FIN3701 Exam Memo Nov 2019

MEMO – FIN3701 NOV 2019




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, QUESTION 1

1.1

The capital budgeting process entails

▪ Proposal generation
▪ Review and analysis
▪ Decision making
▪ Implementation
▪ Follow up



1.2

Initial investment

Cost of new machine (2 500 000)

*After tax proceeds from old machine 288 000

Change in NWC -

2 212 000

*R400 000- 0 = R400 000

R400 000 x 0.28 =112 000

R400 000 -R112 000 =R288 000



Operating cashflow = EBIT(1-T) + depreciation

= 800 000 x (1-0.28) + 500 000

= R1 076 000

Discount rate = Wacc

Source Weight Cost Wacc

Long term debt 0.3 7.11 2.133

Preference shares 0.1 9.47 0.947

Ordinary shares 0.6 18.56 11.136

Total 14.216%


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