Thaba-Bosui Manufacturing (Pty) Limited is a company that is engaged in the manufacturing of clothes in...

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Thaba-Bosui Manufacturing (Pty) Limited is a company that is engaged in the manufacturing of clothes in Sebobakeng in Maseru. The following information relates to the existing machine used in its operations and another machine which is being offered for sale: Net tax value Present market value Remaining useful life Capacity in units per year Fixed cash operating costs (per year) Annual deprecation (straight-line method) M30 000 M40 000 5 years 18 000 M20 000 M6 000 The product manufactured by the machine sells at M7 per unit and has a variable cost of M4 per unit. The sales manager is willing to sell 24 000 units per year. A new machine with a production capacity of 26 000 units per year is available. The following information is pertinent to the machine Purchase price Fixed cash operating costs (per year) Useful life M80 000 M28 000 5 years Annual deprecation (straight-line method) 20% per year The revenue and variable per unit is the same as those relating to the existing machine. None of the two machines have salvaged value at the end of the five years. The tax rate is 30% and the cost of capital is 15% per annum. Required: (a) Evaluate the two machines using the net present value method of investment appraisal. If any, state the relevant assumptions in relation to your computations (b) Which machine option in your opinion should be selected? (22marks) (Imark) (2marks) (c) Support your decision in (b) above with an explanation. (Total marks = 25) Thaba-Bosui Manufacturing (Pty) Limited is a company that is engaged in the manufacturing of clothes in Sebobakeng in Maseru. The following information relates to the existing machine used in its operations and another machine which is being offered for sale: Net tax value Present market value Remaining useful life Capacity in units per year Fixed cash operating costs (per year) Annual deprecation (straight-line method) M30 000 M40 000 5 years 18 000 M20 000 M6 000 The product manufactured by the machine sells at M7 per unit and has a variable cost of M4 per unit. The sales manager is willing to sell 24 000 units per year. A new machine with a production capacity of 26 000 units per year is available. The following information is pertinent to the machine Purchase price Fixed cash operating costs (per year) Useful life M80 000 M28 000 5 years Annual deprecation (straight-line method) 20% per year The revenue and variable per unit is the same as those relating to the existing machine. None of the two machines have salvaged value at the end of the five years. The tax rate is 30% and the cost of capital is 15% per annum. Required: (a) Evaluate the two machines using the net present value method of investment appraisal. If any, state the relevant assumptions in relation to your computations (b) Which machine option in your opinion should be selected? (22marks) (Imark) (2marks) (c) Support your decision in (b) above with an explanation. (Total marks = 25)