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FIN3701 ASSIGNMENT 1 2022 SEMESTER 2
- Institution
- University Of South Africa (Unisa)
Contains solutions for Fin3701 assignment 1 2022 for semester 2. All calculations have been included and the document is useful for revisions.
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FIN3701 ASSIGNMENT 1SEMESTER 2022
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Question 1
1.1 Calculate the incremental cash flows relating to the replacement decision.
(6 marks)
Year 1 Year 2 Year 3 Year 4 Year 5
Proposed 986 000 986 000 986 000 986 000 986 000
machine
Current (895 000) (881 000) (819 000) (805 000) (791 000)
machine
Incremental 91 000 105 000 167 000 181 000 195 000
Cash flow
Calculations:
1) After tax proceeds from disposal of proposed machine
Before tax proceeds 254 000
Tax charge (0.29 x 254 000) (73 660)
After tax proceeds 180 340
1.2 Calculate the NPV and IRR relating to the two investments (using
incremental cash flows calculated above). (2 marks)
NPV: Using Financial Calculator
CF0 = -/+ 1 666 000
CF1 = 91 000
CF2 = 105 000
CF3 = 167 000
CF4 = 181 000
CF5 = 195 000 + 180 340
CFi = 15%
Comp NPV = -1 107 572
Comp IRR = -14.35%
1.3 Based on the NPV and IRR calculated above, would you advise Kaufold Ltd
to invest their funds in the replacement? Provide a reason for your answer. (2
marks)
Based on the above I would not advise Kaufold Ltd to invest in the replacement.
This is because the replacement investment would result in a negative NPV and the
IRR is even negative.
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