QUESTION $2$

Leeds Limited is looking to expand its operations and increase its market share in the cell phone industry. To achieve this,

they are looking to increase its current productive capacity of $100000$ cell phones a year by at least $6\%$ for each of the

next $5$ years. It is considering two cell phone making machines and is unsure which to purchase:

Cell Phone Machine ABC:

Cell Phone Machine ABC can be imported at a landed purchase cost of R$160000$ and a further R$20000$ transport and

installation costs will have to be incurred to get it ready for production. This machine is expected to last $5$ years after which

it will be sold at its scrap value of R$20000.$ Net cash flow from the sale of the additional production is expected to be

$R58000,R63000,R68000,R72000$ and $R51000$ respectively over the $5-$year lifespan of the machine. This machine

will enable Leeds Limited to achieve a $4\%$ increase in productive capacity.

Cell Phone Machine XYZ:

Cell Phone Machine XYZ can be purchased locally for R$190000$ and will also have a useful life of $5$ years. It will not have

any resale value at the end of the $5$ years and will be disposed of$.$ Net cash inflows from additional production will amount

to R$62000$ per annum for each of the five years. This machine will enable Leeds Limited to achieve a $2\%$ increase in

productive capacity.

Additional information:

Leeds Limited requires a return on capital of $12\%$ for all investments made. The depreciation policy is to

depreciate all non$-$current assets on a straight$-$line basis. Assume that all cash flows occur at the end of each

financial year except for the initial investment which occurs in period $0.$

The capital expenditure committee has indicated that R$370000$ is available for this capital expenditure. In terms

of the company's capital expenditure policy, only projects with a payback period of less than four years are

accepted.

REQUIRED

You are the financial manager at Leeds Limited and have been asked by the Board of Directors to advise them on which

machine$/$s to authorise for purchase. Using appropriate capital budgeting techniques which must include the Payback

Period, Net Present Value and Accounting Rate of Return results to compile a report to the Board of Directors detailing

the option that should be chosen.