Exam (elaborations)
FIN3701 EXAM PACK 2023
- Course
- Fin3701
- Institution
- University Of South Africa (Unisa)
ELABORATE QUESTIONS & ANSWERS
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FIN3701EXAM PACK
2023
ELABOATE QUESTIONS & ANSWERS
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Page 4 of 31
FIN3701
CONFIDENTIAL MAY/JUNE 2022
QUESTION 1 [10 marks]
GoldStar Construction Ltd seeks to replace a grinding machine purchased two years ago for
R76 000 with a new one. The existing grinding machine has a useful life of four years and can
be sold today for R55 000 with removal costs of R4 000. The machine was being depreciated
over a four-year straight-line period.
The cost price of the new grinding machine is R80 000 and will be depreciated over its five year
useful life using a straight line method. It will have no residual value and will be worth R0 at the
end of its five year useful life. The use of the new grinding machine is expected to increase
current assets to R30 000 and current liabilities to R80 000.
GoldStar Construction is in the 40% tax bracket.
REQUIRED:
1.1 Calculate the terminal cash flow from the use of the new grinding machine. Show all
calculations. (10 marks)
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FIN3701
CONFIDENTIAL MAY/JUNE 2022
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FIN3701
CONFIDENTIAL MAY/JUNE 2022
QUESTION 2 [12 marks]
A firm with cost of capital of 10% is evaluating two mutually exclusive projects, X and Y. The
initial investment is R350 000 for project X and R425 000 for project Y. Cash inflows
associated with the two projects are given below.
Year Project X Project Y
Cash inflows (R) Cash inflows (R)
1 140 000 175 000
2 165 000 150 000
3 190 000 125 000
4 100 000
5 75 000
6 50 000
REQUIRED:
2.1 Which project should the firm choose, based on their Annualised NPVs? (12 marks)
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