ACCOUNTING 1B

QUESTION 1 Company A has a machine, details of which are as follows: Details Rand Rand Cost 3 500 000 Tax Value 1 600 000 Realisable Value 2 000 000 Book Value 1 800 000 It produces widgets on this machine. The output and costs are as follows: 0 Output per annum: 5400 units 0 Variable cost per unit: R 400 o Fixed cost per annum (including depreciation): R 600 000 The selling price of a widget is R 800. The machine is operating at full capacity. The company has the opportunity of replacing the machine with a second-hand machine of larger capacity, at a cost of R 3 000 000. This machine will result in a variable cost of R350 per unit and xed costs of R 900 000 per annum {including depreciation). Both machines will have a remaining useful life of 5 years and the book and tax values will be written off on a straight-line basis over this period. They will have no residual value. Reguired: Calculate the output required of the replacement machine to make an investment in it worthwhile. The company uses discounted cash ow to evaluate such proposals and uses a rate of 10% after tax. Note that the rate of corporate tax is expected to be 28% throughout the period. (SAICA QE adapted)