QUESTION 4 25 MARK

4.1. An investment of R10 000 at an interest rate of 9% per annum compounded quarterly was made 8 years ago. What amount invested 4 years ago at 12% compounded annually would yield the same maturity value (final value)? (6 marks)

4.2. Schalking Ltd is a logistic company operating in the Southern African market. In order to replace a truck in eight years time, a business sets up a sinking fund, paying R1 800 into the fund each month. Payments start in one months time. Interest of 9.4% p.a. is compounded monthly. How much money will have accumulated in the fund immediately after the last payment has been made at the end of the eight years? And will this be enough to acquire the truck that is currently costing R250 000? (7 marks)

4.3. Techno Serve Ltd has noticed a significant decrease in the profitability of its line of portable CD players. The production manager believes that the source of the trouble is an existing, inefficient equipment used to manufacture the product. The issue raised, therefore, is whether Techno Serve Ltd should (1) buy new equipment at a cost of R120 000 or (2) continue using its present equipment. It is unlikely that demand for these portable CD players will extend beyond a three- year time horizon and the new equipment can be sold for R45 000 at that time. Techno Serve Ltd estimates that both the new equipment and the existing equipment will have a remaining useful life of five years and no salvage value. The new equipment is expected to produce annual cash savings in manufacturing costs of R34 000, before taking into consideration depreciation. However, management does not believe that the use of the new equipment will have any effect on sales volume. Thus, its decision rests entirely on the magnitude of the potential cost savings. The existing equipment can be sold for R20 000 if it is replaced. The company requires a minimum return of 12 percent on all investments in plant assets.

4.3.1. Compute the net present value of the new machine. (8 marks)

4.3.2. Compute the internal rate of return of the investment in the new machine. (2 marks)

4.3.3. Recommend if Techno Serve Ltd should buy the new equipment or continue using its

existing machine.

(2 marks)