FINANCIAL MANAGEMENT

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In this question the first machine can produce 5400 units but we don't know what the second machine will produce but note also to replace the first machine by the second, the first will be depreciated and the duration is 5 years for both machines.

QUESTION 1 Company A has a machine, details of which are as follows: Details Rand Rand . . . Cost 3 500 000 Tax Value 1 600 000 Realisable Value 2 000 000 Book Value 1 800 000 It produces widgets on this machine. The output and costs are as follows: Output per annum: 5400 units Variable cost per unit: R 400 Fixed cost per annum (including depreciation): R 600 000 The selling price of a widget is R 800. The machine is operating at full capacity. The company has the opportunity of replacing the machine with a second-hand machine of larger capacity, at a cost of R 3 000 000. This machine will result in a variable cost of R350 per unit and fixed costs of R 900 000 per annum (including depreciation). Both machines will have a remaining useful life of 5 years and the book and tax values will be written off on a straight-line basis over this period. They will have no residual value. Required: Calculate the output required of the replacement machine to make an investment in it worthwhile. The company uses discounted cash flow to evaluate such proposals and uses a rate of 10% after tax. Note that the rate of corporate tax is expected to be 28% throughout the period. (SAICA QE adapted) QUESTION 1 Company A has a machine, details of which are as follows: Details Rand Rand . . . Cost 3 500 000 Tax Value 1 600 000 Realisable Value 2 000 000 Book Value 1 800 000 It produces widgets on this machine. The output and costs are as follows: Output per annum: 5400 units Variable cost per unit: R 400 Fixed cost per annum (including depreciation): R 600 000 The selling price of a widget is R 800. The machine is operating at full capacity. The company has the opportunity of replacing the machine with a second-hand machine of larger capacity, at a cost of R 3 000 000. This machine will result in a variable cost of R350 per unit and fixed costs of R 900 000 per annum (including depreciation). Both machines will have a remaining useful life of 5 years and the book and tax values will be written off on a straight-line basis over this period. They will have no residual value. Required: Calculate the output required of the replacement machine to make an investment in it worthwhile. The company uses discounted cash flow to evaluate such proposals and uses a rate of 10% after tax. Note that the rate of corporate tax is expected to be 28% throughout the period. (SAICA QE adapted)