Answer ALL questions.

Read the case study and answer the questions that follow:

$[30$ MARKS$]$

DREAMIT ELECTRONICS LTD: PROJECTIONS FOR $2024$ AND $2025$

After posting excellent sales and net profit in the previous year Dreamit Electronics Ltd set its sights on growth and innovation as it celebrated its $10$th anniversary in $2023.$ It has continually strived to become the leader in the electronics industry in South Africa. The company is also committed to being a good corporate citizen, as it strives to fulfil both its economic and social responsibilities.

The following reflects the financial position of the company on $31$ December $2023$:

The carrying value of the fixed assets was R$30000000$ whilst the current assets comprised inventory of R$9400000,$ accounts receivable of R$8000000$ and cash of R$1600000.$ The equity consisted of ordinary share capital, R$17000000,$ and retained earnings of R$6400000.$ An amount of R$22000000$ was owed to Mesa Bank for a long$-$term loan. Trade creditors were owed R$3600000.$

The following projections and proposals were made by Dreamit Electronics Ltd for $2024$:

The sales are expected to increase from R$30000000$ in $2023$ to R$40000000$ in $2024.$ All the sales are on credit. Accounts receivable is based on a collection period of $36\mathrm{.}5$ days. Accounts payable must be calculated using the percentage$-$of$-$sales method. The gross margin and net profit margin ratios are expected to be $25\%$ and $10\%$ respectively for $2024.$ All purchases of inventory are on credit. Purchases for $2024$ are projected at R$25000000.$ The company expects to show a net increase in cash of R$500000$ during $2024.$ R$24000000$ will be spent on additional land and buildings during the fourth quarter of $2024.$ The total depreciation for $2024$ is forecasted at R$4000000\mathrm{.}1000000$ ordinary shares are expected to be sold at R$4$ each during January $2024.$ Dividends of R$3000000$ are expected to be recommended by the directors at the end of $2024.$ These

dividends will be paid during $2025.$ R$5500000$ will be paid to Mesa Bank during $2024.$ This amount includes R$2000000$ for interest on loan. The amount of external funding $($non$-$current debt$)$ required must be calculated.

Dreamit Electronics Ltd has identified a new machine that it is considering for purchase at the start of $2025.$ The cost the machine is R$4000000.$ The machine is expected to have a useful life of five years. No scrap value is anticipated. The annual profits that are expected to be generated from the machine are as follows:

Year $1$ R$600000$; Year $2$ R$620000$; Year $3$ R$700000$; Year $4$ R$660000$; Year $5$ R$560000.$

The cost of capital is $15\%.$ Depreciation is estimated at R$800000$ per year.

QUESTIONS

Prepare the Pro Forma Statement of Financial Position as at $31$ December $2024.$

$($Ignore the investment opportunity for $2025.)$

$(17$ Marks$)$

Refer to the investment opportunity for $2025($the purchase of a new machine$)$ and calculate the following. Ignore taxes. Use only the four$-$decimals present value tables that appear after question $2\mathrm{.}3$ or in the module guide.

$2\mathrm{.}1$ Accounting Rate of Return on average investment $($expressed to two decimal places$).$

$(4$ Marks$)$

$2\mathrm{.}2$ Net Present Value. Your answer must reflect the calculations of the present values and NPV$.$

$(4$ Marks$)$

$2\mathrm{.}2$ Net Present Value. Your answer must reflect the calculates$)$ if the net cash flows are R$1200000$ per year for five years. Your answer must include two net present value calculations $($using consecutive rates$/$percentages$)$ and interpolation.

$(5$ Marks$)$