QUESTION 2 Cedar Ltd has details of two machines which fulfil the company's future production plans. Only one of these machine will be purchased. The "standard" model costs GHC 50,000 and the "de-luxe" GHC 88,000 payable immediately. Both machines would require the input of GHC 10,000 working capital throughout their working lives, and both machines have no expected scrap value at the end of their expected working lives of four years for the standard machine and six years for De-lux machine. The forecast pre-tax operating cash flows associated with the two machines are: Years De-Lux (Cash flow) GHC Standard Machine (cash flow) GHC 1 20,500 32,030 20 110 on ( 3/4 130.875 - - 6 35,100 The de-luxe machine has only recently been introduced to the market and has not been fully tested in operating conditions. Because of the higher risk involved, the appropriate discount rate for the de-luxe machine is believed to be 14% per year, 2% higher than the discount rate for the standard machine. The company is proposing to finance the purchase of either machine with a term loan at a fixed interest rate 11% per year Taxation at 35% is payable on operating cash flows one year in arrears, and capital allowances are available at 25% per year on a reducing balance basis. QUESTION 2 Cedar Ltd has details of two machines which fulfil the company's future production plans. Only one of these machine will be purchased. The "standard" model costs GHC 50,000 and the "de-luxe" GHC 88,000 payable immediately. Both machines would require the input of GHC 10,000 working capital throughout their working lives, and both machines have no expected scrap value at the end of their expected working lives of four years for the standard machine and six years for De-lux machine. The forecast pre-tax operating cash flows associated with the two machines are: Years De-Lux (Cash flow) GHC Standard Machine (cash flow) GHC 1 20,500 32,030 20 110 on ( 3/4 130.875 - - 6 35,100 The de-luxe machine has only recently been introduced to the market and has not been fully tested in operating conditions. Because of the higher risk involved, the appropriate discount rate for the de-luxe machine is believed to be 14% per year, 2% higher than the discount rate for the standard machine. The company is proposing to finance the purchase of either machine with a term loan at a fixed interest rate 11% per year Taxation at 35% is payable on operating cash flows one year in arrears, and capital allowances are available at 25% per year on a reducing balance basis