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Question 1 DTX Co specialises in the production of PVC windows and doors. It is considering whether to invest in a new machine with a
Question 1 DTX Co specialises in the production of PVC windows and doors. It is considering whether to invest in a new machine with a capital cost of R6 million. The machine would have an expected life of five years, at the end of which it would be sold for R600,000. If the new machine were to be purchased, the existing machine could be either sold immediately for R250,000, or hired out to another company at a rental amount of R120,000 per annum, payable at the end of each year, for three years. If the machine is hired out rather than sold, it will have no residual value at the end of the three year period. The existing machine generates annual revenues of R10 million and its running costs are R1,000,000 per annum. If the new machine is purchased, revenues are expected to increase by 20%. In addition to this, however, machine running costs are also expected to increase. Estimates have shown that, in the first year with the new machine, running costs will increase by 15%. In every subsequent year thereafter, running costs will continue to be 15% higher than each previous year's costs. The company's cost of capital is 10%. All workings should be in R000. a) Using the discount tables provided, calculate the net present value of the proposed investment, over five years and state with reasons whether the machine should be purchased. b) Calculate the internal rate of return of the investment. Discount factor table extracts Annuity factor table extracts Time12345Factor10%0.9091.7362.4873.1703.791
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