INFORMATION: Remgro Limited intends replacing machinery that has reached the end of its useful life. The new machinery will cost R600 000 and a further R60 000 will have to be spent on transport and installation costs. The new machinery will have a useful life of four years. The new machinery will be depreciated on a straight-line basis over its useful life to a NIL book value. It is expected that the new machinery will result in an increase in working capital of R75 000. The old machinery was purchased five years ago at a cost of R500 000. This machinery was depreciated on a straightline basis over its useful life to a NIL book value. The old machinery can be sold for R50 000 and a further R15 000 will have to be spent to remove the old machinery from the factory. When the old machinery was originally purchased it resulted in an increase in working capital of R50 000. The earnings before interest and taxation (EBIT) of the new machine is expected to be as follows:

Earnings before interest and taxes (EBIT)

(Year 1) 180 000

(Year 2) 210 000

(Year 3) 240 000

(Year 4 )275 000

In four years time the new machinery can be sold for R60 000 and R6 000 will have to be spent to remove the new machinery. In four years time the old machinery will have no resale value but removal costs of R10 000 will have to be incurred. The company pays taxation at 28%.

REQUIRED:

2.1 Calculate the initial investment for the replacement project. (7 Marks)

2.2 Calculate the operating cash flows for years 1 and 2 for the new machinery. (5 Marks)

2.3 Calculate the terminal cash flow for the replacement project.