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QUESTION FOUR Springboks Limited is looking to expand its operations and increase its market share in the cell phone industry. To achieve this, they are
QUESTION FOUR
Springboks Limited is looking to expand its operations and increase its market share in the cell phone industry. To achieve
this, they are looking to increase its current productive capacity of cell phones a year by at least for each of
the next years. It is considering two cell phone making machines and is unsure which to purchase:
Cell Phone Machine ABC:
Cell Phone Machine ABC can be imported at a landed purchase cost of R and a further R transport and
installation costs will have to be incurred to get it ready for production. This machine is expected to last years after which
time it cannot be sold. Net cash flow from the sale of the additional production is expected to be R R
R R and R respectively over the year lifespan of the machine. This machine will enable
Springboks Limited to achieve a increase in productive capacity.
Cell Phone Machine XYZ:
Cell Phone Machine XYZ can be purchased locally for R and will also have a useful life of years. It will not have
any resale value at the end of the years and will be disposed of Net cash inflows from additional production will amount to
R per annum for each of the five years. This machine will enable Springboks Limited to achieve a increase in
productive capacity.
Additional information:
Springboks Limited requires a return on capital of for all investments made. The depreciation policy is to
depreciate all non current assets on a straightline basis. Assume that all cash flows occur at the end of each financial
year except for the initial investment which occurs in period
The capital expenditure committee has indicated that R is available for this capital expenditure.
In terms of the company's capital expenditure policy, only projects with a payback period of less than four years are
accepted.
REQUIRED
You are the financial manager at Springboks Limited and have been asked by the Board of Directors to advise them on
which machines to authorise for purchase. Using appropriate capital budgeting techniques compile a report to the Board of
Directors detailing the option that should be chosen.
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