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Past Papers - Examiner's Solutions December 2009 Question 1 Duoline Energy is a company that develops wind farms and harnesses wave energy off the West Coast of Scotland. The Scottish Parliament is prepared to grant the company a licence to develop this energy for the next 5 years. Duoline will have to pay an annual licence fee to the Parliament of £500 000. Duoline effectively has first option and must act quickly otherwise other energy companies will take up the licence. The first year will see Duoline operating at 50% of capacity. For the rest of the project the company will be operating at full capacity. The equipment will cost Duoline £15 million; the company has also had a survey done on the suitability of the West Coast of Scotland for this particular equipment. The survey cost £300 000 and will be paid in year 1 of the project. The company has made an estimate of the expected revenues and costs and has produced the following set of accounts for the five years of the project. Year (’£000s) Sales 2010 3 000 2011 6 500 2012 7 200 2013 8 100 2014 7 500 Wages and salaries Materials Licence fee Overheads Depreciation Survey cost Interest charges Operating income 520 300 500 340 2 400 300 390 1 750 560 500 500 340 2 400 600 500 500 340 2 400 630 500 500 340 2 400 600 500 500 340 2 400 390 1 810 390 2 470 390 3 340 390 2 770 The firm faces a tax rate of 30%; and it also has other similar operations in the UK. The company is profitable, so assume any losses can be offset against other profits. The company will need to borrow some specialist equipment and personnel from the parent company in year three. The company costs these inter-company transfers at market rates. Here the cost will be £350 000. However, these resources are actually needed in the company at that time, so they will have to seek temporary cover while they are being used in the West Coast. Company overheads in the accounts contain an apportionment of £190 000 per annum for head offic

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