QUESTION $2(20$ Marks$)$

Using the information provided below, answer the following questions.

INFORMATION

Bettencourt Enterprises Limited $($BEL$)$ is a South African manufacturing firm. As the management accountant at BEL, you

are currently appraising the purchase of a new machine, costing R$20$ million, to replace an existing machine which is near

the end of its useful life, and which has no resale value. The forecast levels of production and sales for the goods to be

produced by the new machine, which has a maximum capacity of $600000$ units per year, are as follows:

Year $1234$

Sales volume $($units$/$year$)400000500000600000600000$

The new machine will incur fixed annual maintenance costs of R$1000000$ per year. Variable costs are expected to be

R$30\mathrm{.}00$ per unit and selling price is expected to be R$50\mathrm{.}00$ per unit. These costs and selling price estimates are in current

price terms and are projected to grow at the inflationary rate of $5\%$ per annum.

It is expected that the new machine will need replacing in four years$$ time due to advances in technology. The resale value

of the new machine is expected to be R$4000000$ at that time, in future value terms.

The purchase price of the new machine is payable at the start of the first year of the four$-$year life of the machine.

Working capital investment of R$2000000$ will already exist at the start of the four$-$year period, due to the operation of the

existing machine. This investment in working capital is expected to increase in nominal terms in line with the general rate of

inflation.

BEL pays corporate tax at an annual rate of $30\%$ and can claim $25\%$ reducing balance tax$-$allowable depreciation on the

purchase price of the new machine. The company has a nominal after$-$tax weighted average cost of capital of $11\%.$

Required:

Using the nominal terms net present value approach, evaluate whether purchasing the new machine is financially

acceptable. Use a table to show the final analysis.