At the end of December $2022$ the company was approached by a group of previously disadvantaged women

who had opened a service station on $01$ July $2022,$ selling only diesel. They needed assistance in improving

the financial performance of the service station. Diesel was sold at R$16$ per litre and the variable costs totalled

R$14$ per litre. The fixed costs were R$135000$ per month. After six months of opening, the sales achieved was

$540000$ litres and the sales were almost the same each month. To improve the performance, the Capri

Limited considered the following proposals:

Proposal $1$

Customers will be allowed to purchase diesel on credit. It is estimated that $60\%$ of the average monthly sales

$($in litres$)$ will be to customers who would take advantage of this opportunity. Sales to these customers should

increase by $25\%$ as they are expected to buy exclusively from this service station. Sales volumes to

customers who do not take advantage of the credit policy are expected to remain unchanged. Additional costs

arising from this proposal are expected to be:

$$ Bad debts of $1\%$ of the sales value in respect of customers who use the credit facility.

$$ Fixed administrative costs of R$7500$ per month.

Proposal $2$

An operating profit of R$25000$ per month would be the target. To achieve this the following changes are

suggested:

$$ The selling price is reduced by R$0\mathrm{.}30$ per litre.

$$ A sales commission of R$1\mathrm{.}50$ per $10$ litres sold will be granted to the diesel attendants.

$$ R$5075$ per month will be spent on advertising.

Proposal $3$

The possibility of only operating from $06$:$00$ to $22$:$00$ is being considered. This earlier closing time is expected

to result in a loss of sales on average of $12500$ litres per month. It is hoped that the saving in fixed costs

resulting from the reduction in operating hours will enable the entrepreneur to achieve an average monthly

operating profit of R$30000$

Refer to the proposed acquisition of a new machine for purchase and installation during the second quarter of

$2024$ and answer the following questions:

$3\mathrm{.}1$ Calculate the Payback Period $($expressed in years, months and days$)(3$ marks$)$

$3\mathrm{.}2$ Calculate the Accounting Rate of Return on initial investment $($expressed to two decimal

places$).(4$ marks$)$

$3\mathrm{.}3$ Calculate the Internal Rate of Return $($expressed to two decimal places$).$ Your answer must

include two net present value calculations $($using consecutive rates$/$percentages$)$ and

interpolation. $(6$ marks$)$

$3\mathrm{.}4$ Calculate the Net Present Value if the machine is expected to have a scrap value of

R$300000.(6$ marks$)$

$3\mathrm{.}5$ Suppose Capri Ltd funds the purchase of the new machine through the issue of $12\%$

preference shares that are expected to sell for R$10$ each. If the floatation costs are

estimated at R$1$ per share, calculate the cost of the preference shares $($expressed to two

decimal places$).(3$ marks$)$

$3\mathrm{.}6$ Suppose Capri Ltd funds the purchase of the new machine through the issue of ordinary

shares. Assume that the present value of an ordinary share of Capri Ltd is R$17\mathrm{.}25,$ the next

projected dividend is R$1\mathrm{.}80$ per share and the expected growth rate in dividends is $15\%$ p$.$a$.$

Use the Gordon Growth Model to estimate the cost of the ordinary shares $($expressed to two

decimal places$)$