The Examiner's Answers – F3 - Financial Strategy Some of the answers that follow are fuller and more comprehensive than would be expected from a well-prepared candidate. They have been written in this way to aid teaching, study and revision for tutors and candidates alike.
SECTION A Answer to Question One
(a) See Appendix A The on-site car parking business has made a positive impact on the forecast results for 2011. Without this business: • Forecast net operating loss for 2011 would increase from D$ 2.1 million to D$ 2.9 million – see A.1. • Operating profit before charging depreciation would decline from D$ 2.9 million to D$ 1.9 million (that is, a reduction of 34%) – see A.2. Assuming that cash flows are reflected by operating profit before depreciation, the on-site car parking business generates one third of the cash flows from operations from just 15% of the revenues. Conclusion This analysis shows the importance of the on-site car parking business to DEF as a whole, both in terms of profitability and cash generation.
(b) See Appendix B The present value of the net cash flows generated by DEF’s car parking business is estimated to be: • D$ 0.74 million assuming no investment is made - see B.1 • D$ 1.46 million assuming the proposed upgrade is made by DEF – see B.2
Financial Strategy
1
March 2011