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VolleyMasters ( Pty ) Ltd is a manufacturer of modern indoor and outdoor volleyball equipment. Over the last financial year, the company paid hefty fines
VolleyMasters Pty Ltd is a manufacturer of modern indoor and outdoor volleyball equipment. Over the
last financial year, the company paid hefty fines for incorrectly dumping steel and aluminium. The
company allegedly tried to bribe environmental inspectors so they could get away with the illegal
dumping. The management team is currently considering investing in a new manufacturing machine
with a cost price of R The current machine's emissions are above the limits set on the ISO
standards. The required target payback period on investments is three years for projects to be
undertaken. The proposed machine has a useful life of three years and depreciation is calculated on a
straightline basis over the useful life. The Managing Director, Mr Monster Block has so far gathered
the following information:
Cash flows:
Net cash inflow Excluding depreciation and aftertax
Factor at
Present values round to the nearest rand
The Financial Manager, Mr Float Serve CA SA has, however, suggested that the company should
rather invest the proposed amount at a specific interest rate at the bank. He ferociously argued that at
the end of three years the amount would have grown to R He is currently facing charges by
SAICA for his alleged involvement in money laundering by his former client while he was still involved
in statutory auditing.
These two investment options are mutually exclusive. The company's target rate of return for investment
projects is and the required payback period is equal to the useful life of the longterm asset.
QUESTION PART B continued
REQUIRED:
a Identify and briefly discuss three environmental, ethical, social or governance factors which are
eminent from the given scenario that VolleyMasters Pty Ltd should consider which may affect
their operations.
b Calculate the internal rate of return IRR of the new manufacturing machine. Interpolate between
and Firstly, show your calculations of Present Values PV and Net Present Values
NPV at and at before showing how you used the interpolation formula to calculate the
IRReffective cost.
ci Determine the effective interest rate for the suggestion of Mr Float Serve. Use the
mathematical formulae method and information given in this regard.
ii Based on your calculations in b and ci and information in the scenario, recommend
and motivate which investment option should be chosen.
For effective interest rate calculations, work to four decimals and round only your final answer to
two decimals.
di Calculate the new machine's payback period. Show all detailed workings.
ii Based on i above, advise management if they should invest in the new machine or not.
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