REQUIRED:

1.1. Assist Convert Ltd by calculating the Net Present Value of the current infrastructure.

1.2. Advise Convert Ltd whether the entity should finance the upgraded infrastructure by entering into a loan or lease agreement. Support the advice by determining the Net Present Cost of both financing options separately.

Convert Ltd ("Convert") is a software developing entity listed in the technological sector of the Johannesburg Stock Exchange ("JSE"). Convert develops various software programs - all with the intention to streamline and assist entities' customers in achieving higher efficiencies in their respective businesses. Possible upgraded infrastructure There is a current possibility to upgrade a portion of Convert's internal infrastructure at R17640000 and sell off the previous infrastructure. This section of the infrastructure is responsible for the development and production of one of Convert's software programs called "Game Changer". Game Changer is in high demand amongst customers and all Game Changers produced each year are sold out. Game Changer packages (referred to as a "unit") are sold to customers for R26 000 each and Convert's current infrastructure has the ability to produce 290 Game Changer packages per year. Convert obtained the services of external industrial engineers to determine some of the consequences of proceeding with the upgrade in the infrastructure. Their feedback report to Convert indicated that although the variable cost of producing each Game Changer unit will decrease from R10 200 to R9 978, the allocated fixed costs (which currently includes depreciation of R535 000 per annum) will remain unchanged at R9 100 per unit. The infrastructure's useful life is also not expected to be affected by the upgrade and will remain useful for four more years at which point the upgraded infrastructure will be sold off for a scrap value of R14 300 . While the current infrastructure only qualifies for a 20% wear-and-tear deduction per annum according to section 12C of the Income Tax Act, the new infrastructure will qualify for a wear-and-tear deduction of 40% of the cost in the first year and 20% of the cost in each of the remaining years thereafter. This cause the current infrastructure's wearand-tear deduction to be of the same value as the accounting depreciation each year. Financing alternative 1: Loan Convert has the option of obtaining a loan from Greenwich Bank to finance the upgraded infrastructure's purchase. Greenwich Bank has indicated that it will provide such a loan to Convert under the loan terms of 10.2% quarterly compounding interest rate applicable and equal instalments being paid annually in arrears over four years. Financing alternative 2: Lease There is also an option available to rather lease the upgraded infrastructure from Provider Ltd. over the four-year period for R3 900000 per annum payable annually in advance. Additional information: - Convert's weighted average cost of capital is 11.26%. - Assume that the interest rate according to the Greenwich Bank loan is reflective of Convert's general cost of debt after tax. - The South African Income Tax rate applicable to companies is 27%