QUESTION 1 You have been appointed as a financial consultant by the directors of Mahlasedi engineering. The company financial director provided you with the below financial assessment of the company. 2012 2013 1,5601 2014 1,560 2015 1,5601 (R000's) 2016 1,560 (600)| (150) (350) (600) (150) (350) (600) (150) (350) (600) (150) (350) (700) (90) (90) (90) (90) Sales revenue Less: Direct Costs Overheads Depreciation Working capital Interest on working capital R&D expenses written off Total costs Profit/Loss Less: Tax at 28% Net profit/loss (100) (100) (100) (700) (700) (1,290) 270) (75.6) 194.4 (1,290 270 (75.6) 194.41 (1,290) 270 (75.6) 194.41 (1,190) 370 (103.6) 266.41 (700) Average profit/(loss) R37,400 Accounting Rate of Return = 3.8% Average investment R980,000 After evaluating the above, it is assumed you made some further enquiries and obtained the following information: Figures in the assessment above relate to the company's financial year, which ends on 31 March, starting with the year to 31 March 2013. All of the above estimates are at prices for the year to 31 March 2013. The rate of inflation is expected to be 3% per annum for the foreseeable future. New equipment costing R1, 600,000 will be purchased on 31 March 2013, and is expected to have a scrap value of R200,000, at the prices then prevailing, when it is disposed of just before the end of the fourth year. The cost of investment also includes the R80, 000 book value of an office building in which the equipment will be housed. The current market value of the office building is estimated as R100,000, and it is expected to be worth R70, 000 (at today's prices) in four years' time. No further capital allowances are expected on the building. Tax relief will be given on new equipment expenditure, with writing down allowances calculated on a reducing balance basis at 25% per annum. The balancing allowance or charge in the final year will be equal to the difference between the written down value at the start of the year and the sale proceeds. The corporation tax rate is 28%, and tax is payable in the year after profits are made. Mahlasedi engineering expects to have taxable profits after deducting any allowances arising from this project. The research and development costs of R300,000 were incurred during 2010 - 2011. Overheads have been estimated as a percentage of direct labour costs, which is the company's normal practice. An independent assessment suggests that the incremental overheads attributable to this project are likely to amount to R90,000 a year. Service sales income from existing business is not expected to be affected by the new project. The company's weighted average after-tax cost of capital is 13%. Required: 1.1 As an initial part of the review that you will be doing, and using the information provided by the financial director, supplemented and amended as appropriate by the information that you have collected, calculate the net present value and payback period of the proposed project. 1.2 Explain in detail how you arrived at your calculation, as well as the assumptions that you have made or used, for each item of your analysis. Note: All answers must be typed out and workings must be shown QUESTION 1 You have been appointed as a financial consultant by the directors of Mahlasedi engineering. The company financial director provided you with the below financial assessment of the company. 2012 2013 1,5601 2014 1,560 2015 1,5601 (R000's) 2016 1,560 (600)| (150) (350) (600) (150) (350) (600) (150) (350) (600) (150) (350) (700) (90) (90) (90) (90) Sales revenue Less: Direct Costs Overheads Depreciation Working capital Interest on working capital R&D expenses written off Total costs Profit/Loss Less: Tax at 28% Net profit/loss (100) (100) (100) (700) (700) (1,290) 270) (75.6) 194.4 (1,290 270 (75.6) 194.41 (1,290) 270 (75.6) 194.41 (1,190) 370 (103.6) 266.41 (700) Average profit/(loss) R37,400 Accounting Rate of Return = 3.8% Average investment R980,000 After evaluating the above, it is assumed you made some further enquiries and obtained the following information: Figures in the assessment above relate to the company's financial year, which ends on 31 March, starting with the year to 31 March 2013. All of the above estimates are at prices for the year to 31 March 2013. The rate of inflation is expected to be 3% per annum for the foreseeable future. New equipment costing R1, 600,000 will be purchased on 31 March 2013, and is expected to have a scrap value of R200,000, at the prices then prevailing, when it is disposed of just before the end of the fourth year. The cost of investment also includes the R80, 000 book value of an office building in which the equipment will be housed. The current market value of the office building is estimated as R100,000, and it is expected to be worth R70, 000 (at today's prices) in four years' time. No further capital allowances are expected on the building. Tax relief will be given on new equipment expenditure, with writing down allowances calculated on a reducing balance basis at 25% per annum. The balancing allowance or charge in the final year will be equal to the difference between the written down value at the start of the year and the sale proceeds. The corporation tax rate is 28%, and tax is payable in the year after profits are made. Mahlasedi engineering expects to have taxable profits after deducting any allowances arising from this project. The research and development costs of R300,000 were incurred during 2010 - 2011. Overheads have been estimated as a percentage of direct labour costs, which is the company's normal practice. An independent assessment suggests that the incremental overheads attributable to this project are likely to amount to R90,000 a year. Service sales income from existing business is not expected to be affected by the new project. The company's weighted average after-tax cost of capital is 13%. Required: 1.1 As an initial part of the review that you will be doing, and using the information provided by the financial director, supplemented and amended as appropriate by the information that you have collected, calculate the net present value and payback period of the proposed project. 1.2 Explain in detail how you arrived at your calculation, as well as the assumptions that you have made or used, for each item of your analysis. Note: All answers must be typed out and workings must be shown