to manufacture the shoe soles will cost Jim’s Shoes
£1,500,000. Jim’s Shoes expects that after four years, the machine will
have a salvage value of
£500,000.
The costs associated with the planned project is as follows:
Variable cost (per shoe sole produced) £0.50
Fixed costs (per annum) £500,000
The additional fixed costs for Jim’s Shoes include £150,000 for machine
maintenance and a charge for depreciation on the machine which is
calculated on a straight-line basis over the useful life of the asset.
All quoted prices above are in current terms, the following is the expected
annual increases due to inflation.
Variable cost 4%
Maintenance 6%
costs
Other fixed cost 5%
The finance manager of Jim’s Shoes Ltd has provided in the table below
the annual demand for the shoe soles based on the expected sales for the
company.
Year 1 Year 2 Year 3 Year 4
Demand (units) 120,000 130,000 140,000 170,000
The company pays annual tax of 30% in arrears; the company can claim
tax allowable depreciation at a rate of 25% on the cost of the equipment
calculated on a reducing balance basis. The balancing allowance will be
2
, claimed in Year 4 when the machine is sold.
/Question continues on the next page.
3
