You are the financial manager of SAC (Pty) Ltd, a manufacturing company. The pro
ID: 2340759 • Letter: Y
Question
You are the financial manager of SAC (Pty) Ltd, a manufacturing company. The production manager approaches you to assist him in motivating the purchase of a new production injection moulding machine. The production manager supplied you with the following information:
Proceeds on the disposal of the existing machine
R75 000.00
Cost of the new machine
R1 050 000.00
Installation cost
R50 000.00
Useful life of the new machine
4 years
Estimated salvage value of the new machine
R150 000.00
The annual profit before tax to be as follows:
Year
Profit before interest and tax
1
R295 000.00
2
R325 000.00
3
R365 000.00
4
R385 000.00
· Tax rate is 28%
· It is decided that the new machine will be sold at the end of its useful life.
· Ignore capital gains tax. Accept that all the proceeds on disposal of the machines are subject to the normal tax rate.
· The company policies regarding the purchase of new machines:
o The target payback period is within 4years.
o Positive net present value. The company uses a discount rate of 15%.
1. Calculate the annual cashflow of SAC (pty) ltd
2. Calculate the net present value.
3. Advise the production manager if the purchase complies with the company’s policies regarding the purchase on new machines.
Proceeds on the disposal of the existing machine
R75 000.00
Cost of the new machine
R1 050 000.00
Installation cost
R50 000.00
Useful life of the new machine
4 years
Estimated salvage value of the new machine
R150 000.00
Explanation / Answer
Years
Cash Outflow
(Mach. Cost + Installation)
(A)
Profit Before tax
Profit After Tax
(B)
Proceeds of Existing Machine (after Tax)
(C)
Salvage value of New machine (after Tax)
(D)
Total Cash Flow
(E=A+B+C+D)
PVIF
@
15%
(F)
Present Value
(E X F)
0
(1100000)
54000
(1046000)
1
(1046000)
1
295000
212400
212400
0.870
184788
2
325000
234000
234000
0.756
176904
3
365000
262800
262800
0.658
172922
4
385000
277200
108000
385200
0.572
220334
Net Present Value = (1046000) + 184788 + 176904 + 172922 + 220334 = (291052)
There is the Negative NPV
Payback Period = 3 years + (336800/385200) = 3.87 years
The Target Paybackperiod is 4 years = This condition is accomplished
Positive NPV = This condition is not accomplished
Hence Purchase of New machine is not beneficial
Years
Cash Outflow
(Mach. Cost + Installation)
(A)
Profit Before tax
Profit After Tax
(B)
Proceeds of Existing Machine (after Tax)
(C)
Salvage value of New machine (after Tax)
(D)
Total Cash Flow
(E=A+B+C+D)
PVIF
@
15%
(F)
Present Value
(E X F)
0
(1100000)
54000
(1046000)
1
(1046000)
1
295000
212400
212400
0.870
184788
2
325000
234000
234000
0.756
176904
3
365000
262800
262800
0.658
172922
4
385000
277200
108000
385200
0.572
220334
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