ACCA · Question 31 · Decision-making techniques

Section C

AquaPure Utility is a state-owned water company evaluating a new water purification project. The project requires an immediate investment of $2,000,000 in new filtration equipment.

The following financial information has been gathered for the first year of operations:

1. Revenue from new water connections: $800,000.
2. Direct operating costs (chemicals, labor): $300,000.
3. Apportioned general head office overheads: $150,000.
4. Depreciation on the new equipment: $200,000.
5. A feasibility study for this project was completed last month at a cost of $50,000. This invoice has not yet been paid.

Furthermore, AquaPure is considering shifting its entire organizational budgeting process from Incremental Budgeting to Zero-Based Budgeting (ZBB) to combat rising inefficiencies.

Required:
(a) Identify the relevant cash flows for the first year of the project and calculate the net relevant cash flow. Briefly explain your treatment of items 3, 4, and 5. (10 marks)

(b) Discuss the behavioral and operational implications for AquaPure Utility of shifting from Incremental Budgeting to Zero-Based Budgeting (ZBB). (10 marks)