Concrete-Mix Limited is considering whether to continue with their production with its existing cement mixing machine or to replace it with a new improved cement mixing machine which is expected to speed up the mixing process.

Information regarding the existing mixing machine: Cost price: R660 000 Current market value: R200 000 Current tax value: R220 000 Realisable value at end of useful life: Nil Current book value: R396 000 Initial useful life: 5 Remaining years: 3 Maximum annual production capacity: 5 600 batches

Information regarding the new improved mixing machine: Cost to purchase new improved mixing machine R840 000 Useful life of new improved mixing machine Realisable value at end of useful life: 3 years Nil Maximum annual production capacity 6 700 batches

1. The depreciation policy of the company is to depreciate assets on the straight-line method over the useful life, while the wear and tear policy of the South African Revenue Service makes provision for assets to be written-off over a period of three years on the straight- line method, with no realisable value at the end of the period. 2. The companys cost of capital is 14% per annum and the current rate of normal taxation is 28%. 3. All the estimated cash flows will arise at the end of the year to which they are applicable, except the initial outlays which occur at the beginning of the year. 4. The net present value (NPV) of the new improved mixing machine was correctly calculated by the company to be R46 809.

REQUIRED: (a) Name two factors that can affect the capital budgeting decision. (1) (b) Determine the net present value of the existing mixing machine by using the net present value method. Advise whether the company should keep the existing mixing machine or purchase the new improved mixing machine and motivate your recommendation. [Work to the nearest rand, round off all your factors to three decimal places and show all your detailed calculations.] (20)

The following expected economic conditions and additional information will have to be considered: Year 1 2 3 4 500 5 600 6 660 170 196 225 Estimated demand for products - batches Selling price - per batch (R) Variable manufacturing cost - per batch (R) Fixed cost per annum - to be incurred excluding depreciation (R) 89 105 156 22 000 13 000 20 000 The following expected economic conditions and additional information will have to be considered: Year 1 2 3 4 500 5 600 6 660 170 196 225 Estimated demand for products - batches Selling price - per batch (R) Variable manufacturing cost - per batch (R) Fixed cost per annum - to be incurred excluding depreciation (R) 89 105 156 22 000 13 000 20 000