, QUESTION 1 [24 marks]
1.1 Initial Investment Required
Fruit-drying system and trays (installed): R200,000 (R170,000 equipment + R10,000 trays +
R20,000 installation)
Marketing campaign: R12,000
Net Working Capital (NWC): R15,000
Total Initial Investment: R200,000 + R12,000 + R15,000 = R227,000 (Note: The R18,000
consultant fee is a sunk cost and is excluded from the initial investment calculation).
1.2 Operating Cash Flows
Component Year 1 (R) Year 2 (R)
Sales 190,000 210,000 (R190,000 × 1.10)
Less: Variable operating costs (25%) (47,500) (52,500)
Less: Fixed operating costs (24,000) (24,000)
Less: Depreciation (100,000) (100,000)
Profit Before Tax (EBT) 18,500 33,500
Less: Tax (29%) (5,365) (9,715)
Profit After Tax (Earnings) 13,135 23,785
Add back: Depreciation 100,000 100,000
Operating Cash Flow (OCF) 113,135 123,785
1.3 Terminal Cash Flow at the End of Year 2
Salvage value of equipment: R50,000
Less: Book value: R0
Taxable gain (recoupment): R50,000
Tax on disposal (29% of R50,000): R14,500
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1.1 Initial Investment Required
Fruit-drying system and trays (installed): R200,000 (R170,000 equipment + R10,000 trays +
R20,000 installation)
Marketing campaign: R12,000
Net Working Capital (NWC): R15,000
Total Initial Investment: R200,000 + R12,000 + R15,000 = R227,000 (Note: The R18,000
consultant fee is a sunk cost and is excluded from the initial investment calculation).
1.2 Operating Cash Flows
Component Year 1 (R) Year 2 (R)
Sales 190,000 210,000 (R190,000 × 1.10)
Less: Variable operating costs (25%) (47,500) (52,500)
Less: Fixed operating costs (24,000) (24,000)
Less: Depreciation (100,000) (100,000)
Profit Before Tax (EBT) 18,500 33,500
Less: Tax (29%) (5,365) (9,715)
Profit After Tax (Earnings) 13,135 23,785
Add back: Depreciation 100,000 100,000
Operating Cash Flow (OCF) 113,135 123,785
1.3 Terminal Cash Flow at the End of Year 2
Salvage value of equipment: R50,000
Less: Book value: R0
Taxable gain (recoupment): R50,000
Tax on disposal (29% of R50,000): R14,500
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