Question
Consider each of the following independently. 1. Argent Industrial Limited intends replacing its existing machine with a new machine. The new machinery will be imported
Consider each of the following independently.
1. Argent Industrial Limited intends replacing its existing machine with a new machine. The new machinery will be imported from Australia at a cost of R1 400 000. A further R100 000 will be spent on transport and installation costs to its plant in Polokwane. It is expected that the new machine will result in an increased investment in working capital of R150 000. The old machine was purchased four year ago at a cost of R800 000 and was written down to a NIL book value. The old machine can be sold for R70 000 and R7 000 will be paid for removal costs. The old machine had originally resulted in increased working capital of R80 000 which will be recovered when it is disposed of. The company pays tax at 28%.
REQUIRED Calculate the total initial investment.
2 Europa Metals Limited is to acquire new machinery to expand operations. The machine will have a purchase price of R900 000. The machine is expected to last for five years after which it can be sold for R80 000. The machinery will be depreciated to its book value on a straight-line basis over its useful life.
The following is the expected net operating profit after tax that will be generated by the new machine:
Year NOPAT
1 R186 000
2 R225 000
3 R260 000
4 R295 000
5 R320 000
REQUIRED Calculate the net operating cash flows related to the new machine for Europa Metals Limited.
3 Iron gate Limited acquired a new machine five years ago at a cost of R1 300 000 to expand its operations. At the time that the new machine was acquired it was expected to have a five-year useful life and NIL scrap value. At this time the investment in working capital increased by R130 000. After five years the new machine is now being sold for R110 000. Removal costs of R20 000 will be incurred. The working capital will also be recovered. The company is subject to a tax rate of 28%. The company depreciates its assets on a straight-line basis over its useful life.
REQUIRED Calculate the terminal cash value of the asset.
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