4.3 Required

Study the information given below and answer the following questions:

4.3.1 Calculate the net present value.

4.3.2 Should ABC Limited consider acquiring the machine? Explain.

4.3.3 Calculate the value of the initial investment at the end of five years, if it is invested at a rate of 12%.

Information

The project manager of ABC Limited is contemplating the import of a machine in order to expand the production capacity at one of its projects. The estimated cost of the machine is R500 000 and the revenues from the sales it is expected to generate are R350 000 per year for four years. The cash costs associated with the project are estimated at R150 000 per year. The machine is expected to have a scrap value of R50 000. The cost of capital is 12%.