Additional information applicable to question 2 Dinoka Company Limited needs to upgrade its manufacturing machinery due to normal wear and tear. One of its largest machines will soon need to be refurbished. The company is considering two options: i. Refurbish and keep the existing machine. ii. Replace the existing machine with a new one. This new machine uses advanced technology and will reduce labour hours significantly. It is also likely that the new machine will use less electricity than the existing machine. The following information is relevant: New machine Existing machine Current tax value R366 666 Cost price R1 320 000 R1 100 000 Cost of refurbishment R880 000 Current realisable value R440 000 Realisable value after 3 years R550 000 R330 000 Working capital requirement (additional) R88 000 R66 000 Fixed manufacturing cost per annum R165 000 R220 000 Variable cost per unit manufactured R330 R352 Sales price per unit manufactured R880 R880 Units manufactured by the machine per annum (100% production) 33 000 27 500 Production capacity (units per annum) 22 000 22 000 Additional information SARS allows for wear and tear over three years. Depreciation is not included in the variable cost. The lifespan of both assets is three years. The companys target weighted average cost of capital (WACC) is 16%. The target debt/equity ratio is 50:50. The current tax rate is 27%. MAC3702 ASSIGNMENT 2 Page 8 of 14 [TURNOVER] QUESTION 2 (continued) REQUIRED For each question below, remember to: Clearly show all your calculations in detail; Where necessary, indicate irrelevant amounts/adjustments with a R0 (nil-value); and Round all your workings to two decimals. (a) Advise whether management should refurbish and continue using the existing machine or replace the existing machine with the new one using the net present value method. (18) (b) Discuss and recommend to management how the new machine should be financed, assuming that management decide to purchase the new machine and working towards attaining the targeted capital structure. Base your discussion on relevant calculations supporting your recommendation. [The companys existing market capitalization must be calculated using the Statement of Financial Positions as provided in Part 1 to this question. Assume book values approximate market values] (9) (c) Discuss three qualitative factors that management should consider when making their investment decision