FIN3701 Assignment 1 Semester 2 2022

FIN3701
Assignment 1
Semester 2 2022

, QUESTION 1

Kaufold Ltd, a large manufacturer of aircraft components, has a capital budget of
R2 000 000 and is evaluating the replacement of its existing machine with the
more sophisticated model. The CFO determined the initial investment required
and the terminal cash flow associated with the replacement to be R1 666 000 and
R254 000 respectively. Both the usable life of the proposed and the remaining life
of the current machine are 5 years.

Expected cash inflows relating to the investments are as follow:

Year Proposed machine Current machine

1 986 000 895 000

2 986 000 881 000

3 986 000 819 000

4 986 000 805 000

5 986 000 791 000




Kaufold Ltd’s WACC is 15% and it is taxed at 29%.

Calculate the incremental cash flows relating to the replacement decision.

Incremental cash-flows

= Proposed machine cash-flows - Current machine cash-flows

Year Proposed machine Current machine Incremental cash flows

1 986 000,00 895 000,00 91 000,00

2 986 000,00 881 000,00 105 000,00




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