Question
QUESTION 2 Harmony Gold Mining Company is considering the replacement of mining machinery that has reached the end of its useful life. The new machinery
QUESTION 2
Harmony Gold Mining Company is considering the replacement of mining machinery that has reached the end of its useful life. The new machinery is expected to cost R2 300 000. This amount excludes installation costs of R110 000 and transport costs of R80 000. The new machine will be depreciated on a straight line basis over its five-year useful life. Working capital will increase by R460 000 as a result of the new investment.
The carrying value of the old machinery is R0, but it is expected to be sold for R120 000. Additional removal costs of R30 000 will be incurred. The company pays tax at a rate of 28%. Net working capital on the old equipment of R320 000 is expected to be recovered.
The following increases in net operating profit after taxes (NOPAT) are expected over the useful life of the new machine:
Year Increase in NOPAT R
1 480 000
2 520 000
3 570 000
4 610 000
5 630 000
After five years the old machinery will have no salvage value but will have the same removal costs of R30 000. The new machinery is expected to have a carrying/book value of R0 at the end of its useful life and is expected to be sold for R160 000. The cost of removal of the new machine will be R40 000. The net working capital is expected to be recovered at the end of year 5.
2.1 Calculate the initial investment. (8 marks)
2.2 Calculate the operating cash flows over the five years. (5 marks)
2.3 Calculate the terminal cash flow. (7 marks)
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