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Tsotsomba Limited is evaluating a project which reflects the following estimated net profit for each year of the project's five year anticipated life. The tax
Tsotsomba Limited is evaluating a project which reflects the following estimated net profit for each year of the project's five year anticipated life. The tax rate is 28%: Annual figures Sales less variable production costs R1.5m Fixed costs (RO.8)m Variable selling and admin costs (RO.5)m Net profit RO.2m Fixed costs include an allocation in respect of existing head office costs of R100 000. Additional rent is required to cater for the workers on the site during their shift periods which costs R125 000 (not included in any of the above costs). Tsotsomba has a WACC is 16% and the company has an available loan option of 9% that it can use to purchase the initial investment. (a) What is the net cash flows in assessing the viability of investing into this project? (8 marks) Please do not use a currency format for your answers (eg if your solution is R10,000 input as 10 000 into the section provided) (b) What is discount rate should be used to evaluate the financing decision of whether to purchase or leasing this particular asset? (2 marks)
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