416 CHAPTER 14 CAPITAL INVESTMENT SKILLS BER EMPLOYABILITY SKILLS FEATURE Scenario: Bhaka Ltd haka Ltd manufactures industrial kitchen dough new machine has become available on the market which will enable Bhaka Ltd to manufacture their kitchen equipment in a shorter space of time. If this new piece of machinery is as good as they hope it to be, Bhaka Ltd plans to eventually expand their product range. Before making a final decision as to whether Bhaka Ltd should go ahead and improve their current machinery, Mr Lembede, the management accountant, has been provided with the following estimates so that he can give consideration as to whether the acquisition of this machinery on 1 November 2020 is a sound investment decision or not. The new machine will cost R1,500,000, which is payable in full on delivery. There are no other payments or receipts expected immediately following the purchase. This machine will be depreciated over five years and it is expected to have no residual value at the end of its useful life. The production and sales for Bhaka Ltd are expected to be R525,000 for the first year, which then increase by R30,000 each year for the following five years. The extra costs from running the new machinery are estimated at R45,000 for each of the five years. Other costs which will also arise are R90,000 for the HODS first year and these costs are expected to increase by 10 per cent each year over the following four years. For capital investment projects Bhaka Ltd usually uses a discount rate of 10 per cent. Practical tasks Use a spreadsheet to complete the following tasks: 1 Calculate the payback period for the new machinery. 2 Calculate the NPV of the new machinery. 3 Calculate the IRR of the new machinery (using appropriate discount rates). Research and presentation Using PowerPoint, present the outcome from Tasks 1 to 3 and provide the following: 4 Prepare a PowerPoint presentation (no more than five slides) for the directors of Bhaka Ltd. The presentation should cover the following points: A summary based on the calculations completed in Tasks 1-3. The micro and macro-economic factors that should be considered for an investment appraisal of this industry. A recommendation to the directors whether the purchase of the new machinery is a viable and beneficial decision.