Exam (elaborations)
FIN3701 Past exams from 2022 to 2019
- Institution
- University Of South Africa (Unisa)
Past exam papers for FIN3701. From 2022 to 2019. Semester 1 and 2
[Show more]
Seller
Follow
Content preview
Page 4 of 34FIN3701
CONFIDENTIAL
JANUARY/FEBRUARY 2022
QUESTION 1 [21 marks]
Merck Ltd is a manufacturer of high-quality plastic products made to demanding specifications,
which makes replication of designs difficult. The company relies on marketing programmes to
ensure that models are constantly changed, and that demand follows new designs. This allows
the company to maintain margins in a highly competitive environment.
Merck Ltd is considering the replacement of outdated equipment, which will allow the firm to
manufacture a new line of products. The cost of the new equipment is R8,5 million and the
company qualifies for a depreciation deduction of 40% of cost for the first year, and 20% in
each of the subsequent three years. The equipment is also expected to result in the sales
revenue of R5 950 000 and total operational cost of R2 480 000 per annum before tax for
another four years, when the life of this product line is expected to end. The expected after-tax
proceeds from the sale of the new equipment amounts to R1 512 000 in four years’ time.
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. The marginal tax rate is 28%
and the firm has a cost of capital of 12%.
REQUIRED
1.1 Calculate the net present value (NPV), internal rate of return (IRR) and payback period
(Pb) for the replacement. (18 marks)
[TURN OVER]
, Page 9 of 34
FIN3701
CONFIDENTIAL
JANUARY/FEBRUARY 2022
1.2 State on the basis of the NPV, IRR and Pb whether the company should replace the
equipment.
NB: The maximum acceptable payback period for Merck Ltd is 2 years. (3 marks)
[TURN OVER]
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Emcsquared. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R99,00. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
56326 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now