capital budgeting

Fairvest Limited is a company situated in Cape Town. The company is planning to purchase machinery to replace an existing machine. The old machine was acquired five years ago for a cost of R1200000. The old machine has been writ down to a Nil book value over its five-year useful life. The old machine can be sold for R80 000 a removal costs of R10 000 are expected to be incurred. Working capital increased by R140 000 five yea ago when the old machine was acquired and is expected to be recovered when the old machine is solo A new replacement machine will be purchased at a total cost of R1 800000 . A further R120 000 will be incurred in shipping the new machine from Germany. The new machine is expected to result in an increase in working capital of R180000. The new machine will have a useful life of five years affer which it will be disposed of for an expected residual value of R100 000 The eamings before interest, tax, depreciation and amortisation (EBITDA) of the new machine is expected to be R600 000 per annum In five years, the old machine will have a nil scrap value but removal costs of R10 000 will still have to be incurred. In five years' time the new machine can be sold for its residual value of R1000000 and clean-up costs of R20 000 will have to be incurred. The working capital is expected to be recovered at this tme. A tax rate of 28% applies to this company. The policy of the company is to write off depreciable assets on a straightline basis over its useful life. REQUIRED Using the information provided above, calculate the following: 1.1 Initial investment 12 Annual operating cash flow of the new machinery (7 Marks) 1.3 Terminalcash flow