FIN3701 Assignment 1 (COMPLETE ANSWERS)
Semester 1 2025 - DUE 31 March 2025
QUESTION 1 [12 marks] Mphoreng Industries is considering replacing its existing
machine, which was purchased three years ago at a cost of R1 million. The
machine is depreciated at 30% per annum and can be sold today at R900 000. The
new machine will cost R700 000 with R20 000 installation cost and R5 000
transportation costs. The use of the new machine will decrease the working capital
with R8 000. Assume a 40% capital gains tax per annum. REQUIRED: FIN3702 1.1
Calculate the book value of the existing machine. Show all calculations. (3 marks)
1.2 Calculate the tax implication from the sale of the existing machine. (3 marks)
1.3 Calculate the after-tax proceeds from the sale of the existing machine. (2
marks) 1.4 Calculate the initial investment associated with the replacement of the
existing machine. FIN3703 (4 marks) QUESTION 2 [12 marks] A firm with a cost of
capital of 11% is evaluating two mutually exclusive projects, X and Y. The initial
investment is R400 000 for project X and R525 000 for project Y. Cash inflows
associated with the two projects are given below. Year INV3701 Project X Cash
inflows (R) Project Y Cash inflows (R) BAN3702 1 140 000 175 000 2 165 000 150 000
3 190 000 125 000 4 190 000 100 000 5 80 000 6 50 000 REQUIRED: Which project
should the firm choose, considering risk concepts in capital budgeting? (12 marks)
QUESTION 3 [12 marks] Marombo currently has a portfolio of ordinary shares
representing several different companies. Marombo considers it to be a well-
balanced investment portfolio, but he wants to reduce the overall risk of the
portfolio a bit more by including ordinary shares from Mamphela Mining
Corporation. The following information on Mamphela Mining Corporation is
available: For the period 2020 to 2023, the company paid the following dividends
per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend is
expected to increase by the average growth rate of the dividends between 2020
and 2023, and the dividend will increase by 10% per year indefinitely from 2022
onwards. Marombo requires a return of 12% on his investment portfolio and is not
prepared to pay more than R52,00 per ordinary share of Mamphela Mining
Corporation. REQUIRED: 4.1 Calculate the current price of Mamphela Mining
Corporation’s ordinary share. (10 marks) 4.2 Should Marombo purchase Mamphela
Mining Corporation shares to include in his investment portfolio? Provide reasons
for your answer. (2 marks) QUESTION 5 [14 marks] The power systems company,
, Raging Volts, is currently 80% equity financed and aims to raise R2 million to fund
a set of attractive investment opportunities. Debt financing may be obtained at an
after-tax cost of 15%. The company’s management wants to introduce 60% debt in
the capital structure while keeping the cost of each financing source together with
its market value the same. Ordinary shares are currently selling for R30 per share.
The company paid a dividend (Do) of R1,50 per share in the previous financial year
and had a growth rate of 7% over the past few years. It is expected that this
growth rate will be maintained in future. The company’s tax rate is 29%. The
company has a market value of R300 000. REQUIRED: 5.1 Calculate the component
costs associated with capital investment financing. (2 marks) 5.2 Calculate the
weighted average cost of capital (WACC), the break point of equity and the break
point of debt under the current structure. (5 marks) 5.3 Calculate the WACC, the
break point of equity and the break point of debt under the proposed structure. (5
marks) 5.4 Calculate the number of shares under the current structure. (1 marks)
14 5.5 Calculate the number of shares under the proposed structure. (1 marks)
QUESTION 1: Replacement Decision (12 marks) Mphoreng Industries is considering
replacing its existing machine.
1.1 Calculate the book value of the existing machine (3 marks) The book value (BV)
of the machine is calculated as:
BV
Initial Cost − Accumulated Depreciation BV=Initial Cost−Accumulated Depreciation
The machine was purchased for R1 000 000 and is depreciated at 30% per annum
(straight-line method). Since it has been used for 3 years, the accumulated
depreciation is:
Semester 1 2025 - DUE 31 March 2025
QUESTION 1 [12 marks] Mphoreng Industries is considering replacing its existing
machine, which was purchased three years ago at a cost of R1 million. The
machine is depreciated at 30% per annum and can be sold today at R900 000. The
new machine will cost R700 000 with R20 000 installation cost and R5 000
transportation costs. The use of the new machine will decrease the working capital
with R8 000. Assume a 40% capital gains tax per annum. REQUIRED: FIN3702 1.1
Calculate the book value of the existing machine. Show all calculations. (3 marks)
1.2 Calculate the tax implication from the sale of the existing machine. (3 marks)
1.3 Calculate the after-tax proceeds from the sale of the existing machine. (2
marks) 1.4 Calculate the initial investment associated with the replacement of the
existing machine. FIN3703 (4 marks) QUESTION 2 [12 marks] A firm with a cost of
capital of 11% is evaluating two mutually exclusive projects, X and Y. The initial
investment is R400 000 for project X and R525 000 for project Y. Cash inflows
associated with the two projects are given below. Year INV3701 Project X Cash
inflows (R) Project Y Cash inflows (R) BAN3702 1 140 000 175 000 2 165 000 150 000
3 190 000 125 000 4 190 000 100 000 5 80 000 6 50 000 REQUIRED: Which project
should the firm choose, considering risk concepts in capital budgeting? (12 marks)
QUESTION 3 [12 marks] Marombo currently has a portfolio of ordinary shares
representing several different companies. Marombo considers it to be a well-
balanced investment portfolio, but he wants to reduce the overall risk of the
portfolio a bit more by including ordinary shares from Mamphela Mining
Corporation. The following information on Mamphela Mining Corporation is
available: For the period 2020 to 2023, the company paid the following dividends
per year respectively: R3,14; R3,55; R3,89; and R3,95. The 2024 dividend is
expected to increase by the average growth rate of the dividends between 2020
and 2023, and the dividend will increase by 10% per year indefinitely from 2022
onwards. Marombo requires a return of 12% on his investment portfolio and is not
prepared to pay more than R52,00 per ordinary share of Mamphela Mining
Corporation. REQUIRED: 4.1 Calculate the current price of Mamphela Mining
Corporation’s ordinary share. (10 marks) 4.2 Should Marombo purchase Mamphela
Mining Corporation shares to include in his investment portfolio? Provide reasons
for your answer. (2 marks) QUESTION 5 [14 marks] The power systems company,
, Raging Volts, is currently 80% equity financed and aims to raise R2 million to fund
a set of attractive investment opportunities. Debt financing may be obtained at an
after-tax cost of 15%. The company’s management wants to introduce 60% debt in
the capital structure while keeping the cost of each financing source together with
its market value the same. Ordinary shares are currently selling for R30 per share.
The company paid a dividend (Do) of R1,50 per share in the previous financial year
and had a growth rate of 7% over the past few years. It is expected that this
growth rate will be maintained in future. The company’s tax rate is 29%. The
company has a market value of R300 000. REQUIRED: 5.1 Calculate the component
costs associated with capital investment financing. (2 marks) 5.2 Calculate the
weighted average cost of capital (WACC), the break point of equity and the break
point of debt under the current structure. (5 marks) 5.3 Calculate the WACC, the
break point of equity and the break point of debt under the proposed structure. (5
marks) 5.4 Calculate the number of shares under the current structure. (1 marks)
14 5.5 Calculate the number of shares under the proposed structure. (1 marks)
QUESTION 1: Replacement Decision (12 marks) Mphoreng Industries is considering
replacing its existing machine.
1.1 Calculate the book value of the existing machine (3 marks) The book value (BV)
of the machine is calculated as:
BV
Initial Cost − Accumulated Depreciation BV=Initial Cost−Accumulated Depreciation
The machine was purchased for R1 000 000 and is depreciated at 30% per annum
(straight-line method). Since it has been used for 3 years, the accumulated
depreciation is:
