Intensive Ltd needs to acquire advanced security monitoring equipment costing R500 000 to expand their facilities in order to be more competitive. The equipment can be purchased or leased. The after-tax cost of the debt is 7% and the company is in the 30% tax bracket. The terms of the lease and purchase plans are as follows: Lease The leasing agreement would require annual end-of-year payments of R96 700 over the five years. The lessee will exercise its option to purchase the equipment for R33 400 at the termination of the lease. Purchase The cost could be financed with a five year, 15% loan, requiring equal annual payments of R119 326. The company will pay R12 000 per year for a service contract that covers all costs. The straight-line method of depreciation is used. The company plans to keep the machine beyond its five year recovery period. The interest payments for the respective five years are R60 000; R51 100; R40 868; R29 090 and R15 500. Required: 4.1 Determine the after-tax cash outflows and the net present value of the cash outflows under each alternative (round off to the nearest rand). (23 marks) 4.2 Which alternative would you recommend? Why? (2 marks)
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Buy-Right (Pty Ltd) is considering the capital project described below. The project is considered a strategic growth enhancer and scale enhancer, and as such, the company believes it should be assessed using the firm-wide cost of capital (WACC), which is currently 7%. Equipment costing R1,050,000 will be purchased and paid for immediately. The purchase will also meet the SARS revenue authority conditions for ten-year straight-line depreciation allowances. The corporate and effective tax rate is currently 25% for the organization. The equipment will be installed at a cost of R130,000 that can be expensed immediately. At the end of the six-year life of the project, the equipment can be sold for R210,000. Sales revenues are projected to be R750,000; R830,000; R910,000; R1,000,000; R910,000; and R830,000 for the 1st through the 6th year of the project, respectively. Cost of goods sold and variable costs are estimated to be 37.9% and 18.8% of revenues, respectively. Fixed costs are estimated at R160,000 per annum. None of these cost estimates include depreciation of the equipment. The additional investment in net working capital (NWC) needed for the project at the beginning of each year of its life is estimated at 14.2% of the revenue projected for the year. 1. What are the expected cash flows for the project? 2. What is the project's net present value? 3. Should Buy-Right go ahead with the project? Briefly justify your answer.
Akash M.
Jimny Limited is an American based manufacturer of heavy-duty equipment. The company is currently investigating two projects for expansion. It can only undertake one of them and has asked your advice in deciding which one to proceed with. Project A: Production at the existing factory could be expanded. The cost of the new plant for this option would be an initial outlay of $10 million. This would result in an additional $240 000 profit being earned in each of the 10 years that the project would last. The new plant to be fully depreciated over the 10 years, on a straight-line basis, in accordance with the company's accounting policy. The financial team has also determined that the new plant must bear its share of the existing overheads and that amounted to 9% of additional profit per annum. Furthermore, additional expenses attributed to the expansion of the existing factory is R25 750. All of these expenses were included in the profit calculation. Project B: Production could be increased by purchasing a new manufacturing facility in South Africa. The cost of the facility would be an initial outlay of R8 000 000. In addition, equipment must be purchased and installed for the safety of workers according to the laws and regulations set by the South African government. The cost of this equipment is R600 000 and cost of installation is R150 000. Annual sales for the 10-year period is expected to be R42 000 000 annually, and fixed and variable cost of R12 000 000 and R1 000 000 respectively. Consultant's fees are expected to be R125 750. Additional information: * The South African inflation is expected to exceed the American inflation by 2% throughout the life of the project. * Jimny's cost of capital is currently 12%. * The current spot exchange rate is R18.27/$ Required: 1.1 Make all the necessary calculations for the two options. 1.2 Advise Jimny Limited on which of these two projects would be more profitable
A small-scale mining company, TD, is evaluating a maintenance contract for its heavy machinery. One company has offered TD a four-year contract for R100,000 to be paid in advance. Another company has offered an eight-year contract for R165,000, also to be paid in advance. TD will be able to save R34,000 per year under either contract because its employees will no longer have to do the work themselves. The company uses a 10 percent cost of capital to evaluate potential investments. Required 2.1. Using these data, calculate the net present value of the two contracts. 2.2. Can the two net present values be compared?
Oluwadamilola A.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
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