QUESTION $2(20$ Marks$)$

INFORMATION

Adco Limited plans to purchase a new machine that is more technically advanced to replace its current machine. The new machine will cost R$1100000.$ A further R$100000$ will have to be paid for transport and installation of the machine to its factory in Polokwane. The new machine will have a six$-$year useful life and will be written down to a NIL book value over the six years. The new machine will result in a change in working capital of R$200000.$

The old machine was acquired five years ago for R$800000$ and was written down to a NIL book value over the five years. The old machine can be sold for R$80000.$ An amount of R$8000$ will have to be paid to remove the old machine from its factory. When the old machine was acquired five years ago it resulted in an increase in working capital of R$120000.$

The new machine is expected to result in the following earnings before interest, taxation and depreciation $($EBITDA$)$:

Year

Earnings before interest, taxation and depreciation $($EBITDA$)$

$1$

$520000$

$2$

$550000$

$3$

$610000$

$4$

$625000$

$5$

$640000$

$6$

$650000$

In six years$$ time the new machine will have a NIL book value but can be sold for R$50000.$ An amount of R$10000$ will have to be paid for removal costs for the new machine. In six years$$ time the old machine will have no resale value but R$20000$ will have to be paid for removal costs.

The taxation rate for the company is $27\%.$

The company depreciates assets on a straight$-$line basis.

REQUIRED:

$2\mathrm{.}1$ Calculate the total initial investment. $(7$ marks$)$