Enzo Africa $($Pty$)$ Ltd $($Enzo$)$ is a privately owned logistics company located in

Germiston. Enzo was established $10$ years ago by Ben Strauss after having

worked for a leading logistics companies for over $20$ years. Enzo provides

transport, warehousing and specialised freight to customers in Southern Africa.

Enzo operates a fleet of $17518-$ton trucks and $5012-$ton trucks. Enzo prides

itself on its innovative approach towards the logistics and warehousing business.

During the year, Enzo obtained a contract to supply transport and warehousing

services to Lacosto Cement $($LC$).$ In terms of the agreement, Enzo must ensure

uninterrupted supply of cement to LC$$s builders over a period of five years. Enzo

will have to rent a warehouse in Limpopo in order to make cement available and

ready for delivery upon request by builders. You recently joined Enzo as an

accountant and your job is to evaluate the viability of new projects.

The financial manager provided you with the following information relating to the

LMC contract: Enzo will have to buy six $18-$ton trucks and three $12-$ton trucks.

The cost of an $18-$ton and a $12-$ton truck is R$1200000$ and R$800000$

respectively. A supplier has agreed to a discount of $20\%$ of the purchase on

n the first four $18-$ton trucks. SARS allows a wear$-$and$-$tear allowance of $20\%$

per annum on trucks. The trucks will cost R$95000$ per annum in totalto maintain.

Enzo will have to hire two drivers for each truck. The financial manager plans to

re$-$deploy their experienced drivers who are currently working for Enzo on other

projects. Each driver currently earns R$5500$ per month. The drivers currently

working on other Enzo projects will have to be replaced with temporary drivers

who will be paid R$4000$ each per month.

Rent on a warehouse in Limpopo will amount to R$175000$ per annum. Enzo$$s

current financial manager will have to manage the project. The project will

consume $20\%$ of the financial manager$$s time. The financial manager is currently

paid a fixed salary of R$550000$ per annum and will not be paid more as a result

of the new project.

Enzo will have to construct a weighbridge at the warehouse. The cost of the

weighbridge will be R$500000.$ SARS allows a wear$-$and$-$tear allowance of $10\%$

per annum on a weighbridge.

The project is expected to generate revenue of R$4535000$ per annum. Other

project$-$related expenses will amount to R$150000$ per annum. There will be

working capital requirements of R$200000$ at the start of the project in the form

of truck consumables. These are expected to remain the same throughout the

five$-$year period.

At the end of the project, all the trucks will be sold to a second$-$hand dealer for

a total of R$1575000.$ The weighbridge will have to be dismantled at a cost of

R$80000$ and will be sold for R$300000.$

The after$-$tax cost of debt is $9\mathrm{.}72\%$ and the WACC is $18\%.$ The current income

tax ravise management on some qualitative considerations to make in the

project above. $(5$

$1\mathrm{.}1$ Calculate the net present value $($NPV$)$ and the IRR of the project. $(20)$

$1\mathrm{.}2$ The net present value $($NPV$)$ assumes that the risk of a project can be

identified and reflected in the appropriate discount rate. Discuss the

impact of an increase in risk on a project$$s discount rate, NPV and IRR.