product, 'Product Greu, following a recent marketing study at a cost of RA million. The machine will cost the firm Rs80 million rupees and is expected to be sold at 10% of its cost at Question 1 (25 marks) Gaprem Ltd is considering the purchase of a new machine to manufacture and sell a new the end of its useful life of four years. The capacity of the machine is one million units of Greut ' per annum. The selling price and variable cost of "Greut' is expected to be R$200 and Rs150 per unit respectively. The total fixed costs of the firm is currently Rs37 million per year which is expected to increase to Rs42 million per year if the new machine is bought. Selling price and costs which are all in current price terms will be affected by selling price inflation of 5% per year and costs inflation of 8% per year. The average general level of inflation is estimated to be 4% per annum. Gaprem Ltd has estimated demand for the new product to be as follows for the four year time period: Year 2 4 Demand(units) 1,300,000 1,100,000 700,000 1 900,000 Gaprem Ltd can claim capital allowances (tax allowable depreciation) at the rate of 25% per year using the diminishing method on the cost of the machine. The firm will be able to claim a balancing allowance at the end of the four year time period and it pays tax on profit at the rate of 20% per annum, one year in arrears. Following implementation of this project, additional investment in working capital at the start of each year is estimated to be 8% of sales revenue for that year. The firm makes use of its nominal after tax weighted average cost of capital to appraise new projects. The long term finance of the firm consists of equity and debt and their market values are Rs540 million and Rs360 million respectively. The cost of equity of the firm is 12.2% and the cost of debt is 8.4%. Required: (i) Calculate the net present value and the internal rate of return for the proposed purchase of the new machine (work to the nearest Rs1,000). [17 marks] Following your results in (i), advise the finance director of Gaprem Ltd on the acceptability of the proposed purchase of the new machine. [3 marks] (iii) Explain the strengths and weaknesses of the evaluation methods used in (i) to decide on the acceptability of the project. [5 marks] Page 1 of 9 product, 'Product Greu, following a recent marketing study at a cost of RA million. The machine will cost the firm Rs80 million rupees and is expected to be sold at 10% of its cost at Question 1 (25 marks) Gaprem Ltd is considering the purchase of a new machine to manufacture and sell a new the end of its useful life of four years. The capacity of the machine is one million units of Greut ' per annum. The selling price and variable cost of "Greut' is expected to be R$200 and Rs150 per unit respectively. The total fixed costs of the firm is currently Rs37 million per year which is expected to increase to Rs42 million per year if the new machine is bought. Selling price and costs which are all in current price terms will be affected by selling price inflation of 5% per year and costs inflation of 8% per year. The average general level of inflation is estimated to be 4% per annum. Gaprem Ltd has estimated demand for the new product to be as follows for the four year time period: Year 2 4 Demand(units) 1,300,000 1,100,000 700,000 1 900,000 Gaprem Ltd can claim capital allowances (tax allowable depreciation) at the rate of 25% per year using the diminishing method on the cost of the machine. The firm will be able to claim a balancing allowance at the end of the four year time period and it pays tax on profit at the rate of 20% per annum, one year in arrears. Following implementation of this project, additional investment in working capital at the start of each year is estimated to be 8% of sales revenue for that year. The firm makes use of its nominal after tax weighted average cost of capital to appraise new projects. The long term finance of the firm consists of equity and debt and their market values are Rs540 million and Rs360 million respectively. The cost of equity of the firm is 12.2% and the cost of debt is 8.4%. Required: (i) Calculate the net present value and the internal rate of return for the proposed purchase of the new machine (work to the nearest Rs1,000). [17 marks] Following your results in (i), advise the finance director of Gaprem Ltd on the acceptability of the proposed purchase of the new machine. [3 marks] (iii) Explain the strengths and weaknesses of the evaluation methods used in (i) to decide on the acceptability of the project. [5 marks] Page 1 of 9