QUESTION? (25 marks) This question consists of three (3) independent parts, Part A, Part B and Part C. kinds of Sportsman-equip Limited is a specialist manufacturer of a variety of balls for differen sports such as netball, soccer and rugby. Sportsman-equip Limited are currenty d existing cutting and stitching machine in the manufacturing of soccer balls. As a pre FIFA world-cup of 2022, to be hosted by Qatar, an improved cutting and stitching i the manufacturing of soccer balls was launched at an international fair in Qatar cutting and stitching machine is expected to have a production capacity that is 15% more that of the existing machine for the period of the useful life of the new improved machine. The following information regarding the existing and the new improved machines is avaa to the for relude roved available Existing machine New improved machine 1 800 000 35 000 1320 000 Cost price Cost to attend the international fair in Qatar Current Book value Current Tax value Current Market value Realisable value (end of useful life) Useful life 792 000 660 000 600 000 Nil 500 000 3 years Initial - Remaining Annual production: 5 years 3 years Maximum production (batches) Maximum sales (batches) 5 600 5 600 6 440 6 440 The following expected economic conditions, estimated costs and additional information should be taken into account Variable Fixed cost per Selling price per Direct material manufacturing year Years batch cost per batch cost per batch (excluding depreciation) Year Year Year 6 000 6 600 7 260 2 000 2 200 2 420 2 520 2 772 3 049 850 000 901 000 955 000 MAC2602/101/3/2019 QUESTION 2 (CONTINUED Additional information: The annual production and sales for the existing as well as the improved machine will be limited to the maximum annual production capacity (batches). The economic climate is such that the maximum annual production is expected to be sold. 1 2. Annual wear and tear allowance for taxation purposes are calculated according to the 3. Depreciation is calculated over the useful life of the asset and the realisable value should straight line method at 25% per annumnthe cost of the asset. be taken into account. The present rate of company taxation is 28% and value added tax (VAT) can be ignored Management requires a return of 16% after tax on capital projects of this nature Assume that all cash flows, except initial capital outlays, which occur at the beginning of the year, occur at the end of the year concerned The net present value (NPV) of the existing machine was already correctly calculated as R12 733 375 4. 5. 6. 7. 1 p9 REQUIRED: a) Use the Net Present Value method to determine the net present value (NPV) of the new improved machine. Show clearly how you calculated the net present values of the cash flows after tax for each year and the NPV by using factors from the tables provided Execute your calculations to the nearest rand, and round off all factors to three decimal places.] (15) Based on the Net Present values, advise whether the existing machine should be replaced by the improved machine or not. Motivate your recommendation b) riefly give the definition or explanation of what the Payback method entails. 1 0 Calculate the payback period for the new improved machine. Supply the formula and use the profitability index (PlI) method to calculate the Pl of the new improved machine. Recommend whether the new improved machine should be bought, based on the PI ratio that you calculated (4) 133 [25)