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FIN3701 EXAM PACK 2020 (June _ Nov Papers With Solutions)
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Exam (Elaborations)FIN3701 EXAM PACK 2020
Contains June 2020 & November 2020 exam questions and answers for
exam preparation. (Exam papers attached)
WhatsApp +27 81 565 7602 for assistance.
, FIN3701
FIN3701
MAY/JUNE 2020 EXAM MEMO
FINANCIAL MANAGEMENT
STUDENT NUMBER
IDENTITY NUMBER
, FIN3701
[70Marks]
QUESTION 1 (23)
Sunbake is one of the major player in the South African bread industry and has been active in the
industry since 1990.The company is considering replacing one of its old ovens with a technologically
advanced model.
Details of the current Oven:
Cost = R400 000
Resale value = R 80 000
Useful life = 5 years
Variable cost = 8% of total sales
Selling price per unit = R21.00
Output per annum = 14 000 units
Fixed cost = 13% of annual depreciation The
oven was purchased three years ago.
The new oven will cost R600 000 and will have a useful life of five years after which it will be sold at the scrap
value of R50 000.
Should the new machine be acquisitioned, there will be no damages which amount to 10% of the current
machine production. The selling price per unit will increase by 9%, fixed and variable costs will remain
the same. Both ovens are written off on a straight-line basis over their 5 years’ useful life. The company
uses the following sources of capital, book value/amount and the before tax cost of capital when
evaluating investment proposals.
Sources of capital Book value Specific cost
Long-term debt R100 000 9.5
Preference shares R200 000 12.3
Ordinary share equity R400 000 15.6
R700 000
The use of the new machine will result in the following change in net working:
Anticipated changes in current assets and current liabilities
Inventory +R50 000
Accounts payable +R40 000
Accounts receivable +R70 000
Cash +R 5 000
, FIN3701
Income and capital gains tax are taxed at 28%. Capital gains are taxed on 67% of the gain at the normal tax
rate.
REQUIRED
1.1 Calculate the initial investment of the new oven. (4)
Initial investment Initial
investment
Cost of new machine (R600 000)
Installation cost -
*Proceeds from the old R102 400
machine
Change in NWC (R85 000)
Initial investment (R582 600)
Proceeds from the old machine
Depreciation R400 000 ÷ 5 = R80 000
Accumulated depreciation R80 000 × 3 = R240 000
Book value R400 000 – R240 000 = R160 000
Capital gain R80 000 – R160 000 = - R80 00
Capital gains tax R80 000 x 0.28 = R22 400 (Benefit)
Proceeds from sale R80 000 + R22 400= R102 400
Change in NWC = 50 -40 +70+5 = R85 000
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