Question $4[15$ Marks$]$

A division of Malema Sports Ltd $($MSL$)$ manufactures wooden hockey sticks for the lower end

of the market. All available market feedback indicates, since the Covid$-19$ lockdown, that this

market has been in decline as sport is not a compulsory activity and hockey is not a mainline

sport. MSL has therefore embarked on a research project to develop a hockey stick made of

composite materials including carbon fibres, fibreglass, and polyvinylchloride foam. Research

costs incurred to date amount to R$860000.$ The project has temporarily been put on hold as

one of the directors, Mr Wiseman Floyida, has asked whether MSL should not rather negotiate

with an international manufacturer to be their African agent.

MSL$$s marketing manager has forecast the following annual sales for a new composite hockey

stick, especially if sold at a competitive price:

Sales Volume Probability

$50000\mathrm{.}15$

$80000\mathrm{.}40$

$120000\mathrm{.}35$

$170000\mathrm{.}10$

MBA$5903$

OCTOBER$/$NOVEMBER $2022$ EXAMINATION

$6$

Whether the new hockey stick is manufactured or imported and distributed, the machinery and

equipment used in the current manufacturing process will not be useable for the new hockey

stick.

Required:

$4\mathrm{.}1.$ Calculate the standard deviation of the new composite hockey stocks$$ expected sales

and indicate clearly whether this is a high or low risk project. $(7)$

$4\mathrm{.}2.$ Briefly discuss the coefficient of variation as a relative measure of variability of risk and

explain why it is a better measure than the standard deviation. $(3)$

$4\mathrm{.}3.$ In measuring Malema Sports Ltd$$s financial performance, recommend and motivate a

course of action regarding the expenditure on the new hockey stick.

$(2)$

$4\mathrm{.}4.$ Briefly list the issues to be considered in the discontinuance of the existing wooden

hockey stick. $(3)$

Question $5[20$ Marks$]$

Trax Ltd is a manufacturer of high$-$quality plastic products made to demanding specifications,

which makes replication of design difficult. The company relies on digital marketing

programmes to ensure that its models are constantly updated, and demand follows new

designs. This allows maintaining margins in a highly competitive environment.

Trax is considering replacing its outdated equipment with efficient modern models, which will

enable the company to manufacture a new line of products. The new equipment will cost R$8\mathrm{.}5$

million and the company will qualify for a depreciation deduction. The equipment is expected

also to reduce the cost of producing the existing product line by R$180000$ per annum beforetax for another four years, when the life of this product line is expected to end.

The expected residual value of the new equipment is R$2\mathrm{.}1$ million in four years$$ time. The new

line of products will result in a selling price of R$85$ per unit and a variable cost of R$38$ per unit.

The product line is expected to result in a constant demand of $70000$ units per annum of four

years.

The current market value of the present equipment is R$410000.$ The equipment is expected

to have a residual value of zero in four years$$ time.

The investment in net working capital, which will occur at the beginning of the year, will amount

to R$475000,$ and this working capital balance will be recovered at the end year $4.$ The marginal

tax rate of $27\%$ and the company has a cost of capital of $12\%.$

Required:

$5\mathrm{.}1.$ Determine the project$$s net present value $($NPV$).$ Ignore the impact of tax

depreciation$/$allowance on both old and new equipment in the calculations. $(12)$

$5\mathrm{.}2.$ Determine the project$$s payback. $(3)$

$5\mathrm{.}3.$ Despite the wide use of the payback method in practice, it has disadvantages. Briefly

discuss these. $(2)$

$5\mathrm{.}4.$ Recommend to management whether to proceed with the replacement of the new

equipment.