Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Voor - En - Toe Ltd is in the pharmaceutical industry sector and has been expanding in the recent past due to a change in

Voor-En-Toe Ltd is in the pharmaceutical industry sector and has been expanding in the recent past
due to a change in its strategic direction from regulated medicines to natural remedies and holistic
medicine. The company has recently identified a project it wants you to evaluate and recommend
whether they should accept or reject. You are provided with the following tabulated financial and
additional information:
Details Year 1 Year 2 Year 3 Year 4 Year 5
R000 R000 R000 R000 R000
Sales 3675054023615866977070451
Raw Materials (herbs,
chemicals, etc)
58859075119791471414495
Labour Salaries and
Wages of Scientists and
Lab Assistants
1177018150239583074628989
Other variable overheads 525662752851957
Fixed overheads 52505513578860786381
Other operating costs 31203353360039784015Additional information:
The tax rate is 28% and payable in the year profits are made;
The company is financed by 75% equity and 25% debt with market values of R75m and
R25m respectively. It has an equity beta of 1,2. The rate on treasury bills issued by the
South African Reserve Bank is 5% and considered to have no risk. The market risk premium
is 7,5%. The companys after-tax cost of debt is 6%;
Profits after tax are similar to cash inflows for the purposes of this project evaluation; and
All receipts and payments arise at the end of the year to which they relate except for the
projects initial outlay of R30m which is paid at the beginning of the project (ie immediately).Required:
Given the information above, calculate the following:
i. Profits for the periods (20 marks)
ii. Weighted average cost of capital (4 marks)
iii. Net present value of the proposed project (13 marks)
iv. Recommendation on the acceptance or rejection of the project with justifications (3
marks)
v. Discuss the advantages of the net present value technique over the payback period and
internal rate of return techniques when capital budgeting (10 marks)
Round off the rand amounts to the nearest rand. The discount factor should be rounded to three
decimal places.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Institutions Management A Risk Management Approach

Authors: Anthony Saunders, Marcia Cornett, Otgo Erhemjamts

10th Edition

1260013820, 978-1260013825

More Books

Students also viewed these Finance questions