MAC3702 ASSIGNMENT 2 SEMESTER 2 Due 12 September 2025
Question 1
(a) Net Present Value (NPV) calculation
To calculate the NPV, we need to calculate the cash flows for the project.
Initial investment: R690 million (machinery) + R115 million (working capital) = R805 million
Annual cash flows:
* Sales: 14,600,000 units/year \* R180/unit = R2,628 million/year
* Contribution margin: 35% of sales = R919.8 million/year
* Fixed costs: R34.5 million/month \* 12 = R414 million/year
* Depreciation: R138 million/year
* Tax: 27% of (contribution margin – fixed costs – depreciation)
Year 1:
Contribution margin: R919.8 million
Fixed costs: R414 million
Depreciation: R138 million
Tax: R(919.8 – 414 – 138) \* 0.27 = R123.41 million
Net cash flow: R919.8 – 414 – 138 – 123.41 = R244.39 million
Years 2-5:
Contribution margin: R919.8 million \* (1 + 0.03)^year
Fixed costs: R414 million \* (1 + 0.03)^year
, Depreciation: R138 million
Tax: 27% of (contribution margin – fixed costs – depreciation)
Net cash flow: Contribution margin – fixed costs – depreciation – tax
Terminal cash flow (Year 5):
Scrap value: R57.5 million
Working capital recovery: R115 million \* 0.8 = R92 million
Tax on scrap value: R57.5 million \* 0.27 = R15.53 million
Net terminal cash flow: R57.5 + R92 – R15.53 = R133.97 million
Using the expected rate of return of 16%:
NPV = -R805 million + Σ (Net cash flow / (1 + 0.16)^year) + R133.97 million / (1 + 0.16)^5
NPV ≈ R234.41 million
The NPV is positive, indicating that the project is viable.
(b) Other quantitative, qualitative, and strategic factors
Other factors to consider:
* Market demand and competition
* Technical feasibility and reliability of the new machinery
* Impact on employees and training requirements
* Potential risks and mitigation strategies
* Alignment with company strategy and mission
(C) Weighted Average Cost of Capital (WACC)
Question 1
(a) Net Present Value (NPV) calculation
To calculate the NPV, we need to calculate the cash flows for the project.
Initial investment: R690 million (machinery) + R115 million (working capital) = R805 million
Annual cash flows:
* Sales: 14,600,000 units/year \* R180/unit = R2,628 million/year
* Contribution margin: 35% of sales = R919.8 million/year
* Fixed costs: R34.5 million/month \* 12 = R414 million/year
* Depreciation: R138 million/year
* Tax: 27% of (contribution margin – fixed costs – depreciation)
Year 1:
Contribution margin: R919.8 million
Fixed costs: R414 million
Depreciation: R138 million
Tax: R(919.8 – 414 – 138) \* 0.27 = R123.41 million
Net cash flow: R919.8 – 414 – 138 – 123.41 = R244.39 million
Years 2-5:
Contribution margin: R919.8 million \* (1 + 0.03)^year
Fixed costs: R414 million \* (1 + 0.03)^year
, Depreciation: R138 million
Tax: 27% of (contribution margin – fixed costs – depreciation)
Net cash flow: Contribution margin – fixed costs – depreciation – tax
Terminal cash flow (Year 5):
Scrap value: R57.5 million
Working capital recovery: R115 million \* 0.8 = R92 million
Tax on scrap value: R57.5 million \* 0.27 = R15.53 million
Net terminal cash flow: R57.5 + R92 – R15.53 = R133.97 million
Using the expected rate of return of 16%:
NPV = -R805 million + Σ (Net cash flow / (1 + 0.16)^year) + R133.97 million / (1 + 0.16)^5
NPV ≈ R234.41 million
The NPV is positive, indicating that the project is viable.
(b) Other quantitative, qualitative, and strategic factors
Other factors to consider:
* Market demand and competition
* Technical feasibility and reliability of the new machinery
* Impact on employees and training requirements
* Potential risks and mitigation strategies
* Alignment with company strategy and mission
(C) Weighted Average Cost of Capital (WACC)
