Question 2

Foster Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of trenching machines (to replace an existing manual system).

The outlay required is R35 000 000. The NC equipment will last 5 years with no expected salvage value. The expected incremental after-tax cash flows (cash flows of the NC equipment minus cash flows of the old equipment) associated with the project are as follows:

Year	Cash Benefit	Cash Expense
	R	R
1	39 000 000	30 000 000
2	39 000 000	30 000 000
3	39 000 000	30 000 000
4	39 000 000	30 000 000
5	39 000 000	30 000 000

Foster has a cost of capital equal to 10%. The above cash flows are expressed without any consideration of inflation.

Required:

2.1 Calculate the payback period. (2)

2.2 Calculate the net present value of the proposed project. (4)

2.3 Calculate the internal rate of return of the proposed project. (4)