QUESTION 2 (10 Marks) INFORMATION Medico Limited intends investing in a project during March 2021 The project is expected to cost R2 500 000 with a five year useful life, and no residual value The annual volume of production for the project is estimated at 150 000 units, which can be sold for cash at R12 per unit Depreciation is expected to be R500 000 per year The following information is available to determine the budget requirements of Medico Limited for January 2021 1 Projected sales of Product Med for January and February 2021 January February 15 000 units at R30 each 12 000 units at R32 each 2 The policy of Medico Limited is to maintain a closing inventory equal to 40 of the budgeted sales of the following month 3 Two (2) labour hours are required to produce one unit of Product Med and the rate per hour is R10 4 Overheads are projected at a rate of R3 per direct labour hour 5 The estimated total production costs per unit (including the costs above) are R40 for January 2021 and R38 for December 2020 Annual cash operating costs are as follows Variable costs R225 000 Fixed costs R750 000 REQUIRED Use the information provided above to calculate the following 2 1 Net Present Value (3 marks 2 2 Accounting Rate of Return on average investment (answer expressed to two decimal places) (3 marks) 2 3 Internal Rate of Return, if the net cash flows are R720 000 per year for five years (answer expressed to two decimal places) (4 marks Medico Limited is in the process of planning for the 2021 financial year The company manufactures only one product, viz Product Med Your assistance is required in the preparation of budgets and undertaking other calculations

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QUESTION 2 (10 Marks) INFORMATION Medico Limited intends investing in a project during March 2021. The project is expected to cost R2 500 000 with

QUESTION 2

(10 Marks)

INFORMATION

Medico Limited intends investing in a project during March 2021.

The project is expected to cost R2 500 000 with a five-year useful life, and no residual value.

The annual volume of production for the project is estimated at 150 000 units, which can be sold for cash at R12 per unit. Depreciation is expected to be R500 000 per year.

The following information is available to determine the budget requirements of Medico Limited for January 2021:
1.	Projected sales of Product Med for January and February 2021:
January	February
15 000 units at R30 each	12 000 units at R32 each

2.	The policy of Medico Limited is to maintain a closing inventory equal to 40% of the budgeted sales of the following month.

3.	Two (2) labour hours are required to produce one unit of Product Med and the rate per hour is R10.
4.	Overheads are projected at a rate of R3 per direct labour hour.
5.	The estimated total production costs per unit (including the costs above) are R40 for January 2021 and R38 for December 2020.

Annual cash operating costs are as follows:

Variable costs

R225 000

Fixed costs

R750 000

REQUIRED
Use the information provided above to calculate the following:
2.1	Net Present Value	(3 marks

2.2	Accounting Rate of Return on average investment (answer expressed to two decimal places)	(3 marks)
2.3	Internal Rate of Return, if the net cash flows are R720 000 per year for five years (answer expressed to two decimal places).	(4 marks

Medico Limited is in the process of planning for the 2021 financial year. The company manufactures only one product, viz. Product Med. Your assistance is required in the preparation of budgets and undertaking other calculations.