BRAND NEW PLANT

ABC Limited made the decision to halt any new asset purchases for the last 4 years given the uncertainty in the market following the covid-19 outbreak. However, management has recently done away with this halt and has asked you to assist in determining whether it would be worthwhile for the business to invest in a new plant.

The companys year-end is 31 December, and the new plant is estimated to have a cost of R800 million. Depreciation is calculated on a straight-line basis and SARS provides an allowance using a 10-year useful life on the straight-line method. The plant will enable the business to earn additional operating cash flows of R110 million for the first five years, then this is expected to reduce to 95 million for the last 5 years. The plant can then be sold in year 10 for R880 million.

All cash flows may be assumed to occur at the end of the year unless otherwise evident.

The weighted average cost of capital or discount rate is 15%

The corporate tax rate is 28% with a capital gains inclusion rate of 80%

REQUIRED Marks
(a)	Calculate the net present value of this asset purchase and advise the management of ABC Limited whether they should proceed with the investment of the new plant.	12

TIME VALUE OF MONEY

Jane has been saving R500 in her retirement account each month for the last 20 years and plans to continue contributing R500 each month for the next 20 years. Her account has been earning an 8 percent annual interest rate and she expects to earn the same rate for the next 20 years.

Her twin brother, Jack, has not saved anything for the last 20 years. Due to sibling rivalry, he wants to have as much as Jane is expected to have at the end of the next 20 years.

REQUIRED Marks
(b)	If Jack expects to earn the same annual interest rate as Jane, how much must Jack save each month to achieve his goal if he starts saving now?	8