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QUESTION 2 ( 2 0 Marks ) Using the information provided below, answer the following questions. INFORMATION Bettencourt Enterprises Limited ( BEL ) is a
QUESTION 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 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 units per year, are as follows: Year Sales volume unitsyear The new machine will incur fixed annual maintenance costs of R per year. Variable costs are expected to be R per unit and selling price is expected to be R per unit. These costs and selling price estimates are in current price terms and are projected to grow at the inflationary rate of 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 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 fouryear life of the machine. Working capital investment of R will already exist at the start of the fouryear 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 and can claim reducing balance taxallowable depreciation on the purchase price of the new machine. The company has a nominal aftertax weighted average cost of capital of 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.
QUESTION 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 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 units per year, are as follows:
Year
Sales volume unitsyear
The new machine will incur fixed annual maintenance costs of R per year. Variable costs are expected to be
R per unit and selling price is expected to be R per unit. These costs and selling price estimates are in current
price terms and are projected to grow at the inflationary rate of 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 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 fouryear life of the machine.
Working capital investment of R will already exist at the start of the fouryear 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 and can claim reducing balance taxallowable depreciation on the
purchase price of the new machine. The company has a nominal aftertax weighted average cost of capital of
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.
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