FIN3701 Assignment 1 (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED

FIN3701 Assignment 1 (DETAILED ANSWERS) Semester 2 2024 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references .... QUESTION 1 [20 marks] Batlokwa Industries wishes to select one of three possible machines, each of which is expected to satisfy the firm’s ongoing need for additional aluminium extrusion capacity. The three machines, A, B and C, are equally risky. The firm plans to use a 12% cost of capital to evaluate each of them. The initial investment and annual cash inflows over the life of each machine are shown in the following table: Year Machine A Machine B Machine C 0 (R92 000) (R65 000) (R100 500) 1 R12 000 R10 000 R30 000 2 R12 000 R20 000 R30 000 3 R12 000 R30 000 R30 000 4 R12 000 R40 000 R13 000 5 R12 000 - R30 000 6 R12 000 - REQUIRED: 1.1 Calculate the NPV for each of the three projects. (9 marks) 1.2 Calculate the annualised net present value (ANPV) of each machine. (9 marks) 1.3 Based on the NPV and IRR calculated above, would you advise Batlokwa (Pty) Ltd to invest their funds in the replacement? Give a reason for your answer. (2 marks) THERE ARE TWO COMPULSORY ASSIGNMENTS FOR THE SECOND SEMESTER. The purpose of this assignment is to evaluate your knowledge of the fundamental aspects of decision-making for long-term investment. Study chapters 9, 10, 11 and 12 in the prescribed book as well as the relevant learning units to complete this assessment. 11 QUESTION 2 [10 marks] Thapelo Sefako is the chief financial officer (CFO) of Computron Industries, an electronic calculator producer. As a financial management graduate, you are expected to assist the CFO of Computron Industries with financial analysis. During the past few years, the company has been too constrained by the high cost of capital to make investments. Thapelo is interested in measuring the company’s overall cost of capital and provided you with the following data, which she believes may be relevant to your task: Ordinary shares (60%): Ordinary shares are currently trading at R12 per share. An ordinary dividend of R0,50 per share has recently been paid. Dividends are expected to grow at 10% per annum for the foreseeable future. Preference shares (20%): Preference shares are currently trading at R1,10 per share. The company is expected to issue R0,12 dividends per share in the next financial year, and flotation costs would amount to R0,10 per share. Long-term debt (20%): R1 000,00 par value, 10% coupon and five-year bonds that could be sold for R1 200,00 will be issued with a flotation cost of R25,00 per bond. The company tax rate is currently 28%. REQUIRED 2.1 Calculate the cost of capital structure: ordinary shares, preference shares and cost of debt. (8 marks) 2.2 Calculate the weighted average cost of capital (WACC) for the company. (2 marks) QUESTION 3 [20 marks] “ABC Industries, the leading producer of pharmaceutical medication in South Africa, must replace outdated equipment to retain its competitive edge. The cost of new equipment is R8,5 million, and the company qualifies for a depreciation deduction of 40% of the cost in the first year and 20% in each of the subsequent three years. The equipment is also expected to reduce the cost of producing an existing product line by R180 000 per annum before tax for another four years, when the life of this product line is expected to end. The expected residual value of the equipment is R2,1 million in four years’ time. The new line of products will result in a selling price of R85 per unit and a variable cost of R38 per unit. The product line is expected to result in a constant demand of 70 000 units per annum for four years. The current tax value of the present equipment is R300 000, and its current market value is R410 000. The equipment is expected to have a residual value of zero in four years’ time. The investment in net working capital will amount to R475 000. 12 PROJECT B Year Project A Cf (R) 0 2 500 000 1 800 000 2 1 000 000 3 1 000 000 4 2 000 000 5 2 000 000 6 930 000 3.1 Calculate the proceeds from the sale of current equipment. (4 marks) 3.2 Calculate the initial investment. (3 marks) 3.3 Calculate the operating cash flow and terminal cash flow. (13 marks)