Question
Masti Supplies is a company involved in the transport of produce from Free State to Johannesburg metropolitan area. The company is evaluating the purchase of
Masti Supplies is a company involved in the transport of produce from Free State to Johannesburg metropolitan area. The company is evaluating the purchase of two new refrigerated trucks which are expected to be more economical than two of the current trucks due to advances in refrigeration technology and improved economy. The company expects to achieve the increase in before tax earnings of R432 000 per year. This is made up as follows: cash fuel savings of R222 000 per year and cash reduction in claims of R180 000 per year as well as a reduction of fixed costs of R30 000 per year. An analysis of the fixed costs indicates an increase in annual accounting depreciation of R120 000 and a reduction of cash fixed costs of R150 000 per year (which results in net reduction of R30 000 per year). The claims arise from not meeting quality variations in product temperatures. The total cost of the two new trucks is R1.2 million. The current trucks, which have tax values of zero, can be sold for R150 000 each. The future residual value for the existing trucks is expected to be zero in 5 years' time. The residual value of the new trucks in 5 years' time is expected to be R300 000 each. The company's cost of capital is 14% and corporate tax rate is 28%. The tax effects on the sale of the existing trucks will occur at the same time as the sale. Required:
b) Determine the NPV of investing in the two trucks using the net present value method
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