FINANCIAL MANAGEMENT

Question 2 - Discounted Cash Flows and Project (20 marks) Buy-Right (Pty) Ltd is considering the capital project described below. The project is considered a strategic growth enhancer and scale enhancing, and as such the company believes it should be assessed using the firm- wide cost of capital (WACC) which is currently 7%. Equipment costing R1,050,000 will be purchased and paid for immediately. The purchase will also meet the SARS revenue authority conditions for ten year straight line depreciation allowances. The corporate and effective tax rate is currently 25% for the organization. The equipment will installed at a cost of R130,000 that can be expensed immediately. At the end of the six-year life of the project, the equipment can be sold for R210,000. Sales revenues are projected to be R750,000; R830,000; R910,000; R1,000,000; R910,000; and R830,000 for 1st through to 6th year of the project respectively. Cost of goods sold and variable costs are estimated to be 37.9% and 18.8% of revenues respectively. Fixed costs are estimated at R160,000 per annum. None of these cost estimates include depreciation of the equipment. The additional investment in net working capital (NWC) needed for the project at the beginning of each year of its life is estimated at 14.2% of the revenue projected for the year. 1 .2 .3 What are the expected cash flows for the project? What is the project net present value? Should Buy-Right go ahead with the project? Briefly justify your