Thabo has been asked by the chairman of Avenge Construction Ltd to evaluate the proposed acquisition of a new earth mover. The earth mover's basic price is R50 000 and it will cost another R10 000 to modify it for special use. The asset will be depreciated over a 3-years period using the straight line method of depreciation and will be sold after 3 years for R20 000. The net working capital (spare parts inventory) for Avenge Construction Limited will increase by R2 000 as a result of the investment in the new earth mover. The earth mover will have no effect on revenues but it is expected to reduce the company's expenses by R40 000 mainly due to reduction in labour costs. The tax rate is 28%. Required Marks (a) a Calculate the initial cost of the earth mover. 4 (b) Calculate the operating cash flows generated by the earth mover for years 1, 2, 7 and 3. (c) 4 Determine the total cash flows in year 3 after accounting for additional (non- operating) cash flows. (d) Calculate the NPV and IRR of the project. Assume that cost of capital is 10%. CON (e) Should Thabo recommend acceptance or rejection of this project and why? TOTAL MARKS 25