Management have estimated that, if the new product were to be sold to customers today, it would have a current selling price of R50 per unit, and a variable cost of R40 per unit. Price inflation is expected to be 5% per annum for sales and 3% per annum on variable costs. Fixed overheads are anticipated to increase at 4% per annum each year from year two onwards. Fixed overheads are expected to amount to R40 000 in the first year. The manufacture and sale of the new product will give rise to an additional working capital requirement. Management have indicated that, based on the historic trends of the company, the working capital requirement at the start of each year will equate to approximately 2% of sales linked to the production from the new machine for that year. Additional information: Mtawarira Ltd currently pays corporation tax one year in arrears. The current corporation tax rate is 28%. Ignore VAT. SARS currently permits a S12C capital allowance on new qualifying fixed asset additions over a four-year period at 40%/20%/20%/20%. A capital gains tax inclusion rate of 80% applies. Mtawarira Ltd use their WACC (Weighted Average Cost of Capital) to appraise capital investment projects. The current WACC of the company has been calculated as 14%. Required: (Round off all calculations to the nearest rand except for price calculations to be rounded to two decimals) Q.5.1 Calculate the working capital requirement for Mtawarira Ltd for the new machine. (13) Q.5.2 Calculate the initial investment for the new machine. (5) Q.5.3 Calculate the operating cash flow for Mtawarira Ltd that relates to the new (25) machines for year 1-3 only. Q.5.4 (2) What type of capital expenditure (capex) will the acquisition of the new machine be classified as? Provide a reason for your answer. Management have estimated that, if the new product were to be sold to customers today, it would have a current selling price of R50 per unit, and a variable cost of R40 per unit. Price inflation is expected to be 5% per annum for sales and 3% per annum on variable costs. Fixed overheads are anticipated to increase at 4% per annum each year from year two onwards. Fixed overheads are expected to amount to R40 000 in the first year. The manufacture and sale of the new product will give rise to an additional working capital requirement. Management have indicated that, based on the historic trends of the company, the working capital requirement at the start of each year will equate to approximately 2% of sales linked to the production from the new machine for that year. Additional information: Mtawarira Ltd currently pays corporation tax one year in arrears. The current corporation tax rate is 28%. Ignore VAT. SARS currently permits a S12C capital allowance on new qualifying fixed asset additions over a four-year period at 40%/20%/20%/20%. A capital gains tax inclusion rate of 80% applies. Mtawarira Ltd use their WACC (Weighted Average Cost of Capital) to appraise capital investment projects. The current WACC of the company has been calculated as 14%. Required: (Round off all calculations to the nearest rand except for price calculations to be rounded to two decimals) Q.5.1 Calculate the working capital requirement for Mtawarira Ltd for the new machine. (13) Q.5.2 Calculate the initial investment for the new machine. (5) Q.5.3 Calculate the operating cash flow for Mtawarira Ltd that relates to the new (25) machines for year 1-3 only. Q.5.4 (2) What type of capital expenditure (capex) will the acquisition of the new machine be classified as? Provide a reason for your
