Sand$-$Hawks Pty $($Ltd$)($Sand$-$Hawks$)$ supplies different types of sand, concrete and ready$-$mixed

cement to the construction industry in and around the Polokwane area. Sand$-$Hawks and other industrial

entities in the area are constantly in the news for their above industry$-$average pollution emissions. In

anticipation of the upturn of the construction industry, the entity is considering replacing its existing mixer

and invest in a new mixer with increased capacity. In addition to concerns about the deteriorating interest

cover ratio, the Financial Manager has so far gathered the following information as part of the evaluation

of this proposed mixer replacement:

$1.$ The net present value of the new mixer was correctly determined as R$10$ million. This was

determined based on the initial investment of R$5$ million and the present value of cash flows after

tax of R$12$ million.

$2.$ The existing mixer was purchased two years ago at an original cost of R$2$ million, with an estimated

useful life of five years. The remaining useful life is three years and depreciation is provided on a

straight$-$line basis over the useful life. The existing mixer will be replaced at the end of its remaining

three$-$year useful life, and it will have no resale value. The mixer can be sold now for R$1$ million.

$3.$ The original purchase price of the mixer was funded by $100\%$ debt at the time when the company

was working towards its target capital structure. Following the recent Repo rate increases by the

South African Reserve Bank, the prevailing interest rate on long$-$term loans is $12\%.$ The capital

amount and the related interest expense are repayable annually in arrears.

$4.$ The investment in working capital for the existing mixer is expected to be R$300000$ in year one;

R$200000$ in year two, and R$0$ in year three.

$5.$ For the remaining three years of its useful life the existing mixer will generate operating profit before

interest and depreciation as follows: Year $1$: R$3$ million; Year $2$: R$6$ million; and Year $3$: R$9$ million.

$6.$ The company taxation rate is $28\%.$ This is in line with the expected low economic growth, low gross

domestic product, and persistent high unemployment rates.

$7.$ The minimum required after taxation return on capital projects of this nature is $12\%.$

$8.$ The South African Revenue Services grants equal annual capital allowances over the useful life of

the mixer.

$9.$ All the cash flows $($including all the relevant taxes$)$ occur at the end of the related financial year,

except for the initial capital outlay$($s$)$ which occur at the beginning of the year.

REQUIRED

For each question below, remember to:

$$ Clearly show all your calculations in detail;

$$ Round all your workings to two decimals, except where otherwise stated; and

$$ Where necessary, indicate irrelevant amounts$/$adjustments with a R$0($nil$-$value$).$

$($a$)$ Identify and briefly discuss four social, ethical, environmental, economic, and financial factors

that may affect the operations of Sand$-$Hawks which are eminent from the given scenario.

$(8)$

$($b$)$ From a quantitative perspective only, comment on whether Sand Hawks should replace the

existing mixer or not.

$$ Comment$/$ Conclusion $(1$ mark$)$; and

$$ Detailed Net Present Value calculations $(16$ marks$).$

$(18)$

$($c$)$ Calculate the Profitability Index $($PI$)$ of the new mixer, and comment on whether Sand$-$Hawks

can accept the project based on the principles of the profitability index.

$$ Calculations $(3$ marks$)$; and

$$ Comment$/$ Conclusion $(1$ mark$)$

$(4)$