FINANCIAL MANAGEMENT

Question 8.25 Company A has a machine, details of which are as follows: R Cost 3,500,000 R Tax value Realisable value 2,000,000 1,600,000 Book value 1.800.000 It produces widgets on this machine. The output and costs are as follows: Output per annum 5 400 units Variable cost per unit R400 Fixed costs per annum (including depreciation) R600 000 The selling price of a widget is R800. 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 R3m. This machine will result in a variable cost of R350 per unit and fixed costs of R900 000 per annum (including depreciation). Both machines will have a remaining useful life of five 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 8.25 Company A has a machine, details of which are as follows: R Cost 3,500,000 R Tax value Realisable value 2,000,000 1,600,000 Book value 1.800.000 It produces widgets on this machine. The output and costs are as follows: Output per annum 5 400 units Variable cost per unit R400 Fixed costs per annum (including depreciation) R600 000 The selling price of a widget is R800. 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 R3m. This machine will result in a variable cost of R350 per unit and fixed costs of R900 000 per annum (including depreciation). Both machines will have a remaining useful life of five 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)