Question 8 (20)

Your Company considers the acquisition of a new brewing machine. The cost price of the machine is R112000 and installation cost will amount to R10000. The machine will be depreciated according to the following schedule; 50% in the first year, 30% in the second year and 20% in the third year. The machine can be sold for R65000 at the end of the third year. If the project is accepted, it requires an increase of R6500 in the net operating working capital (NOWC). Revenues of the company will not be affected however it is expected that a cost saving of R45000, before taxes, will be generated. The company pays taxes at a flat rate of 30%.

a)What is the initial cash flow? (The net cost of the machine for capital budgeting purposes),

b)What are the net operating cash flows for the three-year period; and

c)What is the terminal cash flow? (End of period cash flow).

If the required return of a project of this risk class is 12% should the project be accepted?