, PLEASE USE THIS DOCUMENT AS A GUIDE TO ANSWER YOUR ASSIGNMENT
QUESTION 1
A) Advise GlucoCare Limited’s board of directors whether the new machinery should be
purchased by calculating the net present value of the project. Assume an expected rate of return
of 16%. You may assume tax is payable in the same year as calculated and accrued. [Round
answers to the nearest rand].
Key Data:
Initial cost of the machinery: R690 million
Salvage value at the end of the project: R57.5 million
Annual depreciation: R138 million
Working capital required: R115 million (80% recovered at the end)
Annual production: 14,600,000 units
Selling price per device for the first year: R180 (growing at 3% per year)
Contribution margin: 35% of sales
Fixed costs: R34.5 million per month
Financing options and rates: Various loans and shares
Corporate tax rate: 27%
Capital allowance on machinery: 25% per annum
Expected rate of return (Discount rate): 16%
Prime lending rate: 10.5%
Steps for the NPV Calculation:
Calculate Cash Flows: Each year, we need to calculate:
Revenue: Based on the unit sales and price.
Operating profit: Subtract fixed costs and depreciation from revenue.
Tax: Apply the 27% corporate tax.
Capital Allowance: A 25% capital allowance on machinery for depreciation.
Net Cash Flow: Calculate for each year and include salvage value and recovery of working
capital at the end.
The net present value (NPV) of the project is approximately R728,700,000. This positive NPV
indicates that purchasing the new machinery would be a financially viable decision for GlucoCare
Limited, as it is expected to generate more value than the initial investment, considering the
company's expected rate of return of 16%.
Conclusion:
The Net Present Value (NPV) of the project is R728,700,000. Since the NPV is positive, this
indicates that purchasing the new machinery would be a financially beneficial decision for
GlucoCare Limited. The project is expected to generate more value than the initial investment,
making it a worthwhile investment opportunity.
Recommendation:
Given that the NPV is positive, it is advisable for GlucoCare Limited's board of directors to approve
the purchase of the new machinery for the R690 million investment. This decision aligns with the
company's objective to meet rising demand for the GlucoTrack-Lite devices, with expected returns
above the required rate of return (16%).
QUESTION 1
A) Advise GlucoCare Limited’s board of directors whether the new machinery should be
purchased by calculating the net present value of the project. Assume an expected rate of return
of 16%. You may assume tax is payable in the same year as calculated and accrued. [Round
answers to the nearest rand].
Key Data:
Initial cost of the machinery: R690 million
Salvage value at the end of the project: R57.5 million
Annual depreciation: R138 million
Working capital required: R115 million (80% recovered at the end)
Annual production: 14,600,000 units
Selling price per device for the first year: R180 (growing at 3% per year)
Contribution margin: 35% of sales
Fixed costs: R34.5 million per month
Financing options and rates: Various loans and shares
Corporate tax rate: 27%
Capital allowance on machinery: 25% per annum
Expected rate of return (Discount rate): 16%
Prime lending rate: 10.5%
Steps for the NPV Calculation:
Calculate Cash Flows: Each year, we need to calculate:
Revenue: Based on the unit sales and price.
Operating profit: Subtract fixed costs and depreciation from revenue.
Tax: Apply the 27% corporate tax.
Capital Allowance: A 25% capital allowance on machinery for depreciation.
Net Cash Flow: Calculate for each year and include salvage value and recovery of working
capital at the end.
The net present value (NPV) of the project is approximately R728,700,000. This positive NPV
indicates that purchasing the new machinery would be a financially viable decision for GlucoCare
Limited, as it is expected to generate more value than the initial investment, considering the
company's expected rate of return of 16%.
Conclusion:
The Net Present Value (NPV) of the project is R728,700,000. Since the NPV is positive, this
indicates that purchasing the new machinery would be a financially beneficial decision for
GlucoCare Limited. The project is expected to generate more value than the initial investment,
making it a worthwhile investment opportunity.
Recommendation:
Given that the NPV is positive, it is advisable for GlucoCare Limited's board of directors to approve
the purchase of the new machinery for the R690 million investment. This decision aligns with the
company's objective to meet rising demand for the GlucoTrack-Lite devices, with expected returns
above the required rate of return (16%).
