Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

QUESTION 4 (20 marks) Tucituc (Proprietary) Limited is a car manufacturing company that specialises in contemporary battery operated cars. They realised that their current equipment

image text in transcribed
QUESTION 4 (20 marks) Tucituc (Proprietary) Limited is a car manufacturing company that specialises in contemporary battery operated cars. They realised that their current equipment does not comply with new safety and security regulations. They have to purchase new equipment for their production process. They have gathered information on two possible options, equipment Easy and equipment Peasy. The following information regarding the equipment was gathered: Equipment Easy R Cost price 160 000 195 000 Working capital required 15 000 15 000 Net operating income before tax" (year 1) 21 552 23 560 Net operating income before tax" (year 2) 21 552 29 200 Net operating income before tax" (year 3) 23 100 29 200 Net operating income before tax" (year 4) 24 220 30 100 Realisable value at end of useful life-current 7 500 1 300 USBfUI life 4 years 4 years Additional information: 1. Taxation: ' Normal income tax rate - 28%. ' Wear and tear allowances are calculated on the straight-line method at 20% per annum, on the cost of the asset. Depreciation is calculated on a straight-line basis over the useful life of the equipment. *Depreciation is included in the net operating income before tax. Management requires a 13% after-taxation return on all capital investments. Assume that all cash ows occur at the end of each year, except the initial capital outtays, which occur at the beginning of year 1. The net present value (N PV) of Easy's cash ows has already been correctly calculated as R7 679 at 12% and -R4 085 at 15% and the IRR as 13,96% p.a. P'PP'N 9' REQUIRED: a) Calculate the IRR of equipment Easy, using the information provided to calculate the net present value at 12% and 15% respectively. Then interpolate between 12% and 15%. [Work to three decimal places and round off all other calculations to the nearest rand.] (19) b) Advise management which of equipment Easy or Peasy should be purchased and motivate your recommendation. (1 )

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Applications Of Accounting Information Systems

Authors: David M. Shapiro

1st Edition

194999158X, 9781949991581

More Books

Students also viewed these Accounting questions