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JC Engineering Ltd is evaluating a new three-year project at a cost of R20 million, which is expected to result in an increase in sales
JC Engineering Ltd is evaluating a new three-year project at a cost of R20 million, which is expected to result in an increase in sales revenue of R15 million in the first year, R20 million in the second year and R10 million in the third year. The company expects operating costs to be 60% of sales revenue. The company will need to invest R4 million in working capital at the beginning of the project, which is recoverable at the end of the life of the project. The residual or market value of the project at the end of year 3 is expected to be R12 million. The required rate of return is 12%. Assuming no taxation. 4.1 a) What is the project's NPV? b) What is the project's IRR? (2) 4.2 Magic Media Ltd is considering two mutually exclusive projects. Project A costs R50m and will generate a net cash flow of R20m per year for four years. Project B costs R68m and will generate a net cash flow of R27m per year for four years. The residual value of either project at the end of four years is expected to be 30% of cost. The depreciation deduction is 20% per year on a straight-line basis. The cost of capital is 11% and the corporate tax rate is 28%. a) Which project should you select? (3) 3.1 Explain the following basic financial accounting terms: Asset. A future economic benefit owned or controlled by the reporting company, such as inventory, land, or equipment. Liability. A probable future economic sacrifice or, in simple terms, a debt. Revenue. A measure of the inflow or increase in net assets generated by the sales made by a company. Expense. A measure of the outflow or reduction in net assets caused by the company's attempt to generate revenues and includes costs, such as rent expense, salary expense, and insurance expense. 3.2 What are the four basic financial statements (Together they present the profitability and strength of a company). 3.3 Express the relationship between Revenue, Expenses and Income [NNet income=Revenue-Expenses] (2) 3.4 Define NPV of a time series of cash flows[A rand earned today is worth more than a rand earned one or more years from now. The NPV of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity]. (3) 3.5 Explain the Pay method [Payback analysis is a method to determine the payback period of an investment. The payback period is the time needed to recover the funds spent on an investment, or to reach break-even point]. (3)
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