QUESTION 4 (20 Marks) 4.1 Cobble Furnishers is considering extending credit to some customers who may be at risk of defaulting in payment. Sales will increase by R450 000 if credit is granted to these customers. From the new accounts receivable generated, 10% is expected to be uncollectible. Additional collection costs will be 4% of sales, and the production and selling costs will be 70% of sales. The firm is in the 30% tax bracket. REQUIRED: 4.1.1 Calculate the incremental profit/loss after tax. (7 marks) 4.1.2 Determine the incremental return on sales if these new credit customers are accepted. (3 marks) 4.1.3 Briefly explain any 3 methods used to collect overdue accounts. (3 marks) 4.2 Wema Ltd, a supplier of casual shoes stock records are presented in the table below: Closing inventory of 80 units at R150 each on 31 December 2016 60 units at R160 each, was purchased on 30 May 2017 55 units at R170 each, was purchased on 31 October 2017 During the year (Jan-Dec 2017) 130 pairs were sold at R205 each REQUIRED: Calculate the value of closing inventory as at 31 December 2017 and gross profit for the year ended 31 December 2017 using the first in first out (FIFO) method. (7 marks) 02 5 QUESTION 5 (20 Marks) 5.1 Eaton Enterprises has the option to invest in machinery in projects A and B but finance is only available to invest in one of them. You are given the following projected data: Project A (R) Project B (R) Initial cost 450 000 450 000 Net profit: Year 1 Year 2 Year 3 Year 4 Year 5 36 000 75 000 102 000 129 000 81 000 69 000 69 000 69 000 69 000 69 000 Additional information 1. Cash flows will comprise of net profit plus depreciation. 2. Project A machinery will be disposed of at the end of year 5 with a scrap value of R60 000. 3. Project B machinery will be disposed of at the end of year 5 with a nil scrap value. 4. Depreciation is calculated on a straight-line basis. 5. The discount rate to be used by the company is 12%. REQUIRED Use the information provided by Eaton Enterprises to answer the following questions: 5.1.1 Calculate the payback period for project B. (Answer must be expressed in years and months) (3 marks) 5.1.2 Calculate the accounting rate of return (on average investment) for project A. (Answer must be expressed to two decimal places) (4 marks) 5.1.3 Calculate the net present value of each project. (Round off amounts to the nearest Rand.) (6 marks) 5.1.4 Using your answers from question 5.1.3, which project should be chosen? Why? (2 marks) 5.2 A machine with a purchase price of R420 000 is estimated to eliminate manual operations and save the company R129 000 cash per year. The machine will last 5 years and have no residual value at the end of its life. Use a discount rate above 15%. REQUIRED Calculate the internal rate of return. (Use a discount rate above 15%) (5 marks) END OF PAPER