, PLEASE USE THIS DOCUMENT AS A GUIDE ONLY
QUESTION 1
1.1 Calculate the initial investment required for the proposed dried-fruit project.
The initial investment is the total cash outflow needed to start the project at time zero (t=0).
Components:
1. Cost of New Asset: Purchase price of the fruit-drying system + trays
R170,000 + R10,000 = R180,000
2. Installation Costs: Costs to install the system and trays
R20,000
3. Installed Cost of New Asset: R180,000 + R20,000 = R200,000
4. Marketing Campaign: This is an initial cash outflow at the commencement of the project.
R12,000
5. Net Working Capital (NWC): The R15,000 required to commence production is an outflow at
time zero. The fact that R10,000 is financed via an overdraft does not change the total initial cash
outflow for the project as a whole.
R15,000
The initial investment (as per Table 11.1 in the textbook) is calculated as:
Installed cost of new asset: R200,000
+ Marketing campaign: R12,000
+ Net working capital investment: R15,000
= Initial Investment: R227,000
Note: The R18,000 paid to the agricultural consultant is a sunk cost (as defined on page 430) and is
therefore irrelevant to the investment decision.
QUESTION 1
1.1 Calculate the initial investment required for the proposed dried-fruit project.
The initial investment is the total cash outflow needed to start the project at time zero (t=0).
Components:
1. Cost of New Asset: Purchase price of the fruit-drying system + trays
R170,000 + R10,000 = R180,000
2. Installation Costs: Costs to install the system and trays
R20,000
3. Installed Cost of New Asset: R180,000 + R20,000 = R200,000
4. Marketing Campaign: This is an initial cash outflow at the commencement of the project.
R12,000
5. Net Working Capital (NWC): The R15,000 required to commence production is an outflow at
time zero. The fact that R10,000 is financed via an overdraft does not change the total initial cash
outflow for the project as a whole.
R15,000
The initial investment (as per Table 11.1 in the textbook) is calculated as:
Installed cost of new asset: R200,000
+ Marketing campaign: R12,000
+ Net working capital investment: R15,000
= Initial Investment: R227,000
Note: The R18,000 paid to the agricultural consultant is a sunk cost (as defined on page 430) and is
therefore irrelevant to the investment decision.
