QUESTION 4 (25 Marks) REQUIRED 4.1 Calculate the Payback Period of Machine A (expressed in years, months and days). (3 marks) 4.2 Calculate the Net Present Value of both machines. (8 marks) 4.3 Calculate the Accounting Rate of Return on initial investment (expressed to two decimal places) of both machines. (8 marks) 4.4 Calculate the Internal Rate of Return of Machine B (expressed to two decimal places). (5 marks) 4.5 If the time value of money is taken into account, which machine should be chosen? Why? (1 mark) INFORMATION The directors of Lomax Lid intend expanding the company and they have the choice of purchasing one of two machines at the end of 2022 viz. Machine A or Machine B. Both machines have a five-year life, with only Machine A having a residual value of R300 000. The annual volume of production of each machine is estimated at 6 000 pallets (comprising 500 bricks each), which can be sold at R520 per pallet. Depreciation is calculated on the machines using the straight-line method. Machine A costs R4 800 000 excluding installation cost of R300 000. The annual variable costs are estimated at R1 100 000. A major overhaul at a cost of R200 000 is expected to be undertaken at the end of year three. Fixed costs are estimated at R500 000 (excluding depreciation). Machine B costs R5 100 000 including installation costs of R400 000. Its annual variable costs are estimated at R1 050 000. Fixed costs are the same as for Machine A. The cost of capital may be assumed to be 14%.Answer ALL questions. [100 MARKS] QUESTION 1 (25 Marks) REQUIRED Study the Statement of Financial Position as at 31 December 2021 and 2020 before answering the following questions: 1.1 Calculate the amount that would be reflected as "Working capital changes" in the Statement of Cash Flows for the year ended 31 December 2021. (4 marks) 1.2 Did the company expand its operations during 2021? Motivate your answer. (3 marks) 1.3 Is the long-term loan correctly disclosed in the Statement of Financial Position? Explain. (2 marks) 1.4 Is the company in good financial health? Motivate your answer by referring to at least SIX (6) items on the statement. Ratios are not required. (12 marks) 1.5 Calculate the ratios (expressed to two decimal places) that would reflect the following: 1.5.1 A measure of the company's ability to settle its short-term obligations within twelve months. (2 marks) 1.5.2 A measure of the amount of total assets that are financed by creditors instead of investors. (2 marks) INFORMATION Lomax Lid commenced operations at the start of 2020 manufacturing only standard-sized bricks for the building industry. It's financial position at the end of 2020 and 2021 is evident in the statements provided below: LOMAX LTD STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER: 2021 2020 R R ASSETS Non-current assets Property, plant and equipment (Cost) ? ? Accumulated depreciation 500 000) 365 000 Carrying value ? ? Investments 2 700 000 3 150 000 Current assets Inventories 193 500 29 000 Accounts receivable 1 300 000 100 000 Cash 235 000 194 500 6 500 000 6 680 000 EQUITY AND LIABILITIES Equity Share capital 745 000 630 000 Retained earnings 2 380 000 4 450 000 Shareholders' equity 3 125 000 5 080 000 Non-current liabilities Long-term loan 2 580 000 880 000 Current liabilities Accounts payable 95 000 120 000 Other current liabilities 700 000 600 000 6 500 000 6 680 000Note 1 . There was no significant change in the sales figures over the two-year period. 2 . R240 000 of the long-term loan is expected to be repaid during 2022. QUESTION 2 (25 Marks) REQUIRED Answer each of the following questions independently. As far as possible use the expanded contribution margin model to present your answers. 2.1 Calculate the total Contribution Margin and Operating Profit (Loss) if all 30 000 pallets are Sold. (4 marks) 2.2 Calculate the margin of safety (as a percentage) for 2022. (4 marks) 2.3 Use the contribution margin ratio to calculate the sales value required to achieve an operating profit of R6 000 000. (4 marks) 2.4 Suppose an additional R300 000 is spent on advertising in order to increase the sales by 3 000 pallets. Calculate the number of pallets that need to be produced and sold to break even. (4 marks) 2.5 Suppose the management team of Lomax Lid is considering a R30 per pallet decrease in the selling price with the expectation that this would increase the sales volume by 10%. Is this a good idea? Motivate your answer with the relevant calculations. (4 marks) 2.6 Determine the selling price per pallet that will enable Lomax Lid to achieve an operating profit of R3 192 000. (5 marks) INFORMATION Lomax Ltd sells the bricks that it produces in pallets, with each pallet containing 500 bricks. The following budgeted information for 2022 is available: The number of pallets that are expected to be produced and sold during 2022 is 30 000. Each pallet is expected to be sold for R500. The direct materials cost per brick is RO.14 whilst the direct labour cost per brick is RO.08 RO.04 per brick goes towards variable manufacturing overheads. Fixed manufacturing overheads are expected to total R1 500 000. Annual advertising and salespersons salaries are estimated at R2 160 000. The salespersons are also entitled to a sales commission of 6%. Fixed administration costs are expected to be R3 840 000 whilst other administration costs are estimated at R40 per pallet sold. The management is examining various proposals to assist in decision-making for 2022.QUESTION 3 {25 Marks} REQUIRED Use the information given below to answer the following questions: 3.1 Prepare the Cash BudgetforJanuary, February and March 2022. [22 marks] 3.2 Comment on the cash position of the company for the budgeted period. [3 marks] INFORMATION 1 . Some of the items in the Statement of Financial Position as at 31 December 2021 of Lomax Ltd are as follows: Current assets R M Bank 235 000 Current liabilities Accounts payable [for material purchases} 95 000 Other current liabilities T00 0110 2. The following forecasts have been made by Lomax Ltd forthe rst three months of 2022 forthe bricks that it produces which are sold in pallets [with each pallet comprising 500 bricks]: 2.1 The sales manager anticipates the following credit sales: January February March 2 150 pallets 2 340 pallets 2 250 pallets The bricks are sold at a constant price of R500 per pallet. Ten percent {10%) of the sales are for cash and the rest is on credit. Debtors pay their accounts one month after the sale is made. 2.2 The costs of produ ction include the following: Direct materials R014 per brick Direct labour R008 per brick Valiable manufacturing overheads R004 per brick 2.3 The purchases manager expects to purchase materials to manufacture the following number of pallets each month: January February March 2 400 2 600 2 500 No inventories of materials are held at the end of each month. 2.4 2.5 2.5 2.7 2.3 2.9 2.10 2.11 Sixty perwnt (50%] ofthe materials are purchased for cash in orderto take advantage of a 5% discount and the balance is purchased on credit. Creditors are paid in the month after the purchase. Direct labour costs are incurred in line with production and will be paid dunng the month in which they are incurred. Valiable manufacturing overheads are payable in the month in which they are incurred. Fixed manufacturing and non-manufacturing costs are expected to amount to R550 000 per month. excluding depreciation of RTE gm per month. These costs are payable in the month in which they are incurred. The sales commission of 5% is payable in the month in which it is incu n'ed. Additional administration costs of R40 per unit sold are payable in the month in which they are incurred. 2.10 The company will invest 10% of the total sales for March in a notice deposit account on 31 March 2022. The balance of the current liabilities as at 31 December 2021 will be settled during January 2022