Question 1 (28 marks: 42 minutes REQUIRED Marks (a) Calculate the annual relevant after tax operating cash flows for each of the three years (year 1-3). 16 Fighter Ltd ("Fighter) is a company, based in Cape Town, that specialises supplying security services to businesses in high risk areas, as well as providing protection to company's during times of unrest (i.e. strikes and violent protests). Fighter has recently been informed about a Bloemfontein based company in the same industry which is being sold due of the death of the current owner from Covid-19. (b) Evaluate the Proto-Tect Ltd investment project using the following investment appraisal techniques: The details of the company, Proto-Tect Ltd ("PT") are as follows: Payback period; Net present value (NPV); Internal rate of return (IRR) and; Profitability ratio/index (PI). The purchase price for the company has been calculated as R5 350 000. It was agreed that R2 000 000 of purchase price is for the vehicles and sundry equipment, R3 000 000 is for the fixed property owned by PT and R350 000 for working capital. The following table relates to the write off of these classes of assets: (c) With specific reference to your NPV and IRR answers in (b) above, advise Fighter whether they should proceed with the purchase of Proto-Tect Ltd. 2 Asset Residual value SARS allowance Remaining Useful life Show all calculations clearly. Round all amounts to the second decimal point. Vehicles Fixed property R500 000 R1 000 000 3 years 10 years 20% annually 5% annually TOTAL MARKS FOR QUESTION 1 28 The following forecast statement of profit or loss and other comprehensive income was submitted as part of the purchase agreement between Fighter and Proto-Tect: Year Operating Profit Finance cost Profit before tax 1 R 864 000 (180 000) 684 000 2 R 880 000 (180 000) 700 000 3 R 860 000 ( (180 000) 680 000 Additional information Fighter plans to sell PT at the end of year 3 as they expect that by this stage the market will be flooded and PT will no longer generate the return on investment required by Fighter. The proceeds from the disposal is expected to be R4 600 000, excluding any working capital recoveries. R150 000 of the additional working capital will be recovered once PT is sold at the end of the third year. After accounting for the interest on the finance from the bank, Fighter's target weighted average cost of capital is 14% per annum. Assume a tax rate of 28%. Assume that Fighter Ltd has other taxable income against which any losses may be set-off. Unless otherwise stated assume that all cash flows occur at the end of the year. Question 1 (28 marks: 42 minutes REQUIRED Marks (a) Calculate the annual relevant after tax operating cash flows for each of the three years (year 1-3). 16 Fighter Ltd ("Fighter) is a company, based in Cape Town, that specialises supplying security services to businesses in high risk areas, as well as providing protection to company's during times of unrest (i.e. strikes and violent protests). Fighter has recently been informed about a Bloemfontein based company in the same industry which is being sold due of the death of the current owner from Covid-19. (b) Evaluate the Proto-Tect Ltd investment project using the following investment appraisal techniques: The details of the company, Proto-Tect Ltd ("PT") are as follows: Payback period; Net present value (NPV); Internal rate of return (IRR) and; Profitability ratio/index (PI). The purchase price for the company has been calculated as R5 350 000. It was agreed that R2 000 000 of purchase price is for the vehicles and sundry equipment, R3 000 000 is for the fixed property owned by PT and R350 000 for working capital. The following table relates to the write off of these classes of assets: (c) With specific reference to your NPV and IRR answers in (b) above, advise Fighter whether they should proceed with the purchase of Proto-Tect Ltd. 2 Asset Residual value SARS allowance Remaining Useful life Show all calculations clearly. Round all amounts to the second decimal point. Vehicles Fixed property R500 000 R1 000 000 3 years 10 years 20% annually 5% annually TOTAL MARKS FOR QUESTION 1 28 The following forecast statement of profit or loss and other comprehensive income was submitted as part of the purchase agreement between Fighter and Proto-Tect: Year Operating Profit Finance cost Profit before tax 1 R 864 000 (180 000) 684 000 2 R 880 000 (180 000) 700 000 3 R 860 000 ( (180 000) 680 000 Additional information Fighter plans to sell PT at the end of year 3 as they expect that by this stage the market will be flooded and PT will no longer generate the return on investment required by Fighter. The proceeds from the disposal is expected to be R4 600 000, excluding any working capital recoveries. R150 000 of the additional working capital will be recovered once PT is sold at the end of the third year. After accounting for the interest on the finance from the bank, Fighter's target weighted average cost of capital is 14% per annum. Assume a tax rate of 28%. Assume that Fighter Ltd has other taxable income against which any losses may be set-off. Unless otherwise stated assume that all cash flows occur at the end of the year