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FIN3701 ASSIGMENT 1 SEM 2 DUE 17 AUGUST 2023
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FIN3701 ASSIGMENT 1 SEM 2 DUE 17 AUGUST 2023
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,FIN 3701 ASS 01 S2QUESTION 1 [8 marks]
Selby Industries is considering replacing its existing machine which was
purchased 3 years ago at a cost of R1 million. The machine is depreciated at 20%
per annum and can be sold today at R800 000. The new machine will cost R750
000 with R20 000 installation cost and R5000 transportation costs. The use of
the new machine will decrease the working capital with R7 000. Assume a 40%
capital gains tax per annum.
REQUIRED:
1.1 Calculate the book value of the existing machine. Show all calculations. (2
marks)
To calculate the book value of the existing machine, we need to determine the
accumulated depreciation over the past 3 years and subtract it from the original
cost of the machine.
The depreciation rate is given as 20% per annum, so the accumulated
depreciation over 3 years is calculated as follows:
Depreciation per year = Original cost of the machine * Depreciation rate
Depreciation per year = R1 million * 20% = R200,000
Accumulated depreciation = Depreciation per year * Number of years
Accumulated depreciation = R200,000 * 3 = R600,000
To find the book value, we subtract the accumulated depreciation from the
original cost of the machine:
Book value = Original cost of the machine - Accumulated depreciation
Book value = R1 million - R600,000 = R400,000
, Therefore, the book value of the existing machine is R400,000.
1.2 Calculate the tax implication from the sale of the existing machine.
To calculate the tax implication from the sale of the existing machine, we need
to determine the capital gains and then apply the capital gains tax rate.
The capital gain is calculated by subtracting the book value of the existing
machine from the selling price:
Capital gain = Selling price - Book value
Capital gain = R800,000 - R400,000 = R400,000
Next, we apply the capital gains tax rate of 40% to calculate the tax implication:
Tax implication = Capital gain * Tax rate
Tax implication = R400,000 * 40% = R160,000
Therefore, the tax implication from the sale of the existing machine is R160,000.
1.3 Calculate the after-tax proceeds from the sale of the existing machine.
To calculate the after-tax proceeds from the sale of the existing machine, we
need to subtract the capital gains tax from the selling price.
The selling price of the existing machine is given as R800,000, and the capital
gains tax rate is 40%.
The capital gain is calculated by subtracting the book value of the existing
machine from the selling price:
Capital gain = Selling price - Book value
Book value = Original cost of the machine - Accumulated depreciation
Accumulated depreciation = Depreciation per year * Number of years
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