MAC3702: Application of Financial Management Techniques Exam Notes (UNISA & South African Universities)

MAC3702 (Application of Financial Management Techniques) at the University of South Africa (UNISA) is a core module within the Advanced Cost and Management Accounting stream. It builds on earlier modules such as MAC2601, MAC2602, and FAC3703, and links directly to finance‑oriented courses offered at other South African institutions such as CUT’s CFM370 Financial Management 3, UJ’s FIN3A0 Financial Management, and NWU’s FMAF371 Financial Management Applications. These notes focus on the technical content and typical exam‑style applications of MAC3702, with a strong emphasis on time value of money, investment appraisal, working capital management, and financing decisions.

The emphasis throughout is on how to present professional, exam‑ready calculations and arguments that would be acceptable for UNISA MAC3702 assessments as well as similar courses such as UNISA MAC3761, CUT CACC376, and UKZN FINA3FM. Numerical illustrations are tailored to South African practice, including tax, capital allowances, and cost of capital considerations.

1. Core Time Value of Money Concepts (MAC3702 / FIN3A0 / CFM370)

Time value of money underpins nearly every quantitative technique in MAC3702, as well as equivalent modules like UNISA FIN3701, CUT CFM370, and UP FBS 300 Financial Management. Errors in discounting, compounding, or interpreting nominal vs effective rates are a common source of lost marks.

1.1 Simple vs Compound Interest

Simple interest assumes interest is calculated only on the principal:

[
\text{Interest} = P \times i \times n
]

(P): principal
(i): interest rate per period
(n): number of periods

Compound interest assumes interest is earned on principal plus accumulated interest:

[
FV = P(1 + i)^n
]

Future Value (FV) grows exponentially with compounding.
Present Value (PV) discounts future cash flows back to today:

[
PV = \frac{FV}{(1 + i)^n}
]

MAC3702 exam tip: Simple interest is rarely tested as a standalone concept; compound interest (and annuities) are crucial and feed directly into project appraisal and cost of capital questions.

1.2 Nominal vs Effective Interest Rates

Financial management techniques often involve nominal rates with sub‑annual compounding. The effective annual rate (EAR) is:

[
EAR = \left(1 + \frac{j}{m}\right)^m – 1
]

(j): nominal annual rate
(m): number of compounding periods per year

Example (common in UNISA and CUT CFM370 exams):
A bank quotes 12% nominal compounded monthly.

[
EAR = (1 + \frac{0.12}{12})^{12} – 1 = (1.01)^{12} – 1 \approx 0.1268 = 12.68%
]

When comparing investments or borrowing options in MAC3702, always convert to EARs.

1.3 Annuities and Perpetuities

Annuities are level, periodic cash flows. MAC3702 parallels the coverage in UNISA FIN2601 and CUT’s BACC266.

1.3.1 Ordinary Annuity (End‑of‑Period)

Formula for present value:

[
PV = C \times \frac{1 – (1 + i)^{-n}}{i}
]

(C): constant cash flow
(i): rate per period
(n): number of periods

Future value:

[
FV = C \times \frac{(1 + i)^n – 1}{i}
]

Example: A company deposits R50 000 at the end of each year for 5 years at 10%:

[
FV = 50,000 \times \frac{(1.10)^5 – 1}{0.10} = 50,000 \times \frac{1.61051 – 1}{0.10}
= 50,000 \times 6.1051 = R305,255
]

1.3.2 Annuity Due (Beginning‑of‑Period)

Cash flows occur at the start of each period. Common in lease and rental questions in courses like UNISA FAC3761.

[
PV_{\text{due}} = PV_{\text{ordinary}} \times (1 + i)
]

[
FV_{\text{due}} = FV_{\text{ordinary}} \times (1 + i)
]

Knowing whether the first cash flow is at time 0 or time 1 is a classic MAC3702 exam trick.

1.3.3 Growing Annuities

Cash flows that grow at a constant rate (g), often used for dividend valuation and real options style questions:

[
PV = \frac{C_1}{i – g} \left[1 – \left(\frac{1 + g}{1 + i}\right)^n\right]
]

(C_1): cash flow at end of year 1
(g): growth rate

This is often tested in UNISA MAC3702 in relation to terminal values for projects with growing benefits.

1.3.4 Perpetuities and Growing Perpetuities

A perpetuity is a constant cash flow forever:

[
PV = \frac{C}{i}
]

A growing perpetuity (used in constant growth dividend discount model):

[
PV_0 = \frac{D_1}{k_e – g}
]

(D_1): dividend in year 1
(k_e): cost of equity
(g): growth rate

This directly links to valuation and is consistent across modules at UNISA and CUT.

1.4 Uneven Cash Flows and Discount Factors

MAC3702 exam questions rarely give perfectly level annuities. Practice constructing schedules with:

A timeline (years 0, 1, 2, …, n).
Cash flows at each point (inflows positive, outflows negative).
Discount factors: ( DF_t = \frac{1}{(1 + r)^t} ).
Present value: ( PV_t = CF_t \times DF_t ).

Mini‑example:
Discount the following cash flows at 10%:

Year 0: –R200 000
Year 1: +R80 000
Year 2: +R90 000
Year 3: +R100 000

[
\begin{aligned}
PV_0 &= -200,000 \
PV_1 &= 80,000 \times \frac{1}{1.10} = 80,000 \times 0.9091 = 72,728 \
PV_2 &= 90,000 \times \frac{1}{(1.10)^2} = 90,000 \times 0.8264 = 74,376 \
PV_3 &= 100,000 \times \frac{1}{(1.10)^3} = 100,000 \times 0.7513 = 75,130 \
\text{Total PV} &= -200,000 + 72,728 + 74,376 + 75,130 = 22,234
\end{aligned}
]

This layout is exactly what markers expect in MAC3702, FIN3A0, and similar exams.

1.5 Inflation and Real vs Nominal Rates

Projects in South Africa often need to distinguish between nominal (money) and real (inflation‑adjusted) cash flows.

Fisher equation (approximate):

[
1 + i_n = (1 + i_r)(1 + \pi)
]

(i_n): nominal rate
(i_r): real rate
(\pi): inflation rate

Example: If nominal rate = 15% and inflation = 6%:

[
1 + i_r = \frac{1.15}{1.06} = 1.0849 \Rightarrow i_r \approx 8.49%
]

Consistency rule for MAC3702, UNISA FIN3701, and CUT CFM370:

Discount nominal cash flows with nominal rate.
Discount real cash flows with real rate.
Never mix real cash flows with nominal rates.

2. Capital Budgeting & Investment Appraisal (MAC3702 / FIN3701 / CFM370)

Capital budgeting is a dominant topic in MAC3702 and comparable modules like UNISA FIN3701, CUT CFM370, and NWU FMAF371. Mastery of these techniques is critical as they often account for a large portion of exam marks.

2.1 Net Present Value (NPV)

NPV is the central metric:

[
NPV = \sum_{t=0}^{n} \frac{CF_t}{(1 + r)^t}
]

Accept if NPV > 0 (adds value).
Reject if NPV < 0 (destroys value).
If mutually exclusive, choose highest positive NPV.

Standard MAC3702 style layout:

Year	Cash flow (R)	Discount factor @ 12%	PV (R)
0	–500 000	1.0000	–500 000
1	200 000	0.8929	178 580
2	220 000	0.7972	175 384
3	240 000	0.7118	170 832
	NPV		24 796

Interpretation: At 12%, this project creates R24 796 in shareholder value.

2.2 Internal Rate of Return (IRR)

IRR is the discount rate at which NPV = 0. It’s widely tested in MAC3702 and CFM370:

[
0 = \sum_{t=0}^{n} \frac{CF_t}{(1 + IRR)^t}
]

Because closed‑form solutions are rare, IRR is typically found via interpolation:

Calculate NPV at a low rate (r_L).
Calculate NPV at a high rate (r_H).
Apply:

[
IRR = r_L + \frac{NPV_L}{NPV_L – NPV_H} (r_H – r_L)
]

Where (NPV_L) is the NPV at the low rate and (NPV_H) the NPV at the high rate (should be of opposite sign).

Example (typical UNISA MAC3702 format):

NPV @ 10% = +R30 000
NPV @ 20% = –R10 000

[
IRR = 10% + \frac{30,000}{30,000 – (-10,000)}(20% – 10%)
= 10% + \frac{30,000}{40,000} \times 10%
= 10% + 7.5% = 17.5%
]

Decision rule:

Accept if IRR > required rate of return (cost of capital).
Reject if IRR < required rate of return.

Be aware of multiple IRRs when there are multiple sign changes in cash flow patterns; NPV is more reliable.

2.3 Payback and Discounted Payback

Payback period = time it takes for cumulative undiscounted cash inflows to equal initial investment.

Example: Investment R300 000 with inflows:

Year 1: 100 000
Year 2: 120 000
Year 3: 140 000

Cumulative:

End of Y1: 100 000
End of Y2: 220 000
End of Y3: 360 000

Payback = 2 + (80 000 / 140 000) = 2.57 years.

Discounted payback uses discounted cash flows. This is occasionally examined in MAC3702 and CFM370 to emphasise time value.

Payback is simple, but:

Ignores cash flows after payback.
Ignores time value (unless discounted version).
No link to shareholder wealth creation.

Thus, exam answers should state limitations clearly.

2.4 Profitability Index (PI)

PI (also called benefit‑cost ratio) is common when capital rationing features in MAC3702 questions.

[
PI = \frac{\text{Present value of future cash inflows}}{\text{Initial investment}}
]

Accept if PI > 1
Reject if PI < 1
For rationing, rank projects by PI (subject to independence and indivisibility assumptions).

Example: If PV of inflows = R600 000 and initial investment = R500 000:

[
PI = \frac{600,000}{500,000} = 1.20
]

2.5 Comprehensive Capital Budgeting Example (Full Exam‑Style)

Consider a typical MAC3702 / FIN3701 / CFM370 scenario:

Initial cost of machine: R800 000 (paid at t0).
Project life: 5 years.
Salvage value at end of year 5: R100 000 (market value).
Additional working capital: R80 000 (recovered at t5).
Expected EBDT (earnings before depreciation and tax): R300 000 per year for 5 years.
Depreciation: straight‑line over 5 years on cost, no residual for tax purposes.
Corporate tax rate: 28%.
Cost of capital: 12%.

Step 1: Calculate depreciation

[
\text{Annual depreciation} = \frac{800,000}{5} = 160,000
]

Step 2: Compute annual after‑tax cash flows

For each year 1–5:

EBDT: 300 000
Less depreciation: 160 000
= EBIT: 140 000
Tax @ 28% = 39 200
Earnings after tax = 100 800
Add back depreciation (non‑cash) = 160 000
= Operating cash flow = 260 800

Step 3: Add terminal cash flows at t5

At end of year 5:

Operating cash flow: 260 800
Salvage value (R100 000) – assume tax equals on tax base:
- Tax base at end: cost – accumulated tax depreciation
- Accumulated tax depreciation over 5 years: 800 000 (fully written off)
- Tax base = 0
- Profit on sale for tax = 100 000 – 0 = 100 000
- Tax on profit = 28% × 100 000 = 28 000
- After‑tax salvage = 100 000 – 28 000 = 72 000
Release of working capital: +80 000

Total terminal cash flow at t5 = 260 800 + 72 000 + 80 000 = 412 800

Step 4: NPV calculation @ 12%

Year	Cash flow (R)	DF @ 12%	PV (R)
0	–800 000 – 80 000 = –880 000	1.0000	–880 000
1	260 800	0.8929	232 762
2	260 800	0.7972	207 937
3	260 800	0.7118	185 626
4	260 800	0.6355	165 767
5	412 800 (operating + salvage + WC release)	0.5674	234 255

	NPV		146 347

Decision: Accept; NPV is positive at R146 347.

Typical exam commentary (MAC3702, CFM370):

Show all tax and depreciation workings clearly.
Indicate assumptions (e.g., tax payable in same year as profit).
Explain decision in terms of shareholder wealth and cost of capital.

2.6 Capital Rationing and Project Selection

Capital rationing arises when funds available for investment are limited. MAC3702 and UNISA FIN3701 often require ranking projects by NPV, PI, or using linear programming in more advanced cases.

Example: A company (similar to what could appear in MAC3702 and CUT CFM370) has R1 000 000 to invest and three independent projects:

Project	Initial Outlay (R)	PV of Inflows @ 10% (R)	NPV (R)	PI
A	500 000	650 000	150 000	1.30
B	400 000	520 000	120 000	1.30
C	600 000	720 000	120 000	1.20

Funding R1 000 000:

Possible combinations:
- A + B = 900 000 (NPV = 270 000)
- A + C = 1 100 000 (not feasible)
- B + C = 1 000 000 (NPV = 240 000)

Choose A + B because they give the highest total NPV within the budget.

If projects were divisible, the company would rank by PI and allocate funds from highest PI downward.

2.7 Risk in Capital Budgeting (Scenario & Sensitivity Analysis)

MAC3702 and comparable modules such as UNISA MAC3703 and UCT BUS3019W also test risk adjustment techniques:

Sensitivity analysis – vary one input (e.g., sales volume, selling price, cost of capital) while holding others constant to see its effect on NPV.
Scenario analysis – create discrete scenarios (best case, base case, worst case) with different assumptions, then compute NPV for each.
Risk‑adjusted discount rates – use higher discount rates for riskier projects.
Certainty equivalents – adjust estimated cash flows downward instead of changing the discount rate.

Example of sensitivity analysis:

Base case NPV = R200 000. If sales volume drops by 10%, NPV becomes R80 000.

Change in sales: –10%
Change in NPV: –60%

Sales volume is highly sensitive; this should be flagged in written exam commentary.

3. Cost of Capital and Capital Structure (MAC3702 / FIN3701 / FIN3A0)

Understanding the cost of capital and how it links to capital structure decisions is central in MAC3702 and in related modules such as UNISA FIN3701, CUT CFM370, UJ FIN3A0, and UP FBS 300.

3.1 Cost of Equity

Two main approaches are commonly examined.

3.1.1 Dividend Growth Model (DGM)

For a company that pays dividends expected to grow at a constant rate:

[
k_e = \frac{D_1}{P_0} + g
]

(D_1): expected dividend next year
(P_0): current share price (ex‑dividend)
(g): expected constant growth in dividends

Example:
Current dividend (D_0) = R2.00, growth (g) = 5%, current price (P_0) = R40.

[
D_1 = D_0(1 + g) = 2.00 \times 1.05 = 2.10
]

[
k_e = \frac{2.10}{40} + 0.05 = 0.0525 + 0.05 = 10.25%
]

3.1.2 Capital Asset Pricing Model (CAPM)

CAPM is often tested in MAC3702 and its equivalents at CUT and NWU:

[
k_e = R_f + \beta (R_m – R_f)
]

(R_f): risk‑free rate (e.g., R2030 government bond yield).
(R_m): expected return on market portfolio (e.g., ALSI).
(\beta): systematic risk measure.

Example:
Risk‑free rate (R_f = 8%), market return (R_m = 15%), (\beta = 1.2).

[
k_e = 8% + 1.2(15% – 8%) = 8% + 1.2 \times 7%
= 8% + 8.4% = 16.4%
]

CAPM is particularly relevant when discussing levered vs unlevered beta and capital structure changes.

3.2 Cost of Debt

The before‑tax cost of debt is the yield to maturity (YTM) on debt; the after‑tax cost of debt accounts for tax deductibility of interest.

[
k_d(1 – T)
]

(k_d): before‑tax cost of debt
(T): corporate tax rate

Example:
Company issues 10‑year bonds with coupon 12% (R120 on par value R1 000) traded at R950. If yield to maturity is approximated at 13.2% and tax = 28%:

[
k_d(1 – T) = 13.2% (1 – 0.28) = 13.2% \times 0.72 = 9.504%
]

In exams, the YTM calculation can be done by trial‑and‑error IRR techniques.

3.3 Cost of Preference Shares

Two types appear in MAC3702 and CUT CFM370:

Redeemable preference shares – cost estimated via IRR of expected cash flows.
Irredeemable (perpetual) preference shares – cost is:

[
k_p = \frac{D_p}{P_0}
]

(D_p): annual preference dividend
(P_0): current market price

Example:
R100 par preference share pays 9% annual dividend (R9), market price R90.

[
k_p = \frac{9}{90} = 10%
]

Preference dividends are usually not tax‑deductible in South Africa, so no tax adjustment.

3.4 Weighted Average Cost of Capital (WACC)

WACC aggregates costs of different financing sources weighted by market values.

[
WACC = \frac{E}{V}k_e + \frac{D}{V}k_d(1 – T) + \frac{P}{V}k_p
]

Where:

(E): market value of equity
(D): market value of debt
(P): market value of preference shares
(V = E + D + P)

Example (aligned with MAC3702/FIN3701 exam style):

Capital structure (market values):

Equity: R6 000 000 (60%)
Debt: R3 000 000 (30%)
Preference shares: R1 000 000 (10%)

Costs:

(k_e = 16%)
(k_d = 12%) before tax
(k_p = 10%)
Tax rate (T = 28%)

[
WACC = 0.60(16%) + 0.30(12%)(1 – 0.28) + 0.10(10%)
]

[
= 0.60(0.16) + 0.30(0.12)(0.72) + 0.10(0.10)
]

[
= 0.096 + 0.02592 + 0.01 = 0.13192 = 13.192%
]

This WACC would typically be used as the discount rate for average‑risk projects in MAC3702 capital budgeting questions.

3.5 Capital Structure Theories

Theoretical questions in UNISA MAC3702 and CUT CFM370 often test understanding of:

3.5.1 Traditional Theory

Suggests there is an optimal capital structure where WACC is minimised.
At low levels of gearing, adding debt reduces WACC (due to cheaper, tax‑deductible interest).
Beyond a certain point, financial distress and agency costs increase WACC.

3.5.2 Modigliani & Miller (M&M) Propositions

With no taxes:

Proposition I: Value of the firm is independent of capital structure.
Proposition II: Cost of equity increases linearly with gearing, compensating for higher financial risk.

With corporate taxes:

Value of levered firm (V_L = V_U + T \times D).
Implies that more debt increases value because of the interest tax shield.
In reality, bankruptcy costs, agency costs, and non‑tax considerations limit leverage.

3.5.3 Pecking Order and Trade‑Off Theory

Pecking order theory: Firms prefer internal finance, then debt, then equity (due to asymmetric information and flotation costs).
Trade‑off theory: Balances tax shield benefits against financial distress costs to determine optimal debt level.

Exam approach: Summarise each theory, link to WACC, and briefly discuss implications for financing decisions (e.g., why a JSE‑listed South African company would not finance purely with debt).

3.6 Adjusting WACC for Project‑Specific Risk

MAC3702 sometimes asks you to justify risk‑adjusted discount rates:

Higher‑risk projects: WACC + risk premium (e.g., +2% or +3%).
Lower‑risk projects: WACC – risk adjustment.

Alternatively, use pure‑play comparables:

Estimate beta for comparable firm/project.
Use CAPM to get project‑specific cost of equity.
Recalculate WACC using project’s risk characteristics.

Clear explanation of why and how discount rates are adjusted is often tested in theory questions.

4. Working Capital Management (MAC3702 / FAC3703 / CACC376)

Working capital management is critical in MAC3702 and equivalent modules such as UNISA FAC3703, CUT CACC376 Cost & Management Accounting 3, and WSU FIN370 Working Capital and Treasury Management. It addresses liquidity, profitability, and risk in the short term.

4.1 Working Capital Concepts and Policies

Working capital:

Gross working capital: Current assets.
Net working capital (NWC): Current assets – current liabilities.

Policies:

Aggressive policy – low level of current assets, high reliance on short‑term financing.
Conservative policy – high level of current assets, more long‑term financing of working capital.
Moderate (matching) policy – match asset maturities with liability maturities (e.g., finance permanent current assets with long‑term funds, fluctuating current assets with short‑term funds).

Trade‑off: Liquidity vs profitability. Excessive working capital reduces returns; insufficient working capital increases risk of cash shortages and lost sales.

4.2 Operating Cycle and Cash Conversion Cycle

The operating cycle (OC):

[
OC = \text{Inventory conversion period} + \text{Debtors collection period}
]

The cash conversion cycle (CCC):

[
CCC = OC – \text{Creditors deferral period}
]

Where:

Inventory period = Average inventory ÷ Cost of sales per day.
Debtors period = Trade receivables ÷ Credit sales per day.
Creditors period = Trade payables ÷ Purchases per day.

Example (MAC3702 style):

Data:

Cost of sales: R3 650 000 per year.
Average inventory: R500 000.
Credit sales: R4 380 000 per year.
Debtors: R730 000.
Purchases: R2 920 000 per year.
Creditors: R365 000.

Assume 365‑day year:

Inventory period:

[
\text{Cost of sales per day} = \frac{3,650,000}{365} = 10,000
]

[
\text{Inventory period} = \frac{500,000}{10,000} = 50 \text{ days}
]

Debtors collection period:

[
\text{Credit sales per day} = \frac{4,380,000}{365} = 12,000
]

[
\text{Debtors period} = \frac{730,000}{12,000} \approx 60.83 \approx 61 \text{ days}
]

Creditors deferral period:

[
\text{Purchases per day} = \frac{2,920,000}{365} = 8,000
]

[
\text{Creditors period} = \frac{365,000}{8,000} = 45.625 \approx 46 \text{ days}
]

OC and CCC:

[
OC = 50 + 61 = 111 \text{ days}
]

[
CCC = 111 – 46 = 65 \text{ days}
]

Interpretation: The firm’s cash is tied up for 65 days from paying suppliers to collecting cash from customers. Management may seek to reduce CCC via faster collection, lower inventory days, or longer credit terms from suppliers.

4.3 Inventory Management

Inventory management techniques are tested in MAC3702 and similar modules such as UNISA FAC3703 and CUT CACC376.

4.3.1 Economic Order Quantity (EOQ)

EOQ minimises the total of ordering and holding costs:

[
EOQ = \sqrt{\frac{2DS}{H}}
]

(D): annual demand (units).
(S): cost per order.
(H): holding cost per unit per year.

Example:

Annual demand = 24 000 units.
Ordering cost = R600 per order.
Holding cost = R8 per unit per year.

[
EOQ = \sqrt{\frac{2 \times 24,000 \times 600}{8}}
= \sqrt{\frac{28,800,000}{8}}
= \sqrt{3,600,000} = 1,897.37 \approx 1,897 \text{ units}
]

Number of orders per year:

[
\frac{24,000}{1,897} \approx 12.65 \approx 13 \text{ orders}
]

Total cost at EOQ:

Ordering cost (= 13 \times 600 = 7,800).
Holding cost (= \frac{1,897}{2} \times 8 = 948.5 \times 8 = 7,588).
Total (= 15,388).

MAC3702 questions may compare total costs at EOQ vs alternative lot sizes.

4.3.2 Reorder Level and Safety Stock

Reorder level:

[
\text{Reorder level} = \text{Lead‑time demand} + \text{Safety stock}
]

Where lead‑time demand = expected demand per period × lead time.

Example: If daily demand = 100 units, lead time = 7 days, safety stock = 200 units:

[
\text{Reorder level} = (100 \times 7) + 200 = 700 + 200 = 900 \text{ units}
]

Some South African textbooks used in MAC3702 and CACC376 link reorder levels to service levels and stock‑out probabilities.

4.4 Receivables (Debtors) Management

Key decisions:

Length of credit period (e.g., 30 days vs 60 days).
Cash discounts for early payment (e.g., 2/10, net 30).
Credit standards (tight vs loose).
Collection procedures.

MAC3702 often presents credit policy change scenarios where you must evaluate the effect on profit and required return.

Example (stylised MAC3702/UNISA FIN2601 style):

Current policy:

Annual credit sales: R5 000 000.
Selling price per unit: R50; variable cost R30 (contribution R20).
Debtors period: 30 days.
Bad debts: 1% of sales.
Required return on investment in debtors: 18%.

Proposed policy:

Increase credit period to 45 days.
Expected sales increase by 10% to R5 500 000.
Bad debts increase to 2%.
No change to selling price or variable cost.

Assume 365‑day year.

Contribution effect:

Current contribution:

[
\text{Units} = \frac{5,000,000}{50} = 100,000
]

[
\text{Contribution} = 100,000 \times 20 = 2,000,000
]

Proposed contribution:

[
\text{Sales} = 5,500,000
]

[
\text{Units} = \frac{5,500,000}{50} = 110,000
]

[
\text{Contribution} = 110,000 \times 20 = 2,200,000
]

Increase in contribution = 200 000.

Bad debts effect:

Current bad debts = 1% × 5 000 000 = 50 000.
Proposed bad debts = 2% × 5 500 000 = 110 000.
Increase in bad debts = 60 000.

Investment in debtors:

Current average debtors:

[
\text{Daily sales} = \frac{5,000,000}{365} \approx 13,698.63
]

[
\text{Debtors} = 13,698.63 \times 30 = 410,958.9 \approx 410,959
]

Proposed average debtors:

[
\text{Daily sales} = \frac{5,500,000}{365} \approx 15,068.49
]

[
\text{Debtors} = 15,068.49 \times 45 = 678,082.05 \approx 678,082
]

Increase in debtors = 678 082 – 410 959 = 267 123.

Required return on additional investment:

[
0.18 \times 267,123 = 48,082.14 \approx 48,082
]

Net benefit of policy:

[
\text{Increase in contribution} = 200,000
]

[
\text{Less: Increase in bad debts} = 60,000
]

[
\text{Less: Required return on extra debtors} = 48,082
]

[
\text{Net benefit} = 200,000 – 60,000 – 48,082 = 91,918
]

Decision: If net benefit of R91 918 is positive and risk acceptable, the firm should adopt the new credit policy. In an exam, mention qualitative factors (customer satisfaction, competitive pressures, changes in collection risk).

4.5 Cash Management and Short‑Term Financing

MAC3702 and CACC376 examine basic cash management models and instruments.

4.5.1 Cash Management Models

Baumol model – analogous to EOQ for cash:

[
C^* = \sqrt{\frac{2bT}{i}}
]

(C^*): optimal cash transfer size.
(b): fixed transaction cost per securities sale.
(T): total cash requirement over period.
(i): opportunity cost (interest rate).

Miller‑Orr model – stochastic (random) cash flows; sets upper and lower control limits and a return point.

MAC3702 exams usually require understanding of qualitative implications (not always detailed Miller‑Orr calculations).

4.5.2 Short‑Term Financing Sources

Bank overdraft.
Short‑term bank loans.
Trade credit (payables).
Commercial paper (for large corporates).

Comparison points:

Cost (explicit and implicit).
Flexibility.
Security requirements.
Impact on credit rating.

Students in MAC3702 and similar courses must be able to recommend appropriate instruments for different scenarios.

5. Advanced Topics and Integrated Exam‑Style Applications (MAC3702 / UNISA: Advanced Cost and Management Accounting Modules)

This final section integrates techniques across MAC3702 and related modules in UNISA’s Advanced Cost and Management Accounting category (e.g., MAC3701, MAC3702, MAC3703, MAC3761) and comparable subjects at other South African universities (e.g., CUT CACC376, UJ ACC3MA, UKZN FINA3FM).

5.1 Leasing vs Buying Decisions

Lease vs buy analysis is a typical integrated question: combine tax, cost of capital, and NPV techniques.

Example (stylised MAC3702 exam case):

A company needs equipment worth R1 000 000 for 4 years.

Option 1: Buy

Purchase price: R1 000 000 at t0.
Depreciation (for tax): straight‑line to zero over 4 years (R250 000 p.a.).
Maintenance costs: R50 000 p.a. (paid at year‑end).
Financing: bank loan at 14% p.a., principal repaid in equal instalments over 4 years (but for lease vs buy NPV comparison, use cost of capital).
Cost of capital (after tax) = 12%.
Corporate tax rate = 28%.
Salvage value at end of 4 years: R100 000 (market value).
Tax depreciation fully utilised (no tax loss).

Option 2: Lease

Annual lease rental: R340 000 p.a., payable in advance (annuity due) for 4 years.
Lessor responsible for maintenance.
Lease payments are fully tax‑deductible.
Same tax rate and discount rate.

Approach: Compare present value of after‑tax cash outflows of both options.

5.1.1 Lease Option – Cash Flows

Yearly lease payment: 340 000 at start of years 0, 1, 2, 3 (annuity due). Tax relief (28%) occurs at year‑end based on lease expense.

Timeline (lease):

Year 0: 340 000 (no tax relief at t0).
Years 1–3: 340 000 at start; tax relief 95 200 (0.28 × 340 000) at year‑end for lease instalment of that year.
Year 4: only tax relief of 95 200 for lease payment made at start of year 3.

Cash flow schedule:

Year	Lease paid (R)	Tax shield on lease (R)	Net cash outflow (R)
0	340 000	0	340 000
1	340 000	95 200	244 800
2	340 000	95 200	244 800
3	340 000	95 200	244 800
4	0	95 200	–95 200

Now discount at 12%:

Discount factors:

Year 0: 1.0000
Year 1: 0.8929
Year 2: 0.7972
Year 3: 0.7118
Year 4: 0.6355

PV of lease option:

Year	Net outflow (R)	DF @ 12%	PV (R)
0	340 000	1.0000	340 000
1	244 800	0.8929	218 495
2	244 800	0.7972	195 168
3	244 800	0.7118	174 268
4	–95 200	0.6355	–60 557
			867 374

Total PV of leasing ≈ R867 374.

5.1.2 Buy Option – Cash Flows

Purchase at t0: –1 000 000.
Maintenance costs: 50 000 per year for 4 years (year‑end).
Depreciation tax shield: 28% × 250 000 = 70 000 p.a. (years 1–4).
Tax shield on maintenance: 28% × 50 000 = 14 000 p.a. (years 1–4).
After‑tax salvage at year 4:
- Tax base after 4 years: 0.
- Salvage = 100 000.
- Profit on sale = 100 000.
- Tax = 28 000.
- After‑tax salvage = 72 000.

Net cash flow per year:

Year 0: –1 000 000.
Years 1–4:
- Maintenance outflow: –50 000.
- Tax shield on depn: +70 000.
- Tax shield on maintenance: +14 000.
- Net = –50 000 + 70 000 + 14 000 = +34 000 (net inflow).
Year 4 also includes salvage: +72 000, so year 4 total = 34 000 + 72 000 = +106 000.

PV schedule:

Year	Net CF (R)	DF @ 12%	PV (R)
0	–1 000 000	1.0000	–1 000 000
1	34 000	0.8929	30 359
2	34 000	0.7972	27 105
3	34 000	0.7118	24 201
4	106 000	0.6355	67 363
			*–851 0 –**

Compute PV of years 1–4:

Sum PV = 30 359 + 27 105 + 24 201 + 67 363 = 149 028.

Total PV of buy option:

[
PV_{\text{buy}} = -1,000,000 + 149,028 = -850,972
]

(rounded to –R850 972).

Comparison:

PV of leasing = –R867 374 (higher negative, worse).
PV of buying = –R850 972 (less negative, better).

Thus, buying is financially preferable by a margin of:
Difference ≈ 867 374 – 850 972 = R16 402 in favour of buying.

In MAC3702 exam answers, summarise: “Buying has a lower present value of after‑tax cash outflows by approximately R16 402; the company should purchase rather than lease, assuming non‑financial factors (flexibility, obsolescence risk, balance sheet implications) are acceptable.”

5.2 Replacement Decisions and Equivalent Annual Cost (EAC)

Replacement decisions appear in UNISA MAC3702 and CUT CACC376, often comparing machines with different lives.

Equivalent Annual Cost (EAC) converts NPV of costs into an annualised figure:

[
EAC = \frac{NPV_{\text{costs}}}{\text{PVAF}(r, n)}
]

Where PVAF is the present value annuity factor. Lower EAC = more cost‑effective option.

Example:

Machine A:

Cost: R600 000.
Life: 3 years.
Annual operating cost: R260 000 (end of each year).
Salvage: R100 000 at end of year 3.

Machine B:

Cost: R900 000.
Life: 5 years.
Annual operating cost: R220 000.
Salvage: R150 000 at end of year 5.

Discount rate 10%.

Step 1: NPV of costs for each machine

Machine A cash flows:

Year 0: –600 000.
Years 1–3: –260 000 operating cost.
Year 3: +100 000 salvage.

Net flows for A:

Year 0: –600 000
Year 1: –260 000
Year 2: –260 000
Year 3: –160 000 (–260 000 + 100 000)

Discount at 10% (DF: Y1:0.9091, Y2:0.8264, Y3:0.7513):

Year	CF (R)	DF @ 10%	PV (R)
0	–600 000	1.0000	–600 000
1	–260 000	0.9091	–236 366
2	–260 000	0.8264	–214 864
3	–160 000	0.7513	–120 208
			–1 171 438

(NPV_A \approx -1,171,438).

Machine B cash flows:

Year 0: –900 000
Years 1–5: –220 000 operating costs
Year 5: +150 000 salvage

Net flows:

Year 0: –900 000
Years 1–4: –220 000
Year 5: –70 000 (–220 000 + 150 000)

DF @ 10% (Y1:0.9091, Y2:0.8264, Y3:0.7513, Y4:0.6830, Y5:0.6209):

Year	CF (R)	DF @ 10%	PV (R)
0	–900 000	1.0000	–900 000
1	–220 000	0.9091	–199 999.99 ≈ –200 000
2	–220 000	0.8264	–181 808
3	–220 000	0.7513	–165 286
4	–220 000	0.6830	–150 260
5	–70 000	0.6209	–43 463
			–1 641 817

(NPV_B \approx -1,641,817).

Step 2: Calculate EAC for each

PVAF @ 10%:

For 3 years: (PVAF(10%, 3) = \frac{1 – (1.10)^{-3}}{0.10} \approx 2.4869).
For 5 years: (PVAF(10%, 5) = \frac{1 – (1.10)^{-5}}{0.10} \approx 3.7908).

EAC for A:

[
EAC_A = \frac{-1,171,438}{2.4869} \approx -471,154 \text{ per year}
]

EAC for B:

[
EAC_B = \frac{-1,641,817}{3.7908} \approx -433,088 \text{ per year}
]

Since |EAC_B| < |EAC_A|, Machine B has a lower equivalent annual cost and is preferred.

An exam answer must show:

Correct NPV calculations.
Correct PVAF usage.
Clear conclusion: choose machine with less negative EAC.

5.3 Risk, Return, and Portfolio Effects

MAC3702 sometimes integrates basic portfolio theory, similar to UNISA FIN3701 and UKZN FINA3FM.

Key relationships:

Expected return on a single asset:

[
E(R) = \sum p_i R_i
]

Where (p_i) are probabilities and (R_i) returns in state i.

Portfolio return (two assets A and B):

[
E(R_p) = w_A E(R_A) + w_B E(R_B)
]

Portfolio variance:

[
\sigma_p^2 = w_A^2 \sigma_A^2 + w_B^2 \sigma_B^2 + 2w_A w_B \sigma_A \sigma_B \rho_{AB}
]

(\rho_{AB}): correlation coefficient.

Diversification effect: If (\rho_{AB} < 1), portfolio risk is less than weighted average of individual risks.

Exam questions may:

Ask for calculation of expected returns and standard deviations.
Illustrate how combining assets reduces risk.
Link to CAPM and systematic vs unsystematic risk.

5.4 Evaluating Projects with Different Life Spans and Inflation

MAC3702 sometimes combines inflation with capital budgeting.

Key principles:

Inflate cash flows with expected inflation if starting from real amounts.
Use nominal discount rate when cash flows are in nominal terms.
If using real cash flows, discount at real rate derived via Fisher equation.

Mini‑example:

Real annual cash flow = R200 000 for 5 years.
Inflation = 5% per year.
Real cost of capital = 8%.
Nominal cost of capital:

[
1 + i_n = (1.08)(1.05) = 1.134 \Rightarrow i_n = 13.4%
]

Nominal cash flows:

Year 1: (200,000 \times 1.05 = 210,000)
Year 2: (200,000 \times 1.05^2 = 220,500)
Year 3: (200,000 \times 1.05^3 \approx 231,525)
Year 4: (243,101)
Year 5: (255,256) (approximate).

Discount these at 13.4%, or discount constant real R200 000 at real 8%. Both approaches should give consistent NPV (barring rounding), illustrating exam‑relevant consistency.

5.5 Exam Strategy for MAC3702 and Related Modules (UNISA, CUT, UJ, NWU)

Success in MAC3702, as well as similar South African courses like CUT CFM370, UJ FIN3A0, NWU FMAF371, and UNISA MAC3761, depends as much on exam technique as on technical knowledge.

Key strategies:

Layout and structure:
- Always draw timelines for time value of money and capital budgeting questions.
- Use clear tables for NPV, WACC, payback, and working capital ratios.
- Label all columns (year, cash flow, discount factor, PV, cumulative, etc.).
Show your workings:
- Examiners often award method marks even if final answers are incorrect.
- Indicate formulas, rates, and each step of calculations.
- Use calculator values to at least 4 decimal places before rounding final answers.
State assumptions explicitly:
- Timing of tax payments (same year vs one‑year lag).
- Treatment of working capital (invested at t0, recovered at project end).
- Whether salvage values are given net of tax or before tax.
Tie calculations to theory:
- After computing NPV or IRR, add a brief sentence linking the result to shareholder wealth maximisation.
- For capital structure and WACC questions, relate outcomes to risk‑return trade‑offs.
Past exam patterns (UNISA MAC3702, CUT CACC376):
- One major investment appraisal question (multi‑part, 25–40 marks).
- One question on cost of capital/capital structure (15–25 marks).
- One question on working capital (ratios, policy evaluation, EOQ, debtors management).
- One or two shorter questions on theory (risk analysis, capital markets, corporate objectives, dividend policy).
Time management:
- Allocate minutes per mark (e.g., 1.8 minutes per mark for a 3‑hour, 100‑mark paper).
- If stuck on a calculation, move on and return later; do not leave whole questions blank.
Cross‑module integration:
- MAC3702 is part of the broader UNISA Advanced Cost and Management Accounting stream, which includes modules such as MAC3701 (Costing) and MAC3703 (Strategic Management Accounting).
- Concepts from MAC3702 (e.g., NPV, IRR, WACC) are often combined with advanced costing techniques and performance measurement in later modules like MAC3761 and even postgraduate courses at UNISA and CUT.

These notes provide a structured, exam‑oriented overview of the Application of Financial Management Techniques as required for MAC3702 at UNISA and comparable South African university modules such as CUT CFM370, UJ FIN3A0, NWU FMAF371, and UKZN FINA3FM. Mastery of the detailed techniques, supported by consistent practice with exam‑style questions and past papers, is essential for strong performance in this component of the UNISA: Advanced Cost and Management Accounting Modules.