An entrepreneur born in the South East of Mpumalanga has recently discovered beauty and cosmetics ingredient suitable for African skin she has decided to register a company under the name Swongazi (Pty) Ltd in which is the sole director. The company will also be operating Mpumalanga. Under the company she is considering investing in a manufacturing machine that is going to increase her scale of production to be much higher than human labour. The project that will result in annual before-tax cash flows of R50 million per year, for 5 years. The company will need to invest in machine which the company can either lease or purchase. Purchase: The cost of the equipment is R120 million and the expected residual value at the end of 5 years is zero. The depreciation deduction is 20% per year straight-line. However, the tax allowances for this particular asset will be 50% in the first year and 25% for each of the subsequent years. The cost of running and maintaining the machine will be R30 million a year (including depreciation) Lease: The Company is required to make annual lease payments of R34 million per year, payable in advance over 5 years. The tax rate is 28%. The company's weighted average cost of capital is 13%, whilst the after-tax cost of debt is 9%. (Total 27 Marks) Round off to 3 decimal places. Indicate negative amounts using - minus sign instead of brackets (a) What is the discount rate should be used to evaluate whether this project is worth proceeding with or not? (1 mark) (a) What is the discount rate should be used to evaluate whether this project is worth proceeding with or not? (1 mark) (b) What discount rate should be used to evaluate the option of either to purchase the machine or to lease it? (1 marks) (c) Determine whether this statement is True or false: the tax value of the machine is going to be NIL at the end of third year. (1 Mark) * (d) Assuming that the NPV of the project is positive, determine using the appropriate calculations, whether the company should opt to lease or purchase the machine? The Net present cost (NPC) of leasing is ((9 marks), whilst the NPC for borrowing to purchase is (15 marks) An entrepreneur born in the South East of Mpumalanga has recently discovered beauty and cosmetics ingredient suitable for African skin she has decided to register a company under the name Swongazi (Pty) Ltd in which is the sole director. The company will also be operating Mpumalanga. Under the company she is considering investing in a manufacturing machine that is going to increase her scale of production to be much higher than human labour. The project that will result in annual before-tax cash flows of R50 million per year, for 5 years. The company will need to invest in machine which the company can either lease or purchase. Purchase: The cost of the equipment is R120 million and the expected residual value at the end of 5 years is zero. The depreciation deduction is 20% per year straight-line. However, the tax allowances for this particular asset will be 50% in the first year and 25% for each of the subsequent years. The cost of running and maintaining the machine will be R30 million a year (including depreciation) Lease: The Company is required to make annual lease payments of R34 million per year, payable in advance over 5 years. The tax rate is 28%. The company's weighted average cost of capital is 13%, whilst the after-tax cost of debt is 9%. (Total 27 Marks) Round off to 3 decimal places. Indicate negative amounts using - minus sign instead of brackets (a) What is the discount rate should be used to evaluate whether this project is worth proceeding with or not? (1 mark) (a) What is the discount rate should be used to evaluate whether this project is worth proceeding with or not? (1 mark) (b) What discount rate should be used to evaluate the option of either to purchase the machine or to lease it? (1 marks) (c) Determine whether this statement is True or false: the tax value of the machine is going to be NIL at the end of third year. (1 Mark) * (d) Assuming that the NPV of the project is positive, determine using the appropriate calculations, whether the company should opt to lease or purchase the machine? The Net present cost (NPC) of leasing is ((9 marks), whilst the NPC for borrowing to purchase is (15 marks)
